MUMBAI: The Securities and Exchange Board of India (Sebi) has tightened rules for mutual funds' investment in debt in the wake of the Amtek Auto fiasco that had impacted investors in two schemes of JP MorganAsset Management.

The capital market regulator, after the board meeting, said no fund would be allowed to invest more than 20percent of net asset value in debt securities issued by companies belonging to a business group. This is the first time Sebi has brought in group level limits for debt schemes. The regulator has also lowered single issuer and sector exposure limits to provide investors with enhanced diversification benefits.

Fund houses will not be allowed to invest more than 25percent of the debt scheme in a single sector. This limit has been cut from 30%. In the case of housing finance companies, the additional exposure cap has been cut to 5percent from 10percent.

In an attempt to put mutual funds in a better position to handle adverse credit events, single issuer limit has been lowered to 10percent from 15percent. "By lowering limits on sectors, the portfolio would get more diversified, which would lead to higher discipline. The fund manager will have to look for other sectors to diversify the portfolio. In the short term it will lead to increased demand for G-sec papers,"said A Balasubramanian, CEO, Birla Sunlife Mutual Fund. "Due to the lowering of exposure, corporates will have to find different lenders.This will be applicable for incremental money coming into the scheme,"he said.

The Sebi board also approved the proposal to introduce primary market debt offering through private placement on electronic book,to improve transparency in price discovery. Issuers coming out with private placement of bonds above ` 500 crore would have to mandatorily use the electronic book mechanism. "Requirement of minimum bid size for institutional investors is left to the discretion of the issuer. The issuer shall provide the draft private placement memorandum to the bidders without incorporating coupon details,"Sebi said in a release.

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