The markets regulator, Securities and Exchange Board of India (SEBI) on September 2, 2020 issued a circular, thereby allowing asset managers to side-pocket their exposures to entities that have approached them to restructure their debt. There are fears that redemption requests from investors in debt mutual funds (MFs) may spike because of companies defaulting on repayments.
Side-pocketing will prevent forced and panic redemptions from the fund due to restructuring as side-pocketed units cannot be redeemed.
As per the temporary rules, effective till the end of the year, asset management companies can side-pocket higher-rated debt and not just those below investment grade, whereas side-pocketing was earlier allowed if only there was a default or the debt was downgraded below investment grade.
This way, SEBI has tried to help MFs deal with the turmoil due to the Covid-19 pandemic, and pre-empt a surge in redemptions by forced selling of the underlying assets at a discount. Bad loans are likely to rise sharply to the most in 20 years during March and August. The RBI also permitted lenders to restructure stressed debt of borrowers.
Side-pocketing In simple terms, side pocketing is a practice which enables segregation of bad assets from the good assets. As such, side pocketing enables mutual funds (MFs) to segregate the bad assets in a separate portfolio within their debt scheme. It allows investors to recover investments in illiquid parts of their MF investment portfolio without having to resort to a distress sale of the underlying assets. Since redemptions are not permitted from side-pocketed units, funds pay investors when borrowers make repayments on the stressed debt.