SEBI's New Guidelines: Mark-to-Market Valuation for Mutual Fund Repo Transactions

The Securities and Exchange Board of India (SEBI) has announced new valuation guidelines for repo transactions by mutual funds. This move aims to standardize the valuation process, address potential regulatory arbitrage, and enhance transparency in the market. The new guidelines will come into effect on 1st January 2025.

Here's a breakdown of the key changes:

• Mark-to-Market Valuation: Previously, repo transactions with a tenor of up to 30 days were valued using a cost-plus-accrual basis. SEBI is now mandating a mark-to-market approach, meaning the securities will be valued at their current market price.
• Uniformity and Transparency: The shift to mark-to-market valuation is intended to create a more level playing field for all mutual funds and bring uniformity to the valuation of money market and debt instruments. This is expected to enhance transparency and protect investor interests.
• Role of Valuation Agencies: Mutual funds are required to obtain valuations for all repo transactions, except for overnight repos, from authorized valuation agencies. This ensures that an independent and standardized process is used for valuation.
• Valuation of New Securities: In cases where data from valuation agencies is unavailable for new securities (not currently held by any mutual fund), the purchase yield or price on the date of allotment/purchase will be used for valuation.

What are Repo Transactions?

Repo transactions, also known as sale repurchase agreements, allow mutual funds to raise short-term capital. One party sells securities with an agreement to repurchase them at a later date. Mutual funds in India can conduct repo transactions using corporate debt securities, commercial papers (CPs), and certificates of deposit (CDs). However, they can only engage in these transactions if the corporate debt securities involved are rated "AA" or higher.

Example: If a fund needs ₹1 crore for 10 days, it can enter into a repo transaction using corporate bonds, CPs, or CDs as collateral to get a short-term loan at the prevailing market rate from another fund house.

These new guidelines mark a significant change in how repo transactions are valued in India's mutual fund industry. Investors are encouraged to familiarise themselves with these changes and seek expert advice if needed.