SEBI Announces New Valuation Standards for Mutual Fund Repo Transactions

SEBI Updates Valuation Methodology for Repo Transactions in Mutual Funds

The Securities and Exchange Board of India (SEBI) issued a circular on November 26, 2024, outlining new valuation guidelines for repurchase (repo) transactions within Mutual Funds. These changes will take effect on January 1, 2025, and include specific provisions for both standard repo transactions and tri-party repos (TREPS) that have a tenor of up to 30 days.

New Valuation Guidelines

Valuation Methodology: Repo transactions now must be valued using a mark-to-market methodology, consistent with the valuation practices for other money market and debt securities. This change aims to eliminate regulatory arbitrage stemming from inconsistent valuation methods.
Previous Methodology: Previously, repos were valued on a cost-plus accrual basis. The adoption of the mark-to-market approach ensures a standardized valuation process across all transactions of this nature.
Exclusion of Overnight Repos: All repo transactions, except for overnight repos, require valuation from AMFI-empanelled valuation agencies to enhance consistency and transparency.

Amendments to SEBI Master Circular

The recent circular modifies existing provisions in Chapter 9 of the SEBI Master Circular dated June 27, 2024, regarding the valuation of securities by Mutual Funds. Key changes include:

Revised Clause 9.6.2: Instead of the cost-plus accrual approach, repo transactions with a tenor of up to 30 days will now be valued at market rates. The modified clause reads as follows:
- “Investments in short-term deposits with banks (pending deployment) shall be valued on a cost-plus accrual basis.”
Updated Paragraph 9.2.3(b): Valuation procedures for money market and debt securities are updated to reflect the new guidelines:
- All money market and debt securities: To be valued at the average of security level prices obtained from designated valuation agencies.
- New Securities: If security-level prices are unavailable for new securities not yet held by any Mutual Fund, these may instead be valued based on purchase yield/price at the time of allotment or purchase.

Regulatory Context

This circular is issued under the powers granted by Section 11 (1) of the Securities and Exchange Board of India Act, 1992, in conjunction with Regulations 25(19), 47, and 77 of the SEBI (Mutual Funds) Regulations, 1996. The aim is to protect investor interests and enhance the integrity of the securities market.