3. HUMAIRA KAYANI RABIA ZAMEER AYESHA SHAUKAT ANSA JAVED ZAHIDA PARVEEN Presented by

4. VALUATION OF DEBT SECURITIES BY MUTUAL FUNDS SEBI Circular Dated October 18, 2008

5. Topics to be Covered Introduction Circular dated September 18, 2000 Clause 1 Clause 2 Circular dated February 20, 2002 Clause 4 Proposed amendments in SEBI circular dated October 18, 2008

6. Introduction to Circular This is in partial modification of SEBI Circular September 18, 2000 and February 20, 2002 which, inter-alia, specified the discount adjustments for debt securities rated by external agencies for Ill-liquidity Risk Promoter Background Finance Company Risk Issuer Class Risk

7. Introduction (contd…) It has been brought to the notice of SEBI by AMFI and CRISIL that the current valuation methodology which allows the discretion of -50 basis points (bps) to 100 bps to account for the aforesaid risks is inadequate as debt securities of similar maturity and credit rating are being traded over wide range of yields. With a view to ensure that the value of debt securities reflects the current market scenario in calculation of net asset value, it has been decided to increase the discretion permitted.

8. Circular - September 18, 2000 (Clause 1) GUIDELINES FOR VALUATION OF SECURITIES FOR MUTUAL FUNDS

9. Types of Securities: Traded Securities Thinly Traded Securities Non Traded Securities

10. Methodology: Construction of Risk Free Benchmark Building a Matrix of Spreads for Marking-up the Benchmark Yield Mark-up/Mark-down Yield

11. Circular - September 18, 2000 (Clause 2) Guidelines For Identification and Provisioning for Non Performing Assets (Debt Securities) For Mutual Funds

12. Definition of a Non Performing Asset (NPA): An ‘asset’ shall be classified as non performing, if the interest and/or principal amount have not been received or remained outstanding for one quarter from the day such income / installment has fallen due.

13. Effective date for classification of NPAs: The definition of NPA may be applied after a quarter past due date of the interest. e.g. if the due date for interest is 30.06.2000, it will be classified as NPA from 01.10.2000.

14. Provision for NPAs – Debt Securities. After the expiry of the 1 st quarter from the date the income has fallen due, there will be no further interest accrual on the asset. e.g. if the due date for interest falls on 30.06.2000 and if the interest is not received, accrual will continue till 30.09.2000 after which there will be no further accrual of income.

15. Provision for NPAs – Debt Securities: DurationAsset declared 3 monthsOAEM (other asset especially mentioned) 6 monthsSS (sub standard) 9 monthsDoubtful 12 monthsLoss 15 monthsLoss

16. Provision for NPAs – Debt Securities (contd…) Effective day for provisioning Minimum provision as % of book value (outstanding principal amount) Cumulative provisions 6 months10% 9 months20%30% 12 months20%50% 15 months25%75% 18 months25%100%

17. Circular - February 20, 2002 (Clause 4) Mark up/ Mark down Yield: The discount adjustments provided for securities rated by external rating agencies and internally rated securities on page 5 [Clauses C(I) & C(II)] of the circular dated September 18, 2000, shall be revised as follows:

18. Mark up/ Mark down Yield CategoryDiscretionary discount over benchmark yield in basis points Rated Instruments with duration up to 2 years Discretionary Discount of up to +100 Rated Instruments with duration over 2 years Discretionary Discount of up to +75 Unrated Instruments with duration up to 2 years Discretionary Discount of up to +50 over and above the mandatory Discount of +50 Unrated Instruments with duration over 2 years Discretionary Discount up to +50 over and above the mandatory Discount of +25

19. Proposed Valuation Methodology (for Rated Instruments) Accordingly, the clauses C (I) and C (II) of the circular dated September 18, 2000 and clause 4 of the circular dated February 20, 2002 shall be revised as follows: CategoryCurrentProposed + - Rated instruments with duration up to 2 years 100 bps 50bps500bps 150bps Rated instruments with duration over 2 years 75 bps 25bps 400bps 100bps

20. Proposed Valuation Methodology (for Unrated Instruments) CategoryCurrentProposed + - Unrated instruments with duration up to 2 years Discretionary discount of Up to +50 bps over and above mandatory discount of +50 bps Discretionary discount of up to +450 bps over and above mandatory discount of +50 bps Unrated instruments with duration over 2 years Discretionary discount of Up to +50 bps over and above mandatory discount of +25 bps Discretionary discount of up to +375 bps over and above mandatory discount of +25 bps

21. References This circular is issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992.with the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996, To protect the interests of investors in securities To promote the development of and to regulate the securities market Other contents of the aforesaid circulars remain the same.