Is it true that the SEBI wants to treat such standstill agreements as defaults in future and what does that mean for mutual funds?

That is the gist of the new regulation but let me come back to that later. Mr. Tyagi has made two important arguments against standstill agreements. Tyagi has argued that it is an unregulated way of postponing the issue. NAVs must reflect the market value of the portfolio as close as possible at all times. However, such standstill agreements do not reflect the fair value of the portfolio and this creates value distortion. Secondly, there are legitimate options for fund managers in that they can either side pocket the toxic portfolio and they can also participate in inter-creditor-agreements (ICA). However, MFs have not been too pleased with this idea as it has practical difficulties.

Coming back to standstill agreements, the new SEBI norms do dictate that they be treated as defaults. MFs will have to make an immediate provision for default and adjust the NAVs accordingly. At the end of the day, ever-greening tends to project the wrong picture of credit risk funds and make them look safe. Treating standstills as default is the right approach.