Securities and Exchange Board of India (SEBI) may take decision to tighten norms for Mutual funds, the most popular mutual fund product among institutional investors with average assets under management of over 6 lakh crore. Some of the proposals which capital market regulator is considering for liquid schemes are mandatory minimum investments in short-term government bonds and stricter valuation norms, said three people on this matter.
A plan to introduce a lock-in for investments in liquid funds is also being discussed but SEBI is treading with caution on the issue as it could dent the product and may affect activity in the markets.
These proposals, aimed to reduce the risks involve in Liquid Funds, and may taken up in the SEBI's Board meeting held in February.
Mutual Fund Advisory committee (MFAC), appointed by the regulator which contribute to reforms for mutual funds, is still need to meet formally to discuss these measures, it is not clear, what are the final rules were.
The regulator’s decision to tighten rules for liquid funds comes in the wake of the crisis at the IL&FS Group, which defaulted on its payments to various investors including mutual funds. The net asset value (NAVs) of liquid funds, which owned IL&FS papers, had taken a knock to the extent of 50 % of the product’s annual average returns of 6 to 7 %.
There are stark differences among members of SEBI - appointed MFAC over the recommendations. The plan to ask liquid funds to keep a minimum amount in treasury bills — government bonds with a maturity of less than one year — is aimed at ensuring better liquidity.
The regulator is yet to decide the extent of such investments, but industry officials said these schemes should required to invest at least 15-20 % of their assets under management in treasury bills with 90 days maturity. “It will be prudent because with treasury bills, liquid funds can always tap the CBLO market to borrow,” said a person privy to the matter. In CBLO or Collateralised Borrowing and Lending Obligation — a market for overnight borrowing and lending for mutual funds, insurers and NBFCs — treasury bills are used as collateral to borrow.
The other point of argument has been the over the plan to introduce a minimum investment period for mutual funds. There was a suggestion to bring in a seven-day for liquid funds to ease the volatility in flows, but this proposal has met with maximum opposition from the MFAC and the industry. Three people, who are aware of the proposals, said SEBI is unlikely to implement a lockin for Mutual scheme investments. Mutual fund officials said the step would have an adverse impact on the population
impact on the acceptance of the product among corporates — the biggest investors in liquid funds. “A lock-in would kill the product. So, this proposal looks highly unlikely at this stage,” said one of the persons quoted above.
Companies park their idle funds in liquid funds, which allow them to redeem as their will. But the criticism is on that the instant redemptions may affect the stability of the fund.
SEBI may also ask mutual funds to ‘mark-to market’ bonds with maturity above 30 days, the people said. mutual funds invest in debt papers with maturities of less than 90 days, but they do not have to mark to market securities that the mature under 60 days. If the regulator cuts this requirement to 30 days, funds would prefer to invest in only one-month commercial papers as market linked valuations would increase volatility.
Fund managers said borrowers would reduce dependence on mutual funds due to pressure on retiring the debt in 30 days.
“Borrowers can effectively keep the money for 21-22 working days. It is going to be stressful for companies,” said by senior mutual fund industry official. “The indirect impact of this would be that it would dry up volumes in the overnight market.”
The regulator may also reduce the flexibility that may gives funds to mark up the valuations of securities in mutual fund schemes.
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