×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

RBI, Sebi prop up MFs to stem redemption tide

RBI, Sebi prop up MFs to stem redemption tide
Comment E-mail Print Share
First Published: Tue, Oct 14 2008. 10 36 PM IST

Tricky times: Reserve Bank of India governor D. Subbarao. Gautam Singh / AP
Tricky times: Reserve Bank of India governor D. Subbarao. Gautam Singh / AP
Updated: Thu, Oct 16 2008. 12 48 PM IST
Mumbai: Along with the Reserve Bank of India (RBI), the Securities and Exchange Board of India (Sebi) has also stepped in to help India’s Rs5.29 trillion mutual fund (MF) industry to tide over the unprecedented liquidity crisis that has hit the financial system.
The capital markets regulator has relaxed the borrowing norms for some funds that have seen huge redemptions in the past few days.
While this has been done for specific fund houses, the banking regulator on Tuesday opened a special Rs20,000 crore liquidity window for the industry.
Tricky times: Reserve Bank of India governor D. Subbarao. Gautam Singh / AP
Commercial banks can borrow 14-day money at 9% from RBI and lend it to MFs. To avail of this facility, fund houses are required to offer certificates of deposits (CDs) as collateral.
Under existing Sebi norms, MFs cannot borrow more than 20% of the assets under management (AUM) of a specific scheme to meet redemptions.
Last week Sebi allowed at least two funds to borrow in excess of this limit to help them ease pressure on liquidity.
The capital markets regulator has also allowed some MFs that have an FII (foreign institutional investor) arm to access funds from those units, something it had prohibited so far. FIIs are currently allowed to invest up to $3 billion in corporate debt in India.
A senior Sebi official, who did not want to be named, said that MFs could borrow from their FII arms, provided this exposure comes within the $3 billion limit.
A third of the 36 fund houses in India have significant foreign participation, but not all of them are registered as FIIs.
According to the Sebi official, so far two fund houses, Mirae Asset Global Investment Management (India) Pvt. Ltd and ING Investment Management (I) Pvt. Ltd have been allowed to borrow from their FII arms.
Mirae declined comment and ING didn’t respond to an email seeking comment.
“Enhancing the limit will help,” said Hemant Rastogi, chief executive of Mumbai-based Wise Invest Advisors. “These are extraordinary times and this will help in meeting the liquidity needs.”
An estimated Rs30,000 crore, or about 30% of the corpus of the so-called liquid and liquid plus schemes, has been withdrawn in the past fortnight, as banks pulled out money to invest in the overnight inter-bank market where rates soared to 20%.
Corporations, too, rushed for redemptions fearing a liquidity crunch.
According to the Association of Mutual Funds in India, an industry lobby, liquid and liquid-plus funds, also known as money market funds, constituted about 22% of the Rs3.2 trillion of AUM in debt, or fixed income funds at the end of September.
In the face of heavy redemptions, some of the funds have been forced to liquidate their debt papers, booking losses as prices of such papers have crashed even as interest rates have soared.
The net asset value of at least 33 of the 291 liquid and liquid-plus funds declined last week.
“We need more intervention to inject liquidity in the system,” said Ajay Bagga, chief executive officer of Lotus India Asset Management Co. Pvt. Ltd. “Today, nobody has the scope to lend.”
A helping hand: Sebi chairman C.B. Bhave. Shirish Shete / PTI
The chief executive officer of a large fund house, who declined to be named, said the Rs20,000 crore of support extended by RBI would not be enough to sustain funds till investors regained their confidence. “When you face redemptions and no inflow, how would you run a fund?” he asked.
In a statement, RBI said it would give money to banks on a pro-rata basis, if demand for these funds exceed supply. On Tuesday, it accepted four bids from banks and released Rs3,500 crore for MFs.
“It is a proactive step by RBI,” said Vikrant Gugani, chief executive of Reliance Capital Asset Management Ltd, the largest fund house in the country. He added that the industry was waiting to see how this would be implemented.
“This will also stop the distress sale of bank certificate of deposits by mutual funds,” said N.S. Venkatesh, managing director and chief executive officer, IDBI Gilts Ltd.
Under the July guidelines on CDs, banks and financial institutions were not permitted to grant loans against these certificates and they were also not permitted to buy-back their own CDs before maturity.
RBI has relaxed these norms till 29 October. If banks on-lend the RBI funds to equity-oriented MFs, it will form part of their capital market exposure, the central bank statement said.
Fund managers said debt funds will rush for the liquidity support as they are facing redemptions at a time when they are not being able to sell their assets to generate liquidity.
ravi.k@livemint.com
Comment E-mail Print Share
First Published: Tue, Oct 14 2008. 10 36 PM IST
More Topics: RBI | Mutual Funds | CDs | Sebi | Liquidity crisis |