Impact of Sebi's norms for debt MFs: Companies may shift funds to banks

Topics Sebi | Mutul Fund

The Securities and Exchange Board of India’s (Sebi’s) new investing norms for debt mutual funds (MFs) may compel companies to move part of their short-term money from MFs to banks at lower interest rates, or invest in riskier assets.

For borrowers, rates are likely to increase by 50-100 basis points (bps).

“The borrowing corporates will find it more difficult to access other options of funds, and given Sebi’s restrictions, the cost of funds will move north,” said Prabal Banerjee, group finance director of Bajaj Group. Medium to long term funds will be more difficult to come by for borrowers, as most of the lending will be short-term.

“Corporates which do not have enough credit control internally but have surplus funds are prone to investing in riskier avenues, and may lose money in the bargain. This may show its impact over the next 9-12 months in the money market,” he warned.

Among several measures announced on Thursday, Sebi asked liquid MFs to mandatorily invest 20 per cent of their corpus in government securities or treasury bills.

Besides, the regulator imposed a graded exit load on liquid schemes if an investor were to exit within seven days, which means CFOs will have to manage cash flows better.

For example, the load levied could be up to 3 per cent for the first two days, 2 per cent for the next two days, and 0.5 per cent for the next three days on an annualised basis, said experts.

“It will be a problem for treasurers to manage short-term surplus liquidity,” said Seshagiri Rao, group MD of JSW.
“This will be a disincentive for investors managing cash on a daily basis, who will likely move to overnight funds. Globally, liquid funds do not have a concept of ‘exit load’ and firms could be hit significantly,” said Dwijendra Srivastava, CIO (debt), Sundaram MF.

Funds are also mandated to invest only in listed securities. The regulator also revised rules on how much a fund could invest in securities backed by shares of a single group. All of these, put together, will diminish returns that companies earn from liquid funds.

“While the risk profiles of liquid funds will improve, returns of these schemes may get impacted by 10-50 bps. There are not too many alternative avenues available for corporates, except short-term fixed deposits of banks, or direct investment in commercial papers (CPs) and certificates of deposits (CDs). However, they may not opt to invest directly in CPs/CDs if they do not have adequate research capabilities,” said Dhaval Kapadia, director (portfolio specialist), at Morningstar Investment Advisers India.

Kapadia said that on an average, only 10 per cent of the liquid fund investments are in cash, government securities and T-bills. Since Sebi's new norms stipulate 20 per cent investment in these, funds will have to rejig their current portfolio, which could impact returns, he added.

At present, liquid funds get Rs 50,000-60,000 crore of incremental flows every month. “This money is transient and some of it is likely to move back to banks and overnight funds,” said a debt fund manager. Close to 50 per cent of the one-day money coming into liquid funds could also move to banks, he added.

If a company has to exit on day one, it may choose to park its money in overnight funds or banks, say experts. "If the firm were to keep the money for four days and pay 10 bps as exit load, it may still end up making more money than it would in an overnight fund,” said the debt fund manager.

Companies had already put in more checks and balances in place, before committing monies to debt schemes. This includes assessing investment processes of individual fund houses, their philosophy on taking credit risks and on-boarding process, size of internal credit teams, history of adhering to scheme mandates, and risk management processes.

Many are asking fund houses to tweak portfolios to include more ‘AAA’-rated firms and sovereign public sector undertakings, even if it means sacrificing returns.



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