SEBI Watch: Time for SLR-like feature for debt mutual fund schemes

Thursday, Jun 11, 2020

By Chiranjivi Chakraborty


The ongoing crisis in debt schemes of mutual funds has threatened the stability of India's financial sector, which was evident from the chaos caused by the sudden announcement of winding up of six credit risk funds of Franklin Templeton Mutual Fund in April.


Concerned that a regulatory status quo may send wrong signals in the system and further eat away into the stability of the financial landscape of the country, the Reserve Bank of India has decided to pitch in with potential solutions.

Mutual funds are regulated by the Securities and Exchange Board of India and regulatory actions prescribed by the central bank concerning the jurisdiction of another regulator is rare. But so is the current crisis.


The magnitude of the problem was palpable from the fact that RBI had to for the first time in 12 years provide a special liquidity window to mutual funds to repay investors withdrawing money from debt schemes at a spectacular pace.


The RBI is of the view that an open-ended debt scheme should always keep handy a liquidity buffer to meet redemption pressure in testing times. The buffer that RBI is alluding to is akin to a statutory liquidity ratio or cash reserve ratio that provide insurance to banks against massive withdrawals.


One way to resolve this is to stipulate that the ratio of government securities in incremental holding should increase as the size of a debt scheme increases, RBI's article published in its monthly bulletin said.


The suggestion by the central bank is not new as the capital market regulator has in the past discussed with mutual funds the possibility of creating such liquidity buffers that can ensure that the entire system is not threatened during times of heavy withdrawals by investors.


To be sure, the capital market regulator had in 2019 stipulated that overnight and liquid funds mandatorily hold 20% of their assets under management in liquid assets such as cash, government securities, treasury bills and repo on government bonds.


SEBI, however, has held back from directing all debt schemes to create such a buffer, instead resorting to nudging the industry to gauge redemption pressure and create such liquidity in schemes on its own.


The current crisis provides SEBI a window to make such a requirement mandatory for all debt schemes as the risk of backlash from mutual funds is lower, especially, given their position of weakness.


Demanding that debt schemes hold a portion of their managed assets as liquid assets not only ensures that redemption pressure is dealt with smoothly, but it also acts as a deterrent to fund managers who time and again are caught pushing the boundaries of risk taking.


It is this pushing of boundaries of risk taking by fund managers beyond what was permissible by the mandate of their debt schemes that created this mess in the first place.


The crisis today is also a creation of mis-selling of debt products by mutual funds, in some instances as proxies to fixed deposits in banks. This has eroded investor confidence, and perhaps a safety valve such as an SLR may help bring back some of that lost confidence.


While the RBI's very public policy suggestion will pinch SEBI, a collaborative approach is in the best interest of the economy at large.


It is true that an SLR-like norm will weigh on returns of debt schemes but sacrificing a few basis points of returns in the interest of financial stability will always be worth it.



* SEBI removes Rana Kapoor as YES Bank promoter (Mint)

* Promoter's kin cannot be public shareholders, SEBI tells Mirza Intl

* SEBI advises MFs to push for listing of unlisted NCDs, CPs in 3 mos

* SEBI extends disclosure relaxation for cos listing NCD, CP to Jun 30



* SEBI levies 1.5 mln rupees fine on three entities for fraudulent trading activities (IE)

* SEBI accuses CREDAI of proxy litigation for NBFCs' benefit (CNBC TV18)

* SEBI opposes CREDAI plea in SC on loan moratorium, interest waiver

* SEBI bans 26 entities from capital markets for 6 months for fraudulent trading (PTI)


REGULATIONS (Announced in the past three months)

* SEBI relaxes FPOs rules temporarily to help firms raise additional capital

* SEBI issues norms for regulatory sandbox framework for stock markets

* SEBI eases norms for disposal of physical gold, silver assets held by MFs 

* SEBI says new margin funding rules to be effective Aug vs Jun earlier 



 DateUnit LatestPrevious
FII/FPI net equity investmentJun 9US$ mln   63.15     139.20
II/FPI net debt investmentJun 9US$ mln


DIIs net equity investment#Jun 3bln rupees(-)12.00     (-)2.04
DIIs net debt investment#Jun 3bln rupees   17.47       14.88


* Mahindra MF seeks SEBI's approval for focused equity yojana

* Mahindra MF seeks SEBI's approval for arbitrage yojana 

* HSBC MF seeks SEBI's approval for mid-cap equity fund 

* Principal MF seeks SEBI's approval for large cap fund



* SEBI may give in-principle nod to NSE IPO but with conditions (Moneycontrol)

* SEBI mulls easy fundraising for all cos via preferential route (ET)

* IDBI AMC settles Bilt Graphic case with SEBI, pays 9 mln rupees

* SEBI, Centre at odds over easing disclosure norms for listed NCDs (BS)


Sources – Television, Print, or Web Editions of: PTI–Press Trust of India, BS–Business Standard, ET–The Economic Times, Moneycontrol, CNBC TV-18, Mint, BL–The Hindu Business Line, TH–The Hindu, RTR—Reuters, BT–Business Today, IANS–Indo-Asian News Service, IE— The Indian Express, ToI–The Times of India, BB-Bloomberg Quint


Internet links:


#–data not available for Jun 4, Jun 5, Jun 8 and Jun 9 




Compiled by Nivedita Yadav

Edited by Vandana Hingorani


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