Market regulator Sebi has asked mutual fund (MF) houses to provide monthly data on debt and equity assets, starting 2007. The regulator has sought information on fund houses? monthly borrowings towards meeting redemption requirements, along with the cost of borrowing. Sebi has also sought half-yearly net worth figures from all the fund houses.
While Sebi hasn?t officially spelt out the reasons for the data request, fund officials believe the regulator may want to assess the health of the fund houses before issuing the notification on net-worth requirement, due any time soon. A few weeks ago, Amfi was believed to have informally met Sebi to discuss the net-worth requirement pertaining to fund houses.
Amfi had discussed with Sebi and asked it to relook the net-worth requirement. Amfi had stressed that the net-worth requirement should not act as an entry barrier for serious players and that the net worth alone should not be looked at as the only criteria to judge the seriousness of the players. As of September 2013, about 19 fund houses had a net worth of less than R50 crore, of which 11 were below R25 crore.
Fund officials believe Sebi will also evaluate the quantum of borrowing or leverage taken by fund houses to meet their regular redemption needs, especially in liquid funds. ?There is excessive borrowing at times and the regulator might want to look at the issue. If there is heavy borrowing, then is it a healthy practice, is a question that Sebi might want to ask fund houses,? said a fund official, adding the fund houses sometimes prefer to borrow rather than sell the paper to meet redemption needs to avoid volatility in the scheme NAV.
The borrowing limit allows fund houses to borrow from banks an amount that is directly proportional to their AUM in a particular scheme up to a maximum of 20% of scheme AUM. This means if the liquid assets of a scheme is R100 crore, the fund house can borrow R20 crore to meet its redemption needs.
Sebi in a recent circular had observed that certain smaller mutual funds faced serious stress when their investments made mark-to-market losses and there was huge redemption pressure after the 2008 crisis. Also, in July 2013, similar stress was noticed when RBI hiked the short-term rates sharply. ?In case of huge redemptions at times, schemes have to borrow heavily, the cost of such borrowing has to be borne by the AMCs. If they are not well capitalised, the investors? interest will not be protected,? said the circular.
