Capital market regulator the Securities and Exchange Board of India (SEBI) has given mutual funds (MFs) a breather to implement a norm for valuing money market and debt securities with maturity of over 91 days in their schemes.The market regulator has stretched the deadline for its implementation to August 1 from July 1 earlier, a SEBI circular said. The move has come as a temporary relief to MFs, as liquid plus schemes, which comprise nearly 40% of the industry’s assets under management (AUM) of Rs 8 lakh crore, will be most impacted by the new rule.
The new norm requires MFs to mark the value of money market and debt securities with maturity of over 91 days — the securities that constitute liquid plus schemes — to market prices. This is feared to increase volatility in returns from this product, reducing their popularity among investors such as companies, institutions and banks, which have invested their idle money in it.
MF industry officials said the industry has been lobbying with SEBI to delay the deadline for its implementation, with fund houses grappling with redemptions in short-term debt schemes to as much as Rs 1 lakh crore in recent weeks. Most of the withdrawals have been from telecom companies, which needed cash for 3G auctions, and other firms for advance tax payments.
“With yields expected to remain firm even early July due to the liquidity crunch, MF houses feared that marking-to-market could enhance losses in liquid plus schemes. The industry feared more redemptions due to such losses,” said a top official with a private MF. When bond yields rise, prices fall and vice versa.
Some industry officials claim the demand for extending the implementation deadline was made only by select MFs, including a state-owned and a private bank-sponsored one. Some of these fund houses have entered into ready forward transactions, where a security is sold and then bought back at a pre-decided price after a few weeks — with state-owned banks to hide losses and raise money to meet redemptions.
About this arrangement on June 21. A conspiracy theory doing the rounds in the industry is that some fund houses have lobbied to push the deadline forimplementation of this valuation norm to keep such transactions out of the limelight.
SEBI, in its circular, said MFs are permitted to voluntarily propose the implementation of the new valuation rules before August 1.
“A voluntary implementation is unlikely, as it will be suicidal. The new norm will shrink returns from liquid plus schemes and also heighten volatility,” said a senior debt fund manager with a bank-sponsored MF.
Liquid plus schemes have returned about 4.5% in a year, according to Value Research. Returns from liquid schemes, which invest in debt paper with maturity of less than 90 days, have shrunk after SEBI, last year, directed MFs to align the tenure ofdebt securities in the portfolio of liquid schemes with the maturity of these schemes.
Lower taxes have also encouraged investors to stick to liquid plus schemes compared to liquid funds or bank fixed deposits. Interest income on fixed deposits is taxed at 33%, but the dividend distribution tax, which mutual funds deduct before handing over dividend to investors, is at 22% for corporates and 14% for individuals.
Valuation of Debt and Money Market Instruments
Cir / IMD / DF / 4 / 2010, Dated: June 21, 2010
1. Please refer to circular SEBI/IMD/Cir/No 16/193388/2010 dated February 02, 2010 regarding valuation of Debt and Money Market Instruments. The circular indicated the valuation methodology to be effective from July 1, 2010.
2. In partial modification of the above circular, it has been decided to make this circular applicable w.e.f. August 1, 2010.
3. However, those mutual funds which voluntarily propose to implement the valuation under the aforesaid circular before August 1, 2010 are permitted to do so.
4. This circular is issued in exercise of powers conferred under section 11(1) of the Securities and Exchange Board of India Act, 1992, read with the provisions of regulation 77 of SEBI (Mutual Funds) Regulations, 1996 to protect the interests of Investors in securities and to promote the development of and to regulate the securities market.
Deputy General Manager
Tel no. 022-26449258
Notification No : Cir / IMD / DF / 4 / 2010
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Posted on 22 June 2010