SEBI has allowed fund houses to use AMC’s book if the borrowing cost exceeds running yield or yield to maturity (YTM) of the scheme portfolio.
In a letter sent to AMFI, the market regulator has clarified that the cost of borrowings by a mutual fund scheme would be adjusted against the portfolio yield and if the cost of borrowings exceeds such a yield, then fund houses can use the AMC book to repay additional interest on such borrowing.
Simply put, if a scheme carries yield to maturity of 8% and borrows money at 8.5% to meet its redemption pressure, the fund house managing such a scheme has to pay additional interest of 0.5% from the AMC book ensuring that the scheme expenses remain intact.
Earlier, AMFI had requested SEBI that the cost of borrowing made to manage redemptions in respect of liquid funds to the extent of YTM or running yield of the fund as on the previous day should be charged to the scheme and any excess cost over YTM or running yield of the previous day should be borne by the AMC.
SEBI norms allow fund houses to borrow up to 20% of the total AUM to meet redemption pressure. Most fund houses secure short-term loans to meet their transaction requirements from money market i.e. CBLO (Collateralized Borrowing and Lending Obligations) due to low rate of interest. However, fund houses have to raise eligible securities against the secured collateral that include central government securities such as treasury bills with at least six months left to the maturity date.
While interest rates on CBLO is lower than YTM, at times, it is higher due to large-scale redemption from liquid funds arising out of credit events such as IL&FS. Also, often, fund houses have to resort to borrow from banks at higher rate due to unavailability of eligible securities for CBLO. In both these scenarios, the interest rate on borrowed money could be more that YTM or running yield.