The move would give more liquidity and safety to portfolios during liquidity crunch but it does not necessarily translate into higher returns for investors
Mumbai: SEBI has allowed fund houses to participate in ‘AAA’ rated corporate debt securities with a 10% cap on exposure of the net assets of the scheme.
“The cumulative gross exposure through repo transactions in corporate debt securities along with equity, debt and derivatives shall not exceed 100% of the net assets of the concerned scheme,” stated the circular issued yesterday.
It has directed fund houses to disclose the details of repo transactions of the schemes in corporate debt securities, including details of counterparties, amount involved and percentage of NAV in the half yearly portfolio statements and to SEBI in the half yearly trustee report.
What are corporate debt securities?
Corporate debt securities are non-convertible debt securities issued by companies to raise short term capital. Repos (also called repurchase agreements) are money market instruments which can be bought back at a future date. The repurchase price is usually higher than the sale price and the difference is paid as interest.
As per RBI notification dated January 8, 2010 only ‘AA’ or above rated instruments listed on the stock exchanges are eligible for repo in corporate debt securities. Repos are tenured for a minimum period of one day and a maximum one year. Banks, NBFCs, mutual funds, insurance firms, and primary dealers approved by RBI are among those allowed to participate in repos of corporate debt. Fund houses have been demanding this facility from a long time now.
What to expect?
Kilok Pandya, Head of Fixed Income at Daiwa Asset Management says that it is a step in the right direction and it would help deepen corporate bond markets. “It means higher safety. It would make the portfolio of schemes more liquid and safe. It will enable fund managers to repo part of the securities to generate cash to meet redemptions or any other requirement. It gives a fund manager more elbow room. It does not necessarily translate into higher returns. Mutual Funds were allowed to borrow against CDs. But till now we were not permitted to do this in corporate bonds. Mutual funds will be less hard pressed to sell assets outright and they will look gain temporary liquidity by using this facility,” says Kilok.
He says that fund managers will only exercise this facility if they see any value add to the portfolio. Mutual funds are currently allowed to deal in reverse repos of government securities which is an overnight instrument offering slightly lower return than the Mumbai Inter-bank Offer Rate (MIBOR).
