The AMC may have to cough up income tax for investments made in pass through certificate (PTC) in 2008-09.
Mumbai: Central Board of Direct Taxes (CBDT) is believed to have asked a top AMC to cough up income tax for its investment made in pass through certificates (PTC) in year 2008-2009, said two people familiar with the development. Industry sources say that the IT department might scrutinize the books of other AMCs too.
Industry officials say that since the investors would already had redeemed from fixed income schemes it does not make sense to penalize existing investors by deducting the tax from existing portfolio.
What are PTCs?
PTCs are issued by banks and companies. Through PTCs, banks transfer their long term mortgages (receivables) to NBFCs and mutual funds. Banks do this to hedge some of their risks. This also helps banks maintain their statutory liquidity ratio mandated by RBI. A special purpose vehicle is created for mediating between the investor and the borrower. This method is known as securitization.
Usually short term funds and long term bond funds invest in PTCs. The industry’s exposure to PTC has come down sharply after the market 2008 downturn and the changes in RBI guidelines regarding PTCs. Fund managers say that the PTC market is illiquid.
“AMCs do not have huge exposure to PTCs. In our case it’s none. Earlier PTCs were raised and sold outright but now RBI has asked the originator to keep 10% of tranche to themselves. They are permitted to sell the PTC only after a seasoning period. The originator has to hold back the loan in his books. The incentive for originators to quickly raise a loan is no longer present. The volumes in PTC market have dropped drastically,” says Killol Pandya, Head of Fixed Income at Daiwa AMC.
The yields on PTCs depend on the maturity and interest rates. A longer tenured PTC will pay a higher return and vice versa.
