Capital market regulator SEBI has introduced a new regulatory framework for borrowing for mutual funds to meet the redemption of debt and equity-oriented index and equity ETFs.
The borrowing limit has been capped at 20 per cent of a scheme’s net assets and duration of borrowings at 6 months. The new rules will come into effect from April 1.
Mutual funds are allowed to borrow funds primarily to meet redemptions in liquid and overnight schemes, as these are processed in the morning hours of T+1 day, whereas the MF schemes receive the maturity proceeds from TREPS and reverse repo in the evening hours of T+1 day.
In order To bridge the intraday timing mismatch of inflow and outflow of funds, MFs enter into formal intraday borrowing arrangements with banks.
The same facility was extended to equity oriented index funds and equity ETFs. MFs can breach the 20 per cent intraday borrowing limit subject to approval by the Board, said SEBI in a circular on Friday.
Borrowing policy
The policy for use of intraday borrowing facilities will be approved by thew Board of AMC and Board of Trustees and will be uploaded on the website of AMC.
Intraday borrowings will be used only for repurchase or redemption of units or payment of interest or income distribution cum capital withdrawal payout to the unitholders.
The amount of intraday borrowings will not exceed the guaranteed receivables due on the same day from the Government, RBI and Clearing Corporation of India.
The cost of intraday borrowing will be borne by the AMC. Further, any loss or cost incurred, on account of any unforeseen event or delay in receiving the funds from receivables will be borne by the AMC, said the circular.
SEBI also clarified that borrowings by equity-oriented index funds and equity-oriented ETFs will be permitted only for participation in the closing auction session in the equity cash segment of the stock exchanges.