The Securities and Exchange Board of India (SEBI) on Wednesday proposed to broaden the use of intraday borrowing facilities by mutual funds, allowing asset management companies (AMCs) to use such lines beyond redemption payouts and unitholder payments.
The move will allow intraday borrowing facilities for purposes other than redemption payouts, including trade settlements, forex obligations, mark-to-market (MTM) of derivative positions and other cash management needs. It will also allow such borrowings to exceed both guaranteed and non-guaranteed receivables during the day, subject to safeguards.
Mutual funds currently use intraday borrowing facilities mainly to bridge timing mismatches between payouts and receivables during the trading day and as a cash flow management tool. The proposals aim to address operational challenges faced by AMCs due to timing mismatches between outflows and receivables within a scheme.
“Since the pay-in has to be made before specific cut-off timings, the scheme receivables received later in the evening cannot be deployed effectively, which may impact the returns of the scheme,” the regulator said.
Trade settlements
The industry body Association of Mutual Funds in India (AMFI) had made representations in March that such borrowings are also required for trade settlements (pay-in obligations), forex settlements, derivative obligations, repayment of existing borrowings etc.
For instance, equity and bond trade pay-ins are typically due in the morning, while sale proceeds or TREPS receivables may only come in later in the evening. Restricting such facilities could affect “fund management flexibility and returns of the scheme,” the regulator said.
The regulator has proposed that the amount borrowed intraday need not be restricted to guaranteed receivables from entities such as the Government of India, the Reserve Bank of India, the Clearing Corporation of India Ltd (CCIL) and other clearing corporations.
Borrowing limits
SEBI also suggested that intraday borrowings converted into overnight borrowings must remain within existing regulatory limits. Current rules permit borrowing up to 20 per cent of a scheme’s net assets for temporary liquidity needs, with a maximum borrowing duration of six months.
AMCs would remain responsible for ensuring all intraday borrowings are repaid by the end of the day. Any costs associated with availing such facilities would continue to be borne by the AMCs and not charged to schemes.
Public comments on the proposals have been invited till June 3.