Sebi Chairman Ajay Tyagi on September 22 said mutual funds are not banks and should not attempt to behave like one. The remark comes against the backdrop of some mutual fund houses giving moratorium to borrowers in recent months on the lines of banks.
Addressing members of industry body Amfi (Association of Mutual Funds in India) Tyagi said, debt mutual funds must remember at all times that there is a difference between 'investing' and 'lending' "Mutual funds are not banks and shouldn't attempt to behave like one," he added.
Unlike banks there are neither capital adequacy requirements for mutual funds nor do they have the 'lender of last resort' comfort as banks have from RBI, the Sebi chief said. The true reflection of their portfolio in the net asset value (NAV) on daily basis is the cornerstone of transparency and investors' trust, he added.
He further said there is a need to clearly strive more to make mutual funds popular beyond the top 50 cities in the country. The mutual fund industry has been performing well with net positive inflow of money in mutual funds in each of previous five years, averaging at Rs 1.89 lakh crore each year.
The figure for the current financial year till August 2020 is Rs 1.99 lakh crore, he added. He pointed out that attraction of mutual fund schemes has been skewed towards the urban centres.
To increase penetration of mutual funds across top cities, Sebi has started incentivising mutual fund investments beyond top 15 cities and subsequently, top 30 cities. However, despite the measures taken by the regulator, the share of these top 15 /30 cities in the industry's total assets under management (AUM) has hovered around just 15-17 per cent over the last five years, Tyagi said.
"We need to strive more to make mutual funds popular in areas beyond top 30 cities," he added. The markets watchdog is also working towards increasing liquidity in corporate bonds, wherein mutual funds are biggest investors.
Mutual funds as institutional investors are one of the largest holders of corporate bonds and constantly see inflows and outflows to/from schemes. However, under many scenarios when there are industry-wide trends of subscriptions or redemptions, it becomes difficult for mutual funds to get a sizeable counterparty to cater to their buying or selling needs.
"Thus, there is a pressing need to increase liquidity in the corporate bond market to ensure smooth functioning of the debt mutual funds," Tyagi noted. Apart from mandating mutual funds to do a minimum percentage of their secondary market trades in corporate bonds on the RFQ platform of stock exchanges, Sebi said it is pursuing a multitude of measures to not only increase liquidity in secondary markets but also to enable greater issuances of paper rated below AAA.
The measures include repo in corporate bonds and backstop facility. Tyagi said the regulator is deliberating on having a limited purpose central clearing corporation for guaranteed settlement of tri-party repo trades in all investment grade corporate bonds, including those below AAA rated, to boost repo trading in corporate bonds.
"As major holders of corporate bonds, the mutual funds, who regularly have buying/selling needs, would be one of the biggest beneficiaries of a liquid market. Issuers will also be significant beneficiaries of a liquid and stable market in terms of lower borrowing costs," Tyagi said. In addition, Sebi is examining the setting up of a backstop facility in consultation with various stakeholders.
An entity which can trade in relatively illiquid investment grade corporate bonds and be readily available in times of stress to buy such bonds from various market participants in the secondary market may instill greater confidence of market participants in corporate bonds, especially in below AAA investment grade bonds, he added.
Ajit Menon, CEO, PGIM India Mutual Fund said Sebi's endeavour to deepen the corporate bond market by leveraging technology and Request For Quote ( RFQ ) system combined with an upcoming committee that will work towards creating an ecosystem for acorporate repo market will be very helpful to all stakeholders.
"This will help in increasing liquidity for below AAA bonds and reduce systemic risks for Indian investors especially in stressful times," he added.