The Securities and Exchange Board of India (Sebi) in a circular on Friday, issued strict guidelines for intraday borrowing by mutual funds, especially in liquid and overnight funds. The fund houses can undertake intraday borrowing only for the purpose of redemption payouts to investors, including repurchase of units and payment of interest or IDCW (Income Distribution cum Capital Withdrawal) payout to the unitholders.
It has also said that intraday borrowing cannot be undertaken for investment or leverage.
Addressing Liquidity Mismatches
The regulator has also clarified that the borrowing by equity-oriented index funds and exchange traded funds (ETFs) for settlement of trades due to under execution of their sell trades is only permissible if the fund participates in the closing auction session in the equity cash segment.
Further, the fund houses will also be required to take an approval for intraday borrowing from its AMC board and board of trustees to undertake intraday borrowing.
Governance and Cost Accountability
At present, mutual funds undertake intraday borrowing in order to meet their cash needs due to a mismatch between the payout to investors (in the morning of (T+1) day) and receipt of maturity proceeds from TREPS and reverse repo transactions (in the evening of (T+1) day). Such a borrowing is also done for payment of interest or income distribution-cum-capital withdrawal (IDCW) payouts to its unitholders and settlement of trades equity-oriented index funds and ETFs due to under execution of sell trades on the stock exchange.
Sebi has additionally imposed an upper limit on the intraday borrowing equivalent to the guaranteed receivables due on the same day from the Government of India, RBI and Clearing Corporation of India. The eligible receivables include maturity proceeds from TREPS, proceeds from reverse repo, maturity proceeds from government securities, T-bills, SDL (State Development Loans) and STRIPS (Separate Trading of Registered Interest and Principal of Securities), interest on government securities and SDL and the sale proceeds of government securities, T-bills, SDL and STRIPS bonds.
AMCs have also been directed to bear this cost of borrowing and not pass it on to the investor. Any loss or cost incurred due to any unforeseen event or delay in receipt of funds will also be borne by the fund house.
