The government’s decision to raise the holding period for short-term debt funds from 12 months to 36 months will not just dent the attractiveness of the product but could also result in a surge in the cost of short to medium-term borrowing for corporates by an estimated 1-2 percentage points.
While the debt funds with the MF industry had an aggregate AUM (assets under management) of Rs 7,01,560 crore as on June 30, 2014, almost Rs 2,00,000 crore of that is invested in corporate debt securities. Now with a change in tax structure for the category (debt funds with holding period between 12-36 months) from 10 per cent (without indexation) to the marginal tax rate now, not only there is a risk of redemption and thereby liquidation of investments by mutual funds from those corporate papers but also fresh investments in such papers may dry down.
As a result of the same, corporates who were able to raise funds from mutual funds through their short term issuances will now be faced with a limitation and will have to look at other costlier avenues.
“The government’s move will impact almost 30 per cent or Rs 2 lakh crore worth of corporate borrowing done through money market instruments and short-term debt issuances subscribed by MF’s. While the mutual fund option may dry down for companies, the cost of funds for the corporates may go up by 1-2 percentage points as they will have to rely on bank funding which is costlier,” said Nandkumar Surti, MD & CEO, JP Morgan Asset Management India.
So the process of risk diversification from banks to mutual funds will be get reversed and will also put some strain on the stretched balance sheets of banks. Along with this the overall liquidity in the debt market will also get impacted as mutual funds will pull out their investments from such papers following the redemption pressure. “This will result into a 150 basis points per annum rise in funding costs of the corporate sector and also severely restrict the quantum of funding through this route,” said the head of another leading fund house on conditions of anonymity.
MFs fear R1.5-trillion outflows
Worried over the impact of the Budget announcements on the debt funds, the Association of Mutual Funds has, in a letter addressed to Sebi chairman, UK Sinha, said that the move may result into outflows worth over Rs 1.5 lakh crore. It has sought Sinha’s intervention.