SEBI takes up MMMF regulation from RBI

Once the Sebi regulatory framework for MMMFs is in place, RBI would withdraw its guidelines and advise banks and financial institutions that their MMMFs would be governed by Sebi.

The structure of an MMMF has also been changed. The MMMFs are at present allowed to be set up departmentally as money market deposit account (MMDA) or as separate trusts. But RBI has made it clear that from now the MMMFs will have to be set up a trusts only. Accordingly, RBI will withdraw permission given to some banks to set up MMDAs.

The RBI also decided to offer cheque writing facilities to gilt funds and those liquid income schemes of mutual funds which invest not less than 80 per cent of their investments in money market instruments.

The RBI’s specific policy changes vis-a-vis mutual funds is expected to popularise Gilts among retail investors and impart depth to the interest rate swap and forward rate agreements markets or the rupee derivatives market, say analysts.

Fund managers see the cheque-writing facility extended to Gilt funds as a significant move that will bring in more retail participation. “This is part of an overall strategy to promote Gilts among retail investors. This is a very positive move,” said a mutual fund head.

Others see a big chunk of retail money pouring into Gilt funds. “There are six or eight Gilt funds which have already created a retail market for such funds. All the Gilt funds together would have collected over Rs 1,000 crore, of which about Rs 500 crore could have come from retail accounts,” said a Kotak official.

The RBI had earlier allowed the cheque writing facility only to MMMFs. This will now cover Gilt funds as well as liquid income funds. However, for the latter the funds should be predominantly (not less than 80 per cent of their corpus) invested in money market investments.

Another significant measure announced by the central bank is the permission for mutual fund to participate in FRAs/IRS. Mutual Funds, in addition to corporates, can undertake FRAs/IRS with banks, primary dealers and financial institutions. This facility for MFs is for the purpose of hedging their balance sheet risks, though this cannot be used for market making in these instruments. This will provide depth to the interest rate swap market. At present the main participants, banks and FIs, are net borrowers. MFs will enter the market as net lenders, say officials.

The rupee derivatives market was kicked off in April has a notional principal amount outstanding of around Rs 1,700 crore. This is an enabling provision and many funds would not be in a position to use the facility of rupee derivatives immediately as their documents may not have the provision to do so, say officials. Most of the new funds, including Kotak, have this provision in their offer documents.