RBI allows MFs to raise funds against CDs

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Mumbai, Oct 14: In a bid to help the domestic mutual fund industry, which is reeling under a severe liquidity crisis, the Reserve Bank of India (RBI) has decided to allow them to raise funds against certificates of deposit (CDs). The central bank will also conduct a special 14-day repo auction, at which it would infuse Rs 20,000 crore to meet the liquidity requirements of MFs.

“It has been decided to relax these guidelines for the issuance of CDs on lending and buyback, for a period of 15 days, only in respect of CDs held by mutual funds,” said the central bank in a statement. RBI allows banks and financial institutions to raise funds by issuing CDs to various entities, including MFs, for a period ranging from seven days to three years. Banks and FIs, however, are not allowed to grant loans against CDs or buy back CDs before maturity.

RBI relaxed the CD guidelines in the backdrop of the redemption pressure being faced by MFs, allowing them to seek loans against CDs or surrender them to banks before maturity. The relaxation would be subject to the Sebi (Mutual Funds) Regulations, according to which, “A mutual fund shall not borrow except to meet temporary liquidity needs of the mutual funds for the purpose of repurchase, redemption of units or payment of interest or dividend to the unit holders.”

Commenting on RBI’s decision to conduct a special 14-day repo at 9% for Rs 20,000 crore, Ajay Bagga, CEO, Lotus Mutual Fund, said it would be of immense help to the MF industry. “The limit of Rs 20,000 crore is adequate for the industry to meet its requirements,” he said.

Dhirendra Kumar, CEO, Value Research, said that the apex bank standing behind the redemptions would help to restore investor confidence and reduce redemption pressure on fund houses. However, Rs 20,000 crore may be an inadequate amount and the 14-day period may prove too short a duration, he added.