India Inc exposure to fixed-income schemes close to 56% of overall debt AUMs as of Sept quarter
Corporate India continues to remain invested in debt-oriented mutual funds (MFs), including fixed maturity plans (FMPs). That’s despite the fact that companies willl need to pay a higher tax rate of 30% plus surcharge and cess for short- term investments of less than three years. Companies’ exposure to fixed-income schemes fell just 3.65% in the September quarter, but it nevertheless constitutes close to 56% of the overall debt AUM (assets under management).
Suyash Choudhary, head of fixed income at IDFC Mutual Fund, says there has been absolutely no move by companies to pull out money or redeem fixed-income investments, including FMPs.
“Given the changes in inflation and interest rates, companies need to be invested in fixed income even if it means paying slightly higher taxes. Although MF schemes are now taxed on a par with other debt products, if the holding period is three years, the tax outgo would be much lower considering the indexation benefits,” Choudhary explained.
In the union budget for 2014-15, the finance minister had raised the long-term capital gains tax (LTCG) rate for debt mutual funds from 10% to 20% with indexation benefit. Moreover, the government extended the definition of long-term for debt funds to three years from one year, removing the tax advantage that debt funds with a holding period of over a year used to enjoy. Any debt fund investment redeemed by a company before three years now attracts tax at 30% plus surcharge and cess, similar to what the interest on FDs is.
Companies typically park surplus cash in debt- oriented products through their treasury operations, and these form part of their shorter-term current and medium-term investments.
Sesa Sterlite’s investments in debt MFs, for instance, at the end of the September quarter stood at R32,727 crore, out of total cash, cash equivalents and liquid investments of R47,107 crore it had.
The exposure remains more or less the same as it was prior to the June 2014 budget, when it was R32,524 crore.
Bharti Infratel’s non-current investments in debt MFs across liquid, liquid plus and income funds stood at R3,500 crore, nearly same as at the end of March 2014, according to its latest quarter’s earnings call.
FMPs, a type of closed-ended debt scheme with tenures ranging from a month to 36 months, have seen some outflows, but not as much as feared. The category has seen a net outflow of R18,346 crore in the last four months, leading to a 7.5% fall in AUM to R1.61 lakh crore at the end of October 2014.
Lakshmi Iyer, head of fixed income at Kotak Mahindra Asset Management, says that while one- year FMPs have seen less demand in recent months due to lower short-term rates and adverse taxation, there has been been no major impact on the industry. Kevin P D’sa, president finance at Bajaj Auto, said during the company’s quarterly earnings call that of the R8,000-crore surplus, nearly R5,000 crore was invested in FMPs.
Experts say that unlike retail investors and high net-worth individuals,who have rolled over their schemes to three years, companies have not done so and are paying higher tax. Maruti Suzuki, during its earnings call, stated it had not yet rolled over the FMPs and was assessing its investment strategy.
DEBT MF BETS
Sesa Sterlite’s investments in debt MFs at end of Sept quarter stood at R32,727 cr, out of total cash, cash equivalents and liquid investments of R47,107 cr
Bharti Infratel’s non-current investments in debt MFs across liquid, liquid plus & income funds stood at R3,500 cr
Bajaj Auto said that of the R8,000-cr surplus, nearly R5,000 cr was invested in FMPs