Cost of funds for firms may rise by 100 bps

About 70% of the total assets of the mutual fund sector is invested in corporate debt securities across the rating spectrum and yield curves

The change in taxation rules for debt mutual funds will hit the corporate bond market, too. About 70 per cent of the total assets of the mutual fund sector, or about Rs 7 lakh crore, is invested in corporate debt securities across the rating spectrum and yield curves.

In a letter to Securities and Exchange Board of India Chairman U K Sinha, the Association of Mutual Funds of India (Amfi) has argued under the new tax laws, the cost of funds for companies will rise 75-100 basis points. Some feel the cost could rise 150 basis points. Financial consultant Mahendra Jajoo says, “Currently, companies find it cheaper to borrow from mutual funds because banks cannot lend below the base rate. So, mutual funds aggressively subscribe to corporate bonds. Now, if the subscribers to their short-term schemes or fixed-maturity plans go down because of the lock-in period and additional tax, they will find it difficult to subscribe to corporate bonds. Companies, as a result, will have to look at banks, where costs are higher.”

FEAR OF A CRISIS?

• MFs hold Rs 7 lakh crore under liquid and debt schemes, about 70% of their overall assets under management
• MFs hold Rs 1.77 lakh crore of corporate bonds, 10 per cent of the total corporate bonds outstanding
• MFs participate in 35% of all secondary bond market transactions
• MFs hold 75% of the total issuance in the money market instrument space

Officials in the mutual fund sector say the segment holds as much as 10 per cent of the corporate bonds outstanding and accounts for at least 35 per cent of all secondary corporate bond market trade, the largest by any category of investors. It also holds about 75 per cent of the money market instruments outstanding and accounts for at least 75 per cent of secondary market volumes in this segment.

The chief financial officer of a corporate house said, “A lot of working capital requirements are taken care of by borrowing from fund houses. This process will take a serious hit because of the new tax rules. No one seems to be realising this now, because we are in a bull market. But when liquidity gets tighter, things will take a completely different turn.”

Amfi’s letter says there are expectations of huge outflows from these schemes, to the tune of Rs 1.5 lakh crore, over a period. Banks will have to fill this gap.