MUMBAI: Corporates, non-banking finance companies (NBFCs) and other businesses may soon have to disclose key information for issuing commercial papers (CPs) — an unsecured, convenient instrument to borrow short-term fund —to mutual funds (MFs), the largest investor group.
According to recent discussions between capital markets regulator the Securities and Exchange Board of India (Sebi) and fund houses, the proposed move would compel CP-issuing companies to spell out their asset-liability (AL) mismatch that has deepened the stress in the financial markets.
Along with tight liquidity, concerns over large A-L gaps in some of the housing finance companies (HFCs) and non-banking finance companies (NBFCs) fuelled worries over whether these companies would be able to roll over their CPs and persuade MFs and banks to extend short-term finance to tide over crisis.
“Sebi has raised the matter with MFs since its the regulator for funds. Many CP issuers, particularly NBFCs and HFCs, are not regulated by Sebi while CP (unlike bond and debenture) is a money market instrument which is the domain of Reserve Bank of India,” said a senior official in the MF industry.
An evaluation of the A-L mismatch, along with market intelligence and due diligence carried out by an MF, should enable a fund manager to have a clearer idea on the liquidity stress a CP issuer would face with change in interest rate and other market conditions.
The A-L mismatch would have a very different interpretation if investors believe that a companys outstanding CPs may not be automatically rolled over.
Besides depending on the credit rating, fund managers typically look at gearing and asset quality of CP issuers.
Once they have access to the A-L mismatch data, investors could simultaneously check the kind of reserves that that the company has build up. CP Issuers like NBFCs share their A-L mismatch with RBI, but the central bank is not known to have shared this information on a regular basis with other authorities.
“While there is question as to what extent sensitive information can be released for the sake of transparency, the regulator is trying to understand to what extent short-term funds have been used to create longterm assets by companies, particularly NBFCs. In the current market, many manufacturing companies are also under stress even though it is not realised as the focus has largely been on NBFCs..,” said an official of a credit rating agency.
Sebi took feedback from MFs and it is likely to ask funds to seek additional information from CP issuers. Since MFs are the biggest investors, companies would have to disclose.
“A-L mismatch calculation would include all short-term funds which is a combination of CPs, working capital from banks, inter-corporate deposits etc. Also, availability of extra information would make a fund manager think twice before accommodating a friendly corporate,” said another person.
CPs, having maturities of seven days to one-year, were introduced in 90 to allow highly-rated corporates — and subsequently, financial institutions and bond houses — to diversify their sources of short-term borrowings and allow investors an additional instrument.
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