SEBI ponder over backstop facility for easing stress in debt MFs

Speaking at the annual general meeting of Association of Mutual Funds in India (AMFI), Securities & Exchange Board of India (SEBI) Chairman Ajay Tyagi expressed how in recent times, mutual funds have witnessed substantial redemption pressure in several debt funds that forced them to sell more liquid securities. Franklin Templeton Mutual Fund had to wound up six of its debt funds amid a lack of liquidity. This made portfolios even more illiquid.

In order to ease the stress in debt funds, it’s planning to set up a ‘backstop facility’ that would aid the purchase of relatively illiquid investment-grade corporate bonds from mutual funds.

SEBI chairman Ajay Tyagi said, "The backstop facility would be an entity, which can trade in relatively illiquid investment-grade corporate bonds and be readily available in times of stress to buy such bonds from market participants in the secondary market.”

Further, he added, “Of course, a broad general guiding principle for any such entity to be set up, the market participants should have skin in the game and the moral hazard problem ought to be satisfactorily addressed."

While closing his speech at the AGM of AMFI, Tyagi warned, “Debt mutual funds must remember at all times that there is a difference between investing and lending. Mutual funds are not banks and shouldn’t attempt to behave like one.”

Concluding his statement, he said, “Unlike banks, there are neither capital adequacy requirements for mutual funds, nor do they have the comfort provided by the Reserve Bank of India (RBI) as the lender of the last resort.”