Inter-scheme transfers likely to cross ~2 trillion

At the end of Jan, figure stood at ~1.9 trillion, 12% more than last financial year

The practice of transferring corporate debt papers from one scheme to another ( dubbed inter-scheme transfers) is poised to cross the ~2-trillion mark in FY19. This will be the highest figure since the data has been available. At the end of January, the figure stood at ~1.9 trillion, which is 12 per cent higher than the previous fiscal year.

Experts tracking the industry are of the opinion that there may have been instances of some fund houses transferring riskier debt papers from institutional-driven products to retail products in anticipation of stress in these papers. They added that before the Infrastructure Leasing & Financial Services (IL&FS) crisis rattled markets in September, there were instances of IL&FS exposures falling sharply in institutional products such as short-term funds and surging in credit risk funds.

“The rise in inter-scheme volumes could be due to schemes aligning themselves with investor expectations on interest rate movements. However, if it is a case of one fund benefiting, then it warrants regulatory intervention,” said Dhirendra Kumar, chief executive officer of fund tracker Value Research.

While Securities and Exchange Board of India (Sebi) had in the past warned the mutual fund (MF) industry against rising volume of inter-scheme transfers, the share of such transfers, as an average of debt assets, continued to rise.

As on January 31, 2019, this share had crossed the 15 per cent-mark, which was a tad higher than 14 per cent in the previous fiscal year.

“In some instances, we have also found that valuations and inter-scheme transfers are not exactly according to Sebi requirements. I want you to note that we are watching. We are aware of what is happening. I want to give you an opportunity, please try and make amends,” former Sebi chief UK Sinha had said at the Confederation of Indian Industry’s annual MF summit in 2015.

Such transfers during the financial crisis in 2008 led to illiquid papers ending up in schemes which didn’t invest in them. The regulator subsequently asked for data on such transfers to be disclosed on a daily basis.

This data is available since August 2009. The year FY11 was the first time when the data was available for the whole year.

The current financial year has not been an easy one for debt fund managers with liquidity drying up after IL&FS group defaults and DSP MF’s sale of Dewan Housing’s papers at high yields, aggravating concerns in the commercial paper market.

The average assets under management for debt schemes (income and liquid) in the first 10 months of FY19 was at ~12 trillion, marginally higher than the corresponding period in the previous fiscal.