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A Borrowing Binge

Trying to build wealth on borrowed money

That the liquidity crisis of October 2008 put mutual funds (MFs) in a quandary is no longer news. But it is only when one looks at the half-yearly disclosures of borrowings can the extent of the crisis be gauged. Sure, the Reserve Bank of India (RBI) came to their rescue with a lifeline of Rs 20,000 crore to enable them to meet redemption pressures, but which were the players that were really in a hot soup? Now for the first time we probably have an inkling.

According to the regulations laid down by the Securities and Exchange Board of India (SEBI), MFs have to disclose borrowings, which amount to over 10 per cent of a fund’s net assets in the half-yearly disclosures. But there is ample ambiguity here.

Check this out. ICICI Prudential MF has disclosed that in the past six months (as on March 31, 2009), four of its shorter-term debt plans borrowed over 10 per cent of the fund’s net assets.

Franklin Templeton MF has declared that Templeton India Treasury Management has in the same period borrowed in the range of 15-to-24 per cent to meet redemption pressures.

As for Mirae Asset Liquid Fund, there are four instances where it has borrowed more than 10 per cent of the fund’s net assets.

Fair enough. But it would have been nice to know the interest rate at which they borrowed and what the tenure of the borrowings were. We know it was more than 10 per cent, but exactly how much is unfortunately, not disclosed.

However, there are others who, in keeping with the spirit of the law, have been much more forthcoming. Where the amount of borrowings is concerned, Reliance MF takes the lead. It borrowed upwards of Rs 6,000 crore (35% of its assets in short-term debt funds at the end of September 2008). Its average cost of borrowing was about 12.38 per cent, highest among the fund houses that have disclosed this information. Ironically, the schemes for which the fund house borrowed have actually never ever delivered such returns, even in their best year.

Surprisingly, Religare MF follows. The erstwhile Lotus MF borrowed Rs 4,361 crore. This figure is interesting since total assets in short-term debt funds at the end of September 2008 was just Rs 3,268 crore. This anomaly is due to the fact that the fund house was rolling over its debt as it was not in a position to sell its assets to payback its debt. Moreover, Lotus MF also borrowed over 40 per cent of its net assets in some of its funds, which was beyond the limit prescribed by the SEBI.

A look at the table will throw light on the borrowings of individual Asset Management Companies.

 

The Borrowers
Mutual Fund    Amount Borrowed (Rs/crore)    Interest Cost (%/annum)
Reliance Mutual Fund   6289   12.38
Religare Mutual Fund   4361   -
Birla Sun Life Mutual Fund   3443   11.43
Tata Mutual Fund   2915   -
Principal Mutual Fund   780   -
Deutsche Mutual Fund   690   -
Fortis Mutual Fund   605   -
IDFC Mutual Fund   600   9.29
HDFC Mutual Fund   415   -
HSBC Mutual Fund   400   12.25
DBS Chola Mutual Fund   174   -
Canara Robeco Mutual Fund   170   -
ING Mutual Fund   97   -
AIG Global Inv Grp Mutual Fund   85   -
Borrowings for the 6-month period as on March 31, 2009