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Mutual funds' financial manoeuvring, popularly known as "river crossing" in industry parlance, may be a thing of the past as the market regulator has started looking into daily trade data, including those on certificates of deposit, of fund houses.

River crossing, or parking or holding period return, is a rampant practice that takes place mostly at the financial year end when mutual funds connect with cash-rich entities to tide over redemption pressure. Regulators normally consider the practice imprudent since it raises investor risk.

The Securities and Exchange Board of India (Sebi) is now taking all trade data from MFs, including on CDs and interscheme transactions. There are some outlier trades in the first week of October, which raise suspicion, three people familiar with the matter told ET.

This time the redemption pressure was somewhat higher in the middle of the year, triggered by the Amtek Auto fiasco.

In September, CD rates spiked about 25 basis points across maturities as banks aggressively raised money to shore up deposits ahead of quarterly earnings.

But the rates slid after RBI's rate cut exceeded estimates. At the same time, mutual funds, the biggest buyers of CDs, faced redemption pressure in liquid and ultra short-term funds as lenders wanted to avoid setting aside any extra capital for mutual fund exposure to maintain a good capital adequacy ratio.

Intermediaries or brokers connected with a few cash-rich entities -corporates or bankers -which extended funding support to MFs by temporarily buying CDs at higher rate than normal. Beginning next quarter (October), the financial entities will sell back CDs to MFs at a predetermined price, that could give the financing institute gains of 10-20% in annualised return for 5-10 days. For instance, state-owned Syndicate Bank's CD maturing mid-December traded at a high of 7.61% against a normal rate of 7.05% on October 1, said two market sources. On October 5, Andhra Bank and Axis Bank CDs yielded 7.63% each, with both maturing in November-end.

It is unwise for mutual funds to participate in this practice," said Dhirendra Kumar, CEO of mutual fund portal Value Research. "The gains are few and if something goes wrong, the potential damage to reputation is immense. Showing higher assets for a few days can hardly be a big achievement

 

 

 

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