Association of Mutual Funds appoints consultants to review management guidelines

MUMBAI: The Association of Mutual Funds in India has appointed a consultant to review the more-than-a-decade old risk management guidelines, and is proposing to create a “model credit (appraisal) policy”, jolted by the Amtek Auto fiasco.

CVR Rajendran, former Andhra Bank boss turned AMFI chief, admitted that the Amtek Auto bond default has acted as an eye opener to ensure that investor interests are protected.

“We are all quite happy about it that it (Amtek Auto defaults) has happened…at least now, all of us are discussing to revise our policies or looking at portfolios, even if it is not a major thing,” Rajendran told ET in an exclusive interaction.

“We will take it as a good opportunity to review policies. The big mutual fund growth is going to come in the days to come. We are forewarned about the risk involved in it,” he said.

About two months ago, Amtek Auto had missed payments to the Rs 800 crore worth of bonds where some fund houses too had invested, including JPMorgan Mutual Fund, which had restricted withdrawals from two of its funds because of the Amtek bond ownership.

The company appointed Morgan Stanley as advisor to assist in the group’s debt reduction plan, a move aimed at repayments. The various options include a minority stake sale of up to 25-40% in overseas business.

“Liquidity is a real issue today. We must have to bring in some measures as we will address the matter through the review of risk management policies,” said Rajendran who also tried to assess the global scene on bond defaults.

He had even spoken to AMFI’s counterparts in the US, only to find out that they do not face such a situation there.

“Defaults do happen in the US markets, but liquidity is not a problem. Junk bond market is a very big market in the US,” he said.

There are buyers for junk bond markets, below investment grade bonds. Investors know about defaulting companies’ position along with realisation possibilities. They exit bonds at prevailing market prices.

In India the problem is, when a downgrade happens, bonds become unsaleble, he said, adding that liquidity is only on some actively traded bonds, including PSU bonds and a few papers offered by top corporates, Rajendran rued.

However, rising number of companies are tapping the bond markets as they find the rate less than bank base rates.

So, the liability side investors are getting attractive yields, better than bank fixed deposits. On the asset side, corporates too are coming in due to lower lending rates in the corporate bond market, Rajendran explained.