SBI's questions on investment practices in debt funds leaves fund managers rattled

MUMBAI: A missive from the country's biggest bank State Bank of India (SBI) enquiring about investment practices in debt funds has rattled mutual fund managers trying to cope with the ripple effects of Amtek Auto's shock default last month.

State Bank of India, which runs one of the country's largest treasury operations, has despatched a six-point questionnaire to fund houses asking them to clarify investment policies in liquid, liquid plus, duration and shortterm debt schemes.

While most of the questions are routine and ordinary, one particular question about compensation to clients in case of losses due to downgrades has unnerved fund managers who are interpreting it to mean that the public sector bank is demanding some kind of a guarantee against losses.

"SBI is worried after the Amtek Auto crisis. It wants to make sure that mutual funds are following strict risk mitigation measures," said a person familiar with the matter.


The mutual fund industry was shaken by September's default of Amtek Auto which led to a pullout of Rs 87,000 crore from liquid and short duration schemes. Two schemes of JPMorgan had to bear the brunt of the credit downgrade of Amtek and the subsequent flight of investors.

SBI is the first major investor to formally ask fund houses to explain investment practices and explain the kind of compensation that could be provided to investors in case of a default or a downgrade. Fund industry insiders believe that this could trigger similar such demands from other large investors such as big corporate houses and that the mutual fund industry would find it very difficult to handle.

An email query to SBI on the matter went unanswered till the time of going to print. Its investments in debt mutual funds is said be Rs 8,000 crore-Rs 10,000 crore.

The questionnaire asks details on the maximum percentage of commercial papers in the portfolio and maximum percentage of such securities issued by NBFCs promoted by brokerage firms. The bank has also queried whether any fund has overstepped its investment mandate.

Funds have been asked about the maximum percentage of single stock and single group exposure.

While mutual funds are ready with replies to five of the six points raised in the questionnaire, they are grappling with the response to the sixth and the last one on the list. The innocuously-worded question goes: "Methods to deal with suspension of rating of an investment and client compensation policy in the event of a default" has complicated matters as regulatory rules do not allow funds to guarantee returns or principal.

"We could lose our licenses if we give guarantees of returns or principal protection," said the chief executive of a mutual fund who got this questionnaire from SBI.

Mutual fund industry officials claim they have been warned of losing business if they do not respond to all the questions.

"At best, we can say that ‘Mutual funds are subject to market risks'," said the chief executive of another mutual fund.