Mutual funds to get more information from Commercial Paper issuers

Private companies, House Financing Companies (HFCs), Multi-National Companies (MNCs) and Non-banking Finance Companies (NBFCs) will soon have to release critical information for the issue of commercial papers (CPs).

A commercial paper is a short-term unsecured promissory note – an easy means to raise funds during cash or liquidity crunch.

Mutual funds often rely on CPs; maturity periods of CPs tend to range from 7 days to 12 months. Recently, AMCs and SEBI considered getting the CP-issuing firms to divulge their ‘asset-liability (A-L) mismatch’. An asset-liability mismatch happens when assets of an institution are more or less than its liabilities.

Aside from tight liquidity, there have been apprehensions over huge A-L gaps in some HFCs and NBFCs – whether they could overturn their CPs and convince financial institutions (banks and fund houses) to allow short-term funds to handle the crisis smoothly.

If there is ready access to AL mismatch information, it becomes easier for investors to study the company’s reserves before investing.

RBI usually gets A-L mismatch data from respective NBFCs. However, they typically do not share this with other financial authoritative bodies. NBFCs and HFCs among other CP-issuing companies fall under the purview of RBI and not SEBI.

With an assessment of the A-L disparity and market insights of a fund house, the fund manager must have more clarity on the liquidity stress that can occur when the market fluctuates or if there is a change in repo rates (and eventually interest rates).

It is not ideal to give investors the impression that a company’s unsettled CPs are not auto-processed. Also, fund managers also investigate asset quality of CP-issuing firms along with credit rating.

This additional information can help fund managers take an informed decision before indulging a company for CPs.