The debt market has gone through some turbulence – and I chose the word crisis just to attract attention. Santosh Kamath will not be happy with the choice of the word ‘crisis’.

Whenever I talk about mutual fund, I would ask people “Can a mutual fund invest in the fixed deposit of Tata Steel”.

The class would say “Of course”.

would then say “NO”. A mutual fund CANNOT lend money to any company. It had to invest in “marketable securities”. Let me explain.

If Tata Steel wants to raise say Rs. 10,000 crores, it cannot ask 10 mutual funds to put Rs. 1000 crores as fixed deposits. Tata Steel may want this money for a 10 year period and mutual funds may not want to commit to such a long term. There is what is called Asset Liability mismatch, and hence funds (except 10 year FMP) cannot commit to this.

The procedure is that Tata Steel has to issue MARKETABLE securities and many entities including mutual funds, banks, individuals, …will SUBSCRIBE to the debentures. This will be traded (technically) in the markets. So if Franklin Templeton mutual fund which has bought Rs. 1000 crores worth of debentures wants partial liquidity, it can go to the market and sell of debentures worth Rs. 200 crores and keep Rs. 800 crores worth of securities.

Sadly our regulators and our lazy corporates have not made any effort to develop the debt market. This means if a small company wants Rs.30 crores as a loan it goes to a bank. If a big group wants Rs. 20,000 crores working capital, term loan, etc. it still goes to a bank. It has no capability to raise Rs. 20,000 crores from the ‘debt’ market. It does not exist.

Enter mutual funds. These guys now want to lend to a company. So they issue a debenture and buy the whole issue themselves. When Dhfl, Adag, etc. default, you realize the size of the sham. Even now the regulators are not worried about the basic violation – MUTUAL FUNDS CAN INVEST ONLY IN MARKETABLE SECURITIES.

This requirement has been spoken in spirit. Our regulator …oops who is the regulator? RBI or Sebi?

well, the jury is still out on this…

  1. Dependency on US$, printing and distribution of same via QE/ZIRP/NIRP has probably distorted the economies everywhere in the world. This money has ended mostly in creation of asset bubbles and has not created real economy. Fake money leads to fake economy!? Is gold still the best bet?

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