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The Securities and Exchange Board of India's (Sebi has extended the deadline for valuation norms for debt and money market instruments held by mutual funds to August 1 from July 1 earlier. Mutual funds, currently reeling under redemption pressure due to the liquidity crunch, are finding the extension of the implementation deadline for valuation norms comfortable.

However, those mutual funds that voluntarily propose to implement the new valuation methodology before August 1 will be permitted to do so, the market regulator said. "If the July 1 deadline would have been observed, then it would have created a panic situation in the market. It would have lead to more quarter-end redemptions. By August, however, it will be the middle of a quarter, that won't have a drastic impact," said a fund manager who did not wish to be named.

The Sebi had directed mutual funds to value debt securities with a maturity of up to 91 days at the weighted average price at which they are traded on the valuation day. In case such securities are not traded on a particular valuation day, they shall be valued on an amortisation basis, the Sebi had said.

The market regulator had said floating rate securities with floor and caps on coupon rates, and a residual maturity of up to 91 days should be valued on amortisation basis taking the coupon rate as the floor price. Fund houses faced redemption pressure as companies paid the first installment of advance taxes. There were also huge redemptions from banks due to 3G auction and broadband wireless access auction payments. Redemptions were the highest in income funds and money market funds.

"Right now the liquidity situation is tight and there are mutual fund redemptions. It is also the end of a quarter. August is a good time and fund houses are comfortable with that as that time is neither the end nor the beginning of a quarter. It will lead to smooth transition," said K Ramkumar, head of fixed income, Sundaram BNP Paribas Mutual Fund. However, the cash crunch is temporary as money will flow back into the system in July, say analysts. "Bond redemptions worth Rs 55,000 crore in July will add to the liquidity," said Arvind Konar, head of fixed income, Almondz Global Securities.

On Monday, Reserve Bank of India deputy governor Subir Gokarn said money that is accruing to government account will find its way back into the system. "So it is not a permanent or structural change on the liquidity scenario," he said.

Source: http://digital.dnaindia.com/