The Hindu Business Line : Mibor-linked floaters in demand from MFs

A daily put-call option facilitates the sale of these papers by investors to the issuer at any point of time. This helps MFs meet redemption pressure at short notice and offer an attractive avenue of liquid fund deployment.

Mumbai , Nov. 15

MUTUAL funds are lapping up the Mumbai Inter Bank Offer Rate (Mibor) linked daily put-call option floating rate papers.

This in turn has prompted corporates to issue these papers, which provide an easy exit to both the issuer and the investor, bond traders said. "These papers are becoming popular because of the demand from customers," said a senior dealer at a public sector bank.

"Mutual funds face redemption pressure at a short notice. In such a situation offloading dated securities in a thin volume market can result in a less profitable bargains," said a corporate bond dealer at a primary dealer that underwrites Government debt sales.

In such a situation, papers with a daily put-call option provide a way out. Investors can sell these papers back to the issuer at any point of time and receive payment. This not only provides a way out for meeting redemption pressures at short notice, but is also an attractive avenue of liquid fund deployment.

Having a put option means that the holder of the security has the right but not the obligation to sell to the issuer at a specified price up to a specified date; but in a daily put option the holder can sell it on any day during the period.

A daily call option means that the issuer has a right to redeem the bond, as the bond is callable; the right can be exercised any day after issue of the bond.

Raising funds becomes more convenient for the companies issuing these papers, said a trader. Short-term fund mismatches can also be catered to through these papers.

These papers have been attracting buying from market players from the beginning of the fiscal; this buying support has gained further strength with interest rates hardening . In the past few months, issuances of these papers have been increasing. Issuances have been in a range of anywhere between Rs 15,000 crore and Rs 30,000 crore in the past couple of months.

Some of the large corporates like Reliance Industries, Larsen & Toubro and Hindalco have also issued these instruments.

In a rising rate scenario investors do not want to be linked to a 5 year paper at a fixed rate.

Investors such as provident funds, pension funds and insurance companies exhibit a preference for higher coupon longer tenor papers.

With credit offtake picking up, banks have more or less abstained from this section of the bond market.

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