MFs differ with banks over DHFL resolution, may opt for the DRT route

Mutual funds (MFs) that have exposure to beleaguered Dewan Housing Finance Corporation (DHFL) are likely to break ranks with banks and are weighing the option of going to the Debt Recovery Tribunal (DRT) to settle matters.

A meeting is now scheduled between banks and MFs to find a path that can secure the interests of both sets of players. The debenture trustees to DHFL’s bonds — Catalyst Trusteeship and IDBI Trusteeship — are also expected to give their views.

The issue came to the fore at a meeting held last Friday by SBI Capital Markets — one of the advisors to DHFL — with bankers and MFs. A few MFs said they would examine the option of going to the DRT rather than make common cause with banks.

At the end of May 2019, MFs had an exposure of over Rs 4,184 crore to DHFL. 

A senior banker involved in the talks said on the condition of anonymity that “with MFs set to pull in another direction, the entire resolution process can get derailed”. It was hoped that with an inter-creditor agreement (ICA) in the works — the terms are yet to be signed — if MFs were also to be party to a settlement, an early resolution would have been possible. 

In the case of DHFL, of the Rs 90,000 crore systemic exposure, the banks’ share is about Rs 40,000 crore. MFs, provident funds and retail investors make up the rest. It is the presence of “non-lending” creditors that makes the DHFL case a tricky one. 

The entities that can sign up for an ICA under the RBI’s revised circular of June 7 give NBFCs, small finance banks, NABARD, Exim Bank, and SIDBI a place around the resolution table, but not MFs.

“While they (MFs) cannot be part of the ICA, we hoped that we could find common ground on the haircut to be taken, elongation of debt tenure or a reset in the coupon rate,” said another banker. His fear is that if MFs were to chart their own course, the resolution plan decided by bankers via the ICA itself can be affected. Worse, if it is not acted upon within a year, according to the RBI’s June 7 circular, it will attract an additional 35 per cent in provisioning — 20 per cent if they can’t make it work within 180 days and an additional 15 per cent if no resolution is found within a year.

According to sources, the Securities and Exchange Board of India’s (Sebi’s) stance on the issue of “standstill” will be crucial to DHFL's debt restructuring plans. In the recent past, the market regulator has shown its displeasure with MFs entering into 'standstill' agreements with promoters of stressed groups; giving them extended timelines to repay their debt. On the same lines, the ICA involves giving more time to stressed borrowers to service their debt obligations. The current ICA framework is binding on banks, but institutional investors like MFs’ and provident funds are not bound by it; nor can they be party to it.

According to industry officials, if MFs are not able to participate in the ICA in principle, they will have to eventually look at legal options to recover investors’ money. One of the options on the table is approaching the DRT, sources said.

“Banks are also keen that MFs and other institutional investors become party to the ICA. They are worried that if any class of creditors initiates legal proceedings, it can further delay the recovery process and impact value of the underlying assets," said a fund manager requesting anonymity.

According to sources, MFs are yet to get a direction from Sebi in cases where banks are signing ICAs. As of now, even if MFs were to agree broadly to the ICA, the former is likely to seek more preferential treatment in the debt resolution plan. "Investors in MFs are also retail investors. So, why shouldn't MFs get the same treatment as retail investors," asked another fund manager. "If retail investors are to get their dues settled in full, why should MFs be forced to settle for haircuts on their receivables?"

Stock plunges 29% to 10-yr low
 
Shares of DHFL plunged as much as 32.9 per cent in intra-day trade on Monday after it posted a quarterly loss and flagged doubt about its ability to continue as a going concern. The stock ended 29.15 per cent lower at Rs 48.50, the lowest close since May 20, 2009. DHFL has seen its market value erode 75 per cent this year, compared with the 10 per cent gain in the BSE Finance Index. DHFL is in talks with lenders to restructure its debt and is looking for a strategic partner to help fund an equity infusion.     
 
Bloomberg