Sebi seeks details of MFs' investment, exposure in debt-ridden IL&FS group

Regulator to discuss redemption risks, liquidity issues with top fund houses on Friday

The Securities and Exchange Board of India (Sebi) has sought details of investment and exposure in the debt-ridden Infrastructure Leasing & Financial Services (IL&FS) group from major asset management companies (AMCs) and other financial institutions.

Sebi wrote to fund houses and other institutions on September 22, asking them to furnish information with respect to investments in IL&FS group companies in their portfolio, said an official.

These fund houses have been asked to specify their exposure in IL&FS and its associate entities. The details include portfolio management service name, registration number, and securities details such as maturity time, and amount invested along with the valuation as of date, based on market value, the official added.

The fund houses were directed to give the information in a prescribed format, even if there was no investment. They will have to share the compiled data with Sebi and the stock exchanges.
 

Rating agency Icra has downgraded IL&FS’ debt to default, putting the spotlight on asset managers who have an exposure of Rs 29 billion to outstanding debt issued by the stressed company and its subsidiaries.

This sudden crisis has created a panic-like situation among debt fund managers and is making them take pre-emptive action against possible risks in their portfolios. The debt schemes are also staring at redemption from large corporate investors, resulting in money managers shoring up cash levels through asset sales.

To address the concerns, Sebi is set to meet mutual fund (MF) industry body Association of Mutual Funds in India (Amfi) on Friday. Sources say the industry body is likely to propose key changes in the existing MF norms to improve risk-management practices.

One of the discussion points is likely to be around how open-ended schemes can ensure enough liquidity in dealing with redemptions, said a source.

According to an executive of a large fund house, the industry is concerned that the liquidity tightness created by the IL&FS crisis may have deeper ramifications.

“There is a systemic colour to the IL&FS crisis. If not addressed credibly, things can spiral out of control. The corporate bond market doesn’t have much depth,” said a fund manager. 

The contagion risk from IL&FS’ default came into the spotlight when DSP MF sold Dewan Housing Finance’s debt papers at 11 per cent yield last week.

Experts say this exercise of pre-empting risks can hurt housing finance companies (HFCs) with asset liability mismatches and high leverage on their books. If this situation does not improve, the spillover effect can extend beyond NBFCs (non-banking financial companies) to manufacturing firms, who could soon start facing the heat, a fund manager said.

Redemption pressure has complicated the situation with some fund houses even looking to borrow from banks to meet redemptions in liquid and debt schemes, according to sources. Fund houses are finding it difficult to generate cash as lack of liquidity is making it difficult to offload commercial papers of duration as low as one or two days.

Typically, MFs face redemptions in September as corporates take out funds to settle their tax obligations. The IL&FS event has made some large corporate investors in debt schemes nervous. The investor sentiment on debt schemes was weak, with such schemes seeing a net outflow of more than Rs 500 billion in this fiscal year as yields have hardened.
 

TAKING STOCK

• MFs asked to furnish names of PMS, amount invested, and maturity time

• Amfi, Sebi to meet on Friday to discuss the current liquidity situation

• Rs 29 billion: Estimated MFs' exposure to IL&FS and subsidiaries

• Rs 500 billion: Net outflow from debt schemes in this fiscal year

• MFs are finding it difficult to generate cash as the liquidity crisis is making it difficult to offload low-duration commercial paper