Mutual fund industry in a tizzy over DHFL fallout, halts fresh inflows

AMCs announce 'side pocketing' for schemes with DHFL exposure

The payment default by Dewan Housing Finance Corporation (DHFL) has sent the Rs 24-trillion mutual fund (MF) industry in a tizzy, with fund houses taking steps to contain the fallout. Some asset management companies (AMCs), with exposure to the company’s papers, halted fresh inflows and announced the so-called ‘side pocketing’. AMCs, whose fixed maturity plans (FMPs) are due for maturity, were particularly in a tight spot, with repayments due to investors as early as Thursday.

Overall, more than 160 MF schemes are exposed to various debt papers of DHFL, with more than Rs 5,200 crore of investor money riding on these exposures. Fund managers say the fallout could also potentially spill over into schemes exposed to DHFL group firms, where over Rs 1,000 crore of investor money is exposed. As many as 21 schemes hold these debt papers.  

Meanwhile, sources say market regulator Securities and Exchange Board of India is closely monitoring the situation, particularly the valuation methodology followed by AMCs on their DHFL exposures.

Industry players said the move to stop fresh inflows was aimed at ensuring fair treatment to existing investors.

“The possible recovery from DHFL should only benefit the existing investors and not get shared with new investors who take entry in these schemes following the markdowns,” said a chief executive officer of a fund house, mulling suspending fresh inflows in the exposed schemes.

On Tuesday, Tata MF stated it has suspended fresh subscription in Tata Corporate Bond Fund, Tata Medium Term Fund, and Tata Treasury Advantage Fund. The schemes’ exposure (as percentage of the scheme assets) to DHFL debentures ranged between 3.7 per cent and 28 per cent.

The Tata Corporate Bond Fund was among the worst hit, following the 75 per cent markdown of DHFL debentures as its net asset value (NAV) dropped nearly 30 per cent on Tuesday.

The fund house also stated that it proposes to create a side pocket of DHFL units in these schemes. The side pocket will be created immediately after the mandatory exit window given to investors expires on June 16.

DHFL Pramerica MF has also decided to stop accepting fresh inflows in the some of its schemes, which are exposed to DHFL. DHFL Pramerica’s floating rate fund and medium-term fund were the worst hit on Tuesday, with their NAVs falling 48 per cent and 52 per cent, respectively.
 

The fund house on Wednesday suspended subscription in the medium-term fund, floating rate fund, short maturity fund, and low duration fund. These schemes’ exposure to DHFL debentures ranged between 20 per cent and 37 per cent.

The DHFL issue could also put the FMP investors in the lurch if DHFL is unable to repay on time.

On Thursday, five of Reliance MF’s FMPs were due for maturity. An email query sent to Reliance MF didn’t elicit any response at the time of going to press. The impact on FMP investors on account of DHFL exposures in these schemes couldn’t be ascertained immediately. The schemes have already seen 4-8 per cent hit on NAVs on Tuesday, after DHFL debentures got marked down. These schemes’ exposure to DHFL papers ranged between 6 per cent and 10 per cent of assets.  

“FMPs exposed to DHFL debt papers may see a side pocket getting created as a natural outcome if DHFL further delays its debt obligations. Under the current norms, FMPs are allowed to hold units in a side pocket for two years,” said a fund manager. 
 

Besides Reliance MF, UTI MF has one FMP that is set for maturity on June 18. The scheme — which had 7 per cent of assets exposed to DHFL — saw NAV slipping 8 per cent on Tuesday.