Curbs laid down by Sebi could spell trouble for cash-strapped promoters

MFs' exposures to such entities can face refinancing risks

Curbs laid down by the Securities and Exchange Board of India (Sebi) on promoter funding can spell trouble for cash-strapped promoters who have availed funding from mutual fund (MF). The minimum security cover prescribed by the regulator for “loan against shares” and exposure limits could lead to near-term risks for MFs when existing loans come for refinancing.

“Some of the regulatory changes will make it difficult for promoters seeking funding against pledged shares to roll over their debt. The non-banking financial companies (NBFCs), which are an alternative avenue, are already constrained because of their own liquidity challenges,” said Akhil Mittal, senior fund manager, fixed income, Tata MF.

In its board meeting on Thursday, the market regulator set limits for MFs investing in debt instruments backed by “credit enhancements” such as pledged shares. The limit for such investments was pegged at 10 per cent of a debt portfolio. The regulator also placed a 5 per cent limit on the exposure levels of a scheme in companies belonging to the same group.

“In several instances of promoter exposures, MFs have lent to multiple unlisted companies belonging to the same group or the promoter,” said a fund manager, requesting anonymity.

With the view to make sure that MFs take enough precautions when extending credit to promoters, the regulator stipulated that such investments could only be done if pledged shares give four-times security cover over the loan amount.

According to industry officials, increasing the equity cover to four-times will significantly reduce attractiveness of MF funding for promoters.

"MFs had been lending to promoters at 1.5x-1.6x share cover. Some of the debt-troubled promoters might not have enough shares left to double their equity cover, as per the new norms," said senior executive of a fund house.

However, some analysts are of the view that security cover may not be enough to mitigate various risks related to promoter funding.

"The ability to sell shares with minimal impact cost on trigger event, fundamental credit profile of the underlying entity, stock-specific risks, systemic market risks, and extent of promoter pledging are larger issues, which cannot be addressed by merely increasing the collateral," said Bhushan Kedar, director, Crisil Mutual Fund Research.

Earlier, Reserve Bank of India mandated two-times security cover for investment in loan-against-shares, but no such restriction applied to MFs.

To plug the information gaps, the regulator wants MFs to only invest in non-covertible debentures (NCDs) and commercial papers (CPs) listed on the exchanges. “There are still a sizeable number of NCDs belonging to some of the promoters that are unlisted. Meanwhile, CPs remain unlisted instruments. The move would subject such entities to dislcosure requirements that listed entities need to comply with,” Mittal added.

The loan-against-shares structure came under the regulatory scanner earlier in the year when MFs entered into a 'standstill' agreement with promoters of Essel group. As part of this agreement, MFs and other lenders gave promoters time till September to repay their full dues. In the interim period, they agreed that they would not exercise their right to sell promoters’ pledged shares to recover dues.