Sebi questions rating agencies on valuing debt backed by promoter shares

The regulator wants to know the basis for grading debt schemes with such exposures

The rating agencies have once again come under the scanner of the Securities and Exchange Board of India (Sebi). This time the market regulator wants to know on what basis the rating agencies are rating mutual fund's (MF) debt schemes with exposure to papers that are backed by promoter shares, also known as loan against shares (LAS).

According to people in the know, the regulator also wants to understand how rating agencies are re-valuing LAS instruments when there are sharp correction in pledged equity shares, hitting the share cover of these structures.

Sources say that the LAS exposures have come under the regulatory scanner after most MFs entered into 'standstill' agreement with Essel group promoters. As per the agreement, the MFs and other lenders would not sell the pledged shares of the promoters as promoters sought time till September to repay the loans.

In normal circumstances, a lender has the right to sell pledged shares to recover its dues. 

Exercising this right, Reliance MF on Wednesday sold pledged shares of Essel promoters, recovering over Rs 400 crore of dues, sources said.

Meanwhile, most other fund houses with exposures to the LAS structures of Essel group had reached the understanding with the promoters, stating that sell of pledged shares could lead to 'sub-optimal' recovery. 

"A panic-sell of pledged shares en masse could lead to sharp correction in market value of these shares," said a fund manager, requesting anonymity. 

Earlier, rating agencies had come under scanner for their role in the Infrastructure Leasing and Financial Services (IL&FS) crisis, where the agencies gave multi-notch downgrades to the group entities in a short span of time.

According to industry estimates, MFs' LAS exposures are around RS 20,000 crore-Rs 30,000 crore. 

MFs have also been facing the heat on their LAS exposures to the Anil Ambani group. However, lenders have invoked the pledged shares of Anil Ambani group companies to recover their dues, exchange disclosures showed.