Sundaram MF withdraws DHFL side-pocket, says not in-line with Sebi norms

Proposal was not in-line with Sebi norms on creating a separate portfolio for affected asset

Sundaram Mutual Fund’s (MF’s) proposal to side-pocket debentures of Dewan Housing Finance Corporation (DHFL) nearly 90 days after the ‘credit event’ had led to confusion among other fund houses, as the mechanism could not be invoked even a day after the credit event unless the regulator agreed to a one-time relaxation.

Sundaram MF, however, on Wednesday night issued a note to clarify that it won’t be going ahead with the move as it was not in line with the norms laid down by the Securities and Exchange Board of India (Sebi).

“Some fund houses have been asking Sebi to allow them one-time relaxation to side-pocket DHFL papers. But as the credit event as defined by the regulator has already lapsed, we are unable to side-pocket it. So, Sundaram MF’s proposal came as a surprise,” said senior executive of a fund house.

After the recent board meeting, Sebi Chairman Ajay Tyagi said, “Side-pocketing guidelines were introduced in December. It is not mandatory and MFs know how to go about it. They don’t need any guidance. I have nothing to say on a specific case.” Tyagi was responding to a question on allowing relaxation to MFs to use side-pocket in the case of DHFL.

According to Sebi’s December circular, a credit event is when a company’s debt papers are downgraded to below-investment grade. The non-convertible debentures (NCDs) held by Sundaram MF were downgraded from ‘BBB-’ (investment grade) to ‘D’ or default grade on June 5, 2019. Sebi’s norms indicate that the decision to side-pocket has to be taken on this day of the credit event.  

However, Sundaram MF in an earlier notice had mentioned August 16, 2019 — the date of default — and didn’t make any mention of the date of downgrade to below-investment grade. The segregated portfolio was to come into effect on August 30, 2019.

In the same note, Sundaram MF also disclosed it had fully written off Rs 52.2 crore of interest and principal related to DHFL NCDs held in its schemes. The move followed DHFL’s default on certain NCDs that matured on August 16. Four schemes of the fund house had exposures to the debentures of the troubled housing finance company. These included Sundaram short-term debt fund, low-duration fund, short-term credit risk fund, and debt-oriented hybrid fund.

Overall, 160 MF schemes were exposed to DHFL as of May-end, with the industry’s aggregate exposure at Rs 4,200 crore. In June, the entire industry took sharp markdowns on DHFL exposures after rating agencies downgraded the firm’s debt papers to ‘D’ following a default.