Why Religare got Lotus dirt cheap

Last week, Religare-AEGON bought Lotus Mutual Fund at an estimated value of 1-2 per cent of the average assets under management (AAUM).

Compare this with earlier deals in the mutual fund space and the contrast becomes obvious. For example, Infrastructure Development Finance Corporation (IDFC) bought Standard Chartered Mutual Fund in March this year at Rs 830 crore, which was 5.7 per cent of the AUM. In fact, most acquisition deals in the mutual fund industry have so far been done at 5-7 per cent of the AUM.

One of the reasons for the low valuation of Lotus Mutual was that the fund house had almost 85 per cent of the AUM money in debt. The other reason was the sharp fall in Lotus’ AUM.

In the last one month, the fund house saw a sharp fall in its AUM, from Rs 7,937 to Rs 5,457 crore. Out of this, two institutional schemes — Lotus India Liquid Plus Institutional (Rs 1,430 crore) and Lotus India Liquid Super Institutional (Rs 284 crore) — suffered the most. A fixed maturity plan (FMP) lost another Rs 240 crore.

Lotus India Liquid Plus Institutional is an open-ended liquid plus fund that was launched in 2007. However, as on September-end 2008, the fund held papers whose average maturity is 1.12 years. Sources said though some of these papers will mature in early 2009, a lot of others will mature late next year, or even later.

Both the companies refused to comment on the deal.

According to data from Value Research, a mutual fund research agency, the scheme has invested 35.66 per cent of the corpus in debentures, 27.62 per cent in certificates of deposits (CDs), 20.89 per cent in structured obligation and the rest in commercial paper and pass-through certificates.

When the AUM of the liquid plus scheme fell from Rs 2,094 crore to Rs 663 crore, it transferred some of these illiquid papers to the asset management company (AMC). The AMC, in turn, borrowed from banks to meet the redemption pressures.

Though the average rating of these papers is AA, since they will mature only after a year, the fund house found itself in deep trouble. Sources familiar with the developments said that the promoters — Temasek’s Alexandra Fund management and Sabre Capital — may not even get this price immediately.

“Since Religare-AEGON has the responsibility now to pay back investors, it is quite likely that it may decide to hold back the money till most of these papers mature,” said a mutual fund expert.

The only other way to solve this is to sell these papers immediately. But then, it will have to be sold at a discount. The latter will bring down the valuation of Lotus further.