 "mutual funds")
The mutual fund (MF) industry’s exposure to Essel group papers is likely to cause more pain for debt funds, given that 19 fixed maturity plans (FMPs) are likely to mature before the standstill agreement with promoters ends on September 30.
According to Value Research data, these FMPs will have more than Rs 700 crore worth of investors’ money riding on one or both Essel group entities — Edisons Infrapower & Multiventures, and Konti Infrapower & Multiventures.
Moreover, the data shows that as many as 61 FMPs have exposure to Essel group entities, with the aggregate exposure at Rs 1,672 crore as of December 31, 2018, according to Morningstar. The total exposure of all debt MFs to Essel group bonds stood at around Rs 7,500 crore.
Kotak Mutual Fund and HDFC MF have come under the spotlight in the way they have dealt with the exposures to Essel group in their FMPs.
Fund houses had entered into an agreement to not sell Essel group’s collateral shares that were provided as security for promoter companies’ loans till September 2019. While open-ended schemes maintain these assets as investment grade following the standstill agreement, FMPs maturing before September will have to explain their inability to repay investors.
In a note to investors, Kotak MF said that the fund house would make part-payment on maturity, and the rest would be paid when there is recovery from its exposure to Essel group, which is expected by September.
Meanwhile, HDFC MF, in a note to investors, proposed extending the FMPs’ maturity date by another year to April 29, 2020. As things stand, the FMP matures on April 15, 2019. “In case you (unitholders) do not wish to roll over/extend the maturity of the plan, your units will be redeemed at the applicable net asset value on the existing maturity date,” said the notice.
HDFC MF’s FMP in question had close to 10 per cent of its net assets exposed to debt papers of Essel group at the end of March 2019. Kotak MF’s FMPs, which matured on April 8 and April 10, had 8-10 per cent of assets exposed to Essel group entities.
According to people in the know, HDFC MF will be looking to extend some more of its FMPs that are maturing in this month and which have Essel group exposures.
Sources say the Securities and Exchange Board of India (Sebi) is closely monitoring the situation and has sought details from fund houses on the valuation methodology followed by them in the FMPs, even after the recovery on Essel investments appeared unlikely before maturity of these schemes.
“Sebi will have to intervene soon, given there are more fund houses and FMPs that are exposed to Essel group entities and will be looking at different ways in dealing with Essel-group and other troubled investments,” said the fixed income head of a fund house, requesting anonymity.
He added that by giving Essel group time till September to make repayments, the underlying investments in FMPs were effectively extended beyond the FMPs’ own maturity, which could need the regulator’s approval.
While rolling over or extending the tenure of an FMP is not uncommon, industry participants said that the rolling over of an FMP due to a troubled investment is not something that regulations explicitly allow.
“In the case of extension of an FMP’s maturity date, investors can either exit at the current asset value and will not have any more rights on the possible recovery of payments. Even if they decide to stick around and lock in their investment for another year, there is still a chance that the recovery doesn’t come through,” said another fund manager.
MF distributors say that the episode has dented investors’ confidence in FMPs that were offered as alternatives to fixed deposit investors.
“Such products are offered to FD (fixed deposit) investors who expected 8-9 per cent returns on their investments. However, it will be difficult to convince investors to put their money in FMPs after the recent episodes,” said Dhruv Mehta, chairman of Foundation of Independent Financial Advisors.
