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Mutual fund-borrower standstill pacts not recognised: Sebi's Ajay Tyagi

As part of the 'standstill' agreement, the debt would not be declared as default, despite the drop in value of the underlying shares

Jash Kriplani & Samie Modak  |  Mumbai 

Ajay Tyagi, Chairman, Sebi at the FICCI's 16th Annual Capital Market Conference – CAPAM 2019’ in Mumbai. Photo: Kamlesh Pednekar
Ajay Tyagi, Chairman, Sebi at the FICCI's 16th Annual Capital Market Conference – CAPAM 2019’ in Mumbai. Photo: Kamlesh Pednekar

regulator Securities and Exchange Board of India (Sebi) has reiterated that the so-called standstill agreement between mutual funds (MFs) and borrowers doesn’t have regulatory blessing.

“It is not there in any of the regulations. We have made our position clear. Entities have to follow the regulations that are there. There is no confusion in that,” said Ajay Tyagi (pictured), chairman of Sebi, on the sidelines of a capital market conference organised by the industry body FICCI. The comments on a ‘standstill’ have come a day after the Essel group said it has obtained fresh extension to honour its debt obligations to lenders, which includes MFs. The Essel group promoters have pledged shares of Zee Entertainment as collateral against the loans.

In January, MFs had given the Essel group promoters time till September to repay the dues. The rationale behind the move was to realise fair value for the shares instead of a distress selloff. As part of the ‘standstill’ agreement, the debt would not be declared as default, despite the drop in value of the underlying shares. MFs also agreed to not exercise their right to sell pledged shares of promoters to recover dues. Since then, part of the dues have been repaid by the promoters after they raised funds by selling stake in Zee Entertainment.

When asked if Sebi would provide for a special dispensation to MFs to be a part of the inter-creditor agreement in the case of Dewan Housing Finance Corporation (DHFL), Tyagi said Sebi has already laid down the rules for this.

Under the framework, only those MF schemes where side-pocket is enabled can be part of the ICA process. As most schemes had not enabled side-pocket at the time of DHFL’s downgrade to below-investment grade, these schemes can’t be in an ICA unless Sebi makes an exception. On the issue of LIC’s shareholding breach at the National Stock Exchange (NSE), the Sebi chief said the life insurer will have to divest its holdings. Sebi has partially frozen LIC’s voting rights in NSE after it got classified as a ‘trading member’ following its acquisition of IDBI Bank.

Together with IDBI Bank, LIC owns nearly 14 per cent stake in NSE. Under Sebi regulations, a trading member directly or indirectly can only own up to 5 per cent in a stock exchange. To ensure compliance, LIC may have to divest about 9 per cent or IDBI Bank will have to surrender its trading member license of NSE, said experts. A trading member is an entity that facilitates trading on a stock exchange. Tyagi also said that Sebi is examining the ruling passed by the Securities Appellate Tribunal (SAT) in favour of audit firm Price Waterhouse (PW) in the Satyam accounting scandal.

The tribunal had quashed the Sebi order banning PW firms and two of its auditors from providing audit services to listed companies for their alleged involvement in the multi-crore accounting scam.

The SAT’s order had casted doubts on whether Sebi can pass rulings against audit firms. Tyagi said they will obtain legal views before deciding whether to appeal the SAT order in the Supreme Court.

First Published: Thu, September 26 2019. 23:25 IST
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