The Reserve Bank of India (RBI) on Wednesday clarified that it had no issues with mutual funds (MFs), or other set of creditors, participating in the inter-creditor agreement (ICA) process, in cases where a portion of the outstanding debt is lent by non-bank entities.
"When the banks dealt with individual cases, they found that a good portion of the outstandings of individual entities were from insurance companies, mutual funds and others. When you have an ICA that covers only 50-60 per cent of the outstanding of the company, then you are not doing anything about the remaining 40-50 per cent. So, it is necessary to look at the entire liability of an entity comprehensively," RBI Governor Shaktikanta Das said, during his media interaction post-monetary policy meet.
The Securities and Exchange Board of India (Sebi) is yet to give a green-light to MFs to participate in the ICA process for resolution of Dewan Housing Finance Corporation (DHFL). MFs' debt exposures to DHFL stood at Rs 4,184 crore at the end of May with as many as 160 schemes exposed to the company. The exposure levels in June are significantly lower, but that is largely on account of industry-wide markdowns triggered by DHFL's downgrades and default in June.
Das further added that RBI has been holding meetings with other regulators on the ICA framwork. "We have had inter-regulator meetings at senior levels with our deputy governors and members of Sebi and Irdai. The latter has taken a decision to enable the insurance companies to be part of the ICA. Our discussions with other regulators are ongoing. Unless the total oustanding is not looked comprehensively, you may not make good progress," Das said.
Pension funds - which are regulated by the Pension Fund Regulatory and Development Authority - also have exposures to DHFL.
Deputy governor NS Vishwanathan was also of the view that unless all creditors come to some understanding on how to deal with a stressed asset, it becomes a problem.
On how ICA-framework will be able to deal with different quality of collateral held by different set of creditors, Vishwanathan said, "We do not have a problem if ICA provides for different treatment for different types of creditors."
Industry sources add that mutual funds don't want to be treated unfairly in DHFL's resolution process, which is being led by a consortium of 27 banks. "MFs should be treated on par with retail investors as MFs also receive investments from retail investors," said a head of fixed income, requesting anonymity.
According to sources, Sebi might allow MFs to become part of the ICA-backed resolution process through the side-pocket mechanism. However, that would require a one-time relaxation from Sebi on various regulatory requirements.
For starters, a side-pocket needs to be enabled immediately after the credit event. In DHFL's case, the credit event happened two-three months back. Apart from this, MFs need to insert the 'side-pocket' provision in scheme information documents, put in place detailed internal policy, seek trustees' approval and provide load-free exit to investors.