It took my colleague Aman a month of poring over company filings with the Registrar of Companies to report that Essel Group’s 15 investment companies and 88 operational companies had run up an unsustainable debt of over Rs 17,000 crore. Most of these companies were loss making. And a large portion of the debt raised by them was on the back of promoter shares in Zee Entertainment Enterprises Ltd. So much so that promoters Subhash Chandra and family had pledged over half of the their 41 percent stake in Zee and almost all of the 61 percent stake in Dish TV, the two largest listed companies of the group, to fund unviable infrastructure projects.
India’s mutual fund industry invested over Rs 7,500 crore in debt instruments issued by Essel Group companies and, alarmingly, missed all the red flags.
- Private companies.
- Opaque structures.
- Investments in non-core activities.
- Rising debt levels.
- Shares as collateral.
- Large proportion of promoter shares pledged, making exit difficult and defeating the very purpose of the collateral.
- Most of these equity-backed bonds were rated by one rating agency.
That was the original sin. But not the only one.
The Standstill
The severity of Subhash Chandra’s financial crisis should have been evident in November 2018, when the Essel Group announced it wanted to sell up to half its shareholding in flagship company Zee. It’s what prompted BloombergQuint to dig deep into the Chandra-promoted Essel Group’s financials. But the mutual fund industry stayed silent.
On Jan. 25, 2019 the Zee stock price dropped over 30 percent. That depleted the collateral value of the shares, triggering a default across all the debt instruments where they served as collateral. The Essel Group has issued Rs 13,500 crore of such equity-backed debt instruments. Chandra convinced 44 lenders, including mutual funds and non banking finance companies, to hold off on selling any shares till September 2019.
Mutual funds defended the standstill as an opportunity to stabilise the share price in order to protect collateral value and improve chances of debt recovery. After all, the promoter had offered a personal guarantee and an upside sharing opportunity on sale of the Zee stake. Nilesh Shah, managing director of Kotak Mahindra AMC described it as an ‘agnipariksha’ for the industry.
“…most of us believe that the intrinsic value of Zee was far higher than what was quoted in market. From that day when the lender selling pressure started easing off, by virtue of this agreement, prices have recovered from Rs 300 to roughly Rs 477,” Shah said to BloombergQuint in a discussion on Feb. 28.
The Restructuring
In April the ‘fire test’ singed Kotak Mahindra MF’s unitholders.
The fund failed to fully redeem two fixed maturity plans that had reached maturity. That is, investors got repaid sans the money the fund had invested in Essel Group companies. That’s, “because we have provided an allowance of time to Essel group promoted companies,” Shah said, in an interview that day.
But neither he nor anybody else in the mutual fund industry clearly disclosed that not only had they agreed not to sell Zee shares, they had also given Essel Group companies up to September 2019 to repay the debt.
We know that only because BrickWork, the rating agency that continues to rate these Essel Group companies’ debt at ‘A’ and above, cited an agreement between the companies and mutual funds to reschedule the payments due by Essel Group firms as a justification for their rating decision.
Kotak Mahindra MF is but one of those under the spotlight. More than 50 FMPs managed by HDFC Mutual Fund and Reliance Mutual Fund among others have exposure to Essel Group debt. And many of those schemes reach maturity soon.
Looks Like NPA, Smells Like NPA, Then It Must Be…
To be clear, in Essel Group’s case there’s been a twin default.
First when the collateral cover fell short and wasn’t topped up. And second when the debt repayment was pushed to September 30.
That would make Essel Group a non performing asset in RBI’s books. Except the Reserve Bank of India is not the regulator here. The Securities Exchange Board of India is. And it has steadfastly refused to comment on the matter.
Meanwhile the Zee share price that crashed to Rs 319 on Jan. 25 and rocketed to Rs 486 after the standstill was announced has since fallen to Rs 410.
This is just the story of mutual fund debt investments in Essel Group. Mutual funds are also invested in such equity-backed bonds issued by the bankrupt IL&FS group and the Anil Ambani-led Reliance Group. In the latter, mutual funds have yet again agreed to standstill and in the former a court ordered standstill is in place.
BrickWork Ratings estimates a total Rs 60,000 crore has been raised via such bonds. It’s not clear what the total exposure of the mutual fund industry is. But get ready to watch this replay again and again and again….
Menaka Doshi is Managing Editor at BloombergQuint.
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