HDFC Mutual Fund Rescues Some FMP Investors Suffering Essel Group Hit

In a move to rescue investors of its fixed maturity plans, HDFC Asset Management Company Ltd. will purchase Essel Group companies’ non-convertible debentures of up to Rs 500 crore. Thereby transferring any loss (or gain) due to the investment from investors to itself.

In its statement to stock exchanges, the AMC termed this a “liquidity arrangement” to deal with illiquidity issues faced by these debt mutual fund schemes with exposure to NCDs issued by Essel Group companies.

The liquidity arrangement will apply to FMP schemes --

• that have exposure to NCDs issued by Edisons Infrapower & Multiventures Pvt. Ltd. and Sprit Infrapower & Multiventures Pvt. Ltd., companies promoted by the Essel Group
• that have already matured in the month of April, 2019
• or will mature till the standstill arrangement (September 2019)

It will not apply to those FMP schemes that the asset manager had rolled over for a year earlier in April, said a senior executive at the mutual fund, on condition of anonymity. That is because the unitholders had approved the rollover and those who did not were given other exit options at the time, the executive said.

Effectively, HDFC AMC is transferring these NCDs and the accompanying risk to its own books. The acquisition of the securities will be done “at the prevailing valuation as on respective maturity/purchase dates”, the AMC statement said. It may spend up to Rs 500 crore on this acquisition of NCDs.

Investors who were stuck will now get their money back, Amol Joshi, financial consultant and founder of PlanRupee Investments Services, told BloombergQuint. Still, the arrangement is “ambiguous” on two counts: what are the prevailing valuations and what will be the date considered for the purpose of such acquisition, Joshi said.

As of now, these debentures are still investment grade, due to restructuring of the debentures between lenders and the Essel Group, and so there is hardly any mark down, the executive explained. To be sure, HDFC AMC has not clarified as much in its statement.

This is not the first instance of an AMC seeking to absorb potential losses from debt investments in order to protect investors. In 2016, Franklin Templeton Asset Management Company pvt. Ltd. acquired downgraded Jindal Steel and Power Ltd. debt securities from its schemes. While Franklin was and is a privately owned AMC, HDFC AMC is a public listed asset manager.

The acquisition means any gain or loss on this paper at the end of the standstill agreement will be borne by the AMC and not its investors.

“It is an interesting move,” Kaustubh Belapurkar, director of fund research at Morningstar Investment Adviser India told BloombergQuint. He said while it’s good news for mutual fund investors, this should not be continued going forward.

Kumar said the action is a breach of the key principal of mutuality. “It's a wrong thing principally, because mutual fund is a pass through and you are setting a wrong precedence. It'll create quite an unequal market place,” he added.

Kumar expects HDFC AMC’s decision to create a different kind of traction around the company’s products. “It’ll also be trusted more. But is it the right way of enhancing or building trust?” Kumar questioned.

This standstill was signed by the Essel Group with several lenders, including mutual funds, in order to delay debt repayment as well as ensure as ensure there is no sale of the promoter group’s shares in listed media major Zee Entertainment Enterprises Ltd., that served as collateral for these borrowings. Terms of the standstill run parallel to promised asset sales by the Essel Group promoter, including a significant stake in Zee.

These sales are expected to happen before the standstill ends in September. If they do, the debt and interest on it will be repaid in full, and the lenders have also been promised an upside linked to the price at which the Zee stake is sold. If the asset sales fail to occur, the standstill is called off and Essel Group fails to repay debt, rating agencies will downgrade the NCDs and owners of the NCDs will have to book consequent losses.

The restructuring of Essel Group has prompted Kotak Mahindra Mutual Fund to holdback full redemption of some of its debt schemes, whereas HDFC MF rolled over some affected schemes.

At the time of the rollover HDFC MF said it had two choices—to invoke the pledged shares and sell immediately, or two extend the maturities of fixed plans that had exposure to Essel Group. The first plan, it said, would have resulted in significant under-recovery due to depressed share prices. But the second plan offered more chance of a higher or complete recovery against the debt exposures. “Thus, the risk-reward seemed clearly in favour of providing additional time to Essel Group,” it had said in a statement.

Still, the move caught the regulator’s eye. In May, the Securities and Exchange Board of India issued two show cause notices to HDFC MF for delaying repayment to investors. SEBI issued another additional notice on June 12. Kotak MF too received notices from SEBI.

Mutual funds have the biggest exposure to Essel Group’s debt, at Rs 7,570 crore, according to data by fund houses and credit rating agencies. Among the fund houses with the biggest exposure to these debt instruments are Aditya Birla Sun Life Mutual Fund, followed by HDFC Mutual Fund, Franklin Templeton Mutual Fund.

Mutual Funds faced severe criticism for the risky investments as well as agreeing to a standstill with the promoter.

Watch the complete interview with Kaustubh Belapurkar here: