In the wake of partial and delayed payments by various mutual funds in their fixed maturity plans (FMPs), the Securities and Exchange Board of India is expected come out with fresh guidelines to curtail excessive risk-taking by fund houses.
The planned changes in rules are aimed at ensuring that mutual funds act as investors on behalf of the unit-holders, and not as lenders or bankers as has been found in recent cases. The changes will pertain to fund houses having clear and enforceable collateral on their books when they invest in secured debt, lower exposure limits in single company and corporate group among others.
“Unlike mutual funds, banks have capital adequacy norms and they have the capacity to absorb losses in an event of a default. But when fund houses get into lending activity in the garb of investment, it exposes their investors to risk in an event of default by the investee company, as has been seen in recent cases of default (by Essel Group companies and IL&FS Group). The government and the regulator are working on three key issues to ensure effective regulation: the issue of collateral, adequate ratings of debt papers and appropriate exposure to a single company or a group,” a government official familiar with the discussions said.
In the case of Essel Group companies where three top mutual funds had exposure of over Rs 950 crore, the fund houses have been stuck with their investments. One FMP of Kotak Mahindra Mutual Fund had over 19 per cent exposure to the two companies putting a significant portion of the scheme AUM at risk. The Indian Express earlier reported that while the two Essel Group companies that mutual funds had invested into were loss-making and had no capacity to repay, the funds were given against collateral provided by the promoters on their holding in Zee Entertainment.
Now with Zee Entertainment working out a stake sale (expected to be completed by September 30, 2019), the fund houses took a call to not encash the collateral till the resolution is attained. SEBI is looking into these nuances of how collateral is created and its enforceability, sources said. The regulator is also expected to review investment restrictions imposed on funds at the issuer level and sector level. The limits on the exposure that funds can take in debt securities issued by a single company and a corporate group could be reduced to provide higher diversification.
As per existing SEBI rules, asset management companies need to ensure that the total exposure of debt schemes of mutual funds in a group does not exceed 20 per cent of the net assets of the scheme, which can be extended to 25 per cent. Over the last month, there has been a debate on mutual fund exposure to illiquid debt papers. Though MF exposure to IL&FS Group companies in 2018 came as a setback to investors, missives from Kotak Mutual Fund and HDFC MF to their investors, last month, created a scare in the market.
Kotak Mahindra Mutual Fund acknowledged that its FMP Series 183 had almost 27 per cent of the scheme corpus invested in IL&FS Transportation Networks Limited and two Essel Group companies – Edisons Utility Works and Konti Infrapower & Multiventures. It said that as on September 9, 2018, the scheme had 7.37 per cent of AUM invested in papers of ITNL and as on March 29, 2019, the scheme had 19.24 per cent of AUM invested in papers of Konti and Edisons. While the fund house had already written off investment in ITNL, it looked to assure the investors that it said that the fund house is working towards optimal recovery from two Zee Group companies.
In the meantime, while HDFC Mutual Fund was working hard to reassure its investors over exposure to Essel Group companies, the fund house reported fresh concerns on exposure of over Rs 230 crore in Hazaribagh Ranchi Expressway Limited, which defaulted on its debt obligations and forced the fund house to take a mark down of 37 per cent on its investment and accrued interest.