Debt Mutual Funds With Subhash Chandra’s Zee Exposure Alarm Investors
Tensions relating to the prospects of debt mutual funds holding securities of Subhash Chandra’s Essel Group entities have risen again after Kotak Mutual Fund delayed full redemption in various fixed maturity plans (FMPs), resulting into a scramble among investors to check if they too have any exposure to such paper.
Wealth managers said investors have turned jittery about the repayment capabilities of Essel, which has bought time from lenders — mutual funds and non-banking finance companies (NBFCs) — till September 30 to pay back the money. HDFC Mutual Fund, the country’s largest, has given unit holders the option to roll over investments for another 380 days instead of redeeming at maturity on April 15. It is not clear whether investors seeking refund would have to take a haircut.
Investors in six Kotak FMPs maturing between April 8 and May 31 will not get back the entire money on account of the delay in repayment by the two Essel group companies — Zee Enterprises and Dish TV. This is the first time investors in FMPs — a debt product with a lock-in — are not getting repaid in full on maturity. The six Kotak FMPs have assets of Rs 2,094 crore, about Rs 357 crore of which is accounted for by the Zee/Essel group companies.
After the Zee crisis broke in late January, fund houses holding Essel paper had managed to assuage investors with promoters pledging to sell assets and repay debt. But in the absence of a stake sale in Zee, investors are nervous.
“Investors would do well not to allocate fresh money to schemes which have a high holding to Essel/Zee group,” said Ashish Shankar, head or investment advisory, Motilal Oswal Wealth Management. “While fund houses are working towards a settlement, we do not know how this whole episode will pan out and it is best that investors wait for this to settle down.”
Mutual funds, which have been lending to promoter entities through various complex structures, have come under regulatory scrutiny. The Securities and Exchange Board of India (Sebi) had asked trustees of mutual funds to review the exposure and risk management practices of debt schemes pertaining to investments in promoter group entities and submit the findings by March 31. The regulator has been silent regarding the latest development.
Sebi is concerned that mutual funds may have gone overboard in lending to promoter group firms and that the structures through which the loans have been given are opaque. Mutual funds’ total exposure to debt securities of promoter-owned entities is not known. This is the first time Sebi is formally assessing the industry’s risks involving such structures.
As many as 10 fund houses hold securities of Zee or Essel group promoter entities in various schemes, according to Morningstar India, as of December 31 last year. Cumulatively, mutual funds hold paper worth Rs 8,000 crore in these companies.
Kotak Mutual Fund’s managing director told ET in an interview that it has started putting cap on how much promoters can borrow with shares as collateral in the wake of the Zee episode. “We are now placing both absolute cap and relative cap on how much promoters can borrow through share pledging. The idea is that even if the stock price falls by 50-60 per cent, the promoter will still have ability to repay and he doesn’t become overleveraged.”
OPPORUTNITY FOR RISK TAKERS
Open-end mutual fund schemes holding paper of Zee /Essel group continue to accept money from investors. Some risk takers sense an opportunity in such schemes, which have attractive yields as high as 9-12 per cent.
Mutual funds had lent to Essel promoters entities, who put up shares as collateral. Debt mutual funds and NBFCs lent to privately held structures set up by promoters that were rated by credit rating agencies. Promoters channelled the money to finance their other business interests or buy assets abroad. In the case of Zee, the businesses that the group entered into incurred losses.
After shares of Zee and Dish plunged in late January, Essel Group’s cashstrapped founders failed to replenish collateral. This prompted Essel to enter into an agreement with mutual funds, which have agreed not to act until September 30.
In a statement on Thursday, an Essel Group spokesperson said, “Essel Group wishes to highlight the point that Kotak Mahindra AMC is also a part of the consortium of lenders with whom an arrangement has been achieved. As per the arrangement with the lenders, a resolution for the repayment will be achieved by September 2019. Essel Group is confident to complete the repayment towards each and every lender.”
The spokesperson said group will not comment on the arrangement between Kotak Mahindra AMC and its investors. Wealth managers said they have been fielding queries from clients in the last few days on what needs to be done with schemes holding Essel group debt.
“Structures like loan against shares (LAS) or loan against property (LAP) in a mutual fund are not meant for retail investors who rarely understand all these risks,” said S Shankar, founder, Credo Capital. “If you are one such retail investor and have invested in one of such schemes, it may be wise to restructure your debt portfolio and switch to a simple debt product which you can understand, suits your needs and carries lower risk.”