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A wrong precedent

When we talk about mutual funds, we immediately relate it with SEBI’s mandatory warning: “Mutual funds are subject to market risk, please refer to investment document before investing.”

In an unusual move, HDFC AMC has taken over the risk in its own book and has not passed it on to the unit-holders of in some of the underlying securities held by its Fixed Maturity Plans (FMP’s) schemes.

As per the company’s communication in its filing to the stock exchange on 17 June, 2019, it has earmarked Rs 500 crore to buy securities of two companies belonging to Essel Group from its FMs which will mature on or before 30 September, 2019. The two entities incidentally are Edison Infrapower & Multiventures Private Limited and Sprit Infrapower & Multiventures Private Limited.

It all started in January 2019, when shares of Zee Entertainment Enterprises Limited (ZEEL) and Dish TV Limited crashed by more than 25 per cent. As an agreement, generally lenders, including mutual funds, invest in securities backed by a pledge of equity shares of listed entities and as and when the share prices of these securities fall below agreed specified limits, these lenders would have the right to sell pledged shares or force the borrower to pledge more shares as guarantee.

The instruments of Essel group companies were backed by a pledge of equity shares of ZEEL and Dish TV Ltd. As the shares fell below the agreed limits, a few lenders went ahead and sold the shares resulting in a further decline in the share prices of those stocks. In its immediate rescue, Essel group management underwent an agreement with lenders not to sell its shares and bargained for time till 30 September, 2019, for repayment. That’s why the company has decided to bailout unit-holders of those FMPs due to mature before 30 September, 2019.

It is the shareholders who have to suffer

In other words, provision of such liquidity arrangement will entail the acquisition of NCDs issued by the Essel Group companies held by such FMP’s schemes at the current valuation as on respective maturity/purchase dates and ensure timely repayment to unit-holders. Though unit-holders gain, it is the shareholders who have to suffer. The stock fell by close to 7 per cent the following day. Under the arrangement, the AMC would take over the bad securities in its books. It will be a matter of worry to shareholders if the Essel group doesn’t pay back the amount in September when the agreement expires, the securities deliver losses and will results in AMC’s not recovering the full amount.

It is not for the first time that the AMC’s has taken over the securities in its own book to meet the redemptions of unit-holders. Similar situation happened in 2008 when the whole of equity and debt market across the globe crashed on the back of global credit crises, which led to investors rushing for redemptions. In the absence of buyers, many AMC’s have taken over the risk in its own books to meet the redemptions.

Ideally, HDFC AMC would have redeemed the unit-holders to the extent of redemption value less Essel securities or rollover the securities to the future date for redemption. By setting up a wrong precedent, will not the next bunch of investors expect bailout whenever the next crisis strikes?

 

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