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Sebi to seek details from mutual funds with schemes linked to Zee group

Shrimi Choudhary & Samie Modak/New Delhi/Mumbai 12 Apr 19 | 01:09 AM

The Securities and Exchange Board of India (Sebi) will ask Kotak Mutual Fund and HDFC Mutual Fund for details on their decision-making process and the applicability of the guideline with regard to repaying those who invested in their schemes that had an exposure to the Essel group.

The regulator is examining the different approaches taken by the two large fund houses with regard to repayment. 

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Kotak MF has repaid investors in its eight fixed-maturity plans (FMPs) but has held back portions of the assets exposed to the Essel group. 

HDFC MF, on the other hand, had extended the maturity of one of its FMPs by 380 days. 

Sources familiar with the developments said the regulator had asked for an update on the meetings and discussions between the promoters of the Essel group and the committee of lenders since the two inked the so-called standstill agreement. 

Both fund houses maintain the decisions have been taken in the best interests of unit-holders and they see recovery.

The Essel group owes lenders Rs 13,500 crore. Of this Rs 7,500 crore is with mutual funds (MFs). The exposure is secured by equity shares of listed firms that include Zee Entertainment and Dish TV. At the end of January, nearly 85 per cent of the lenders lent a helping hand to the Essel group by agreeing not to invoke and sell the pledged shares in the open market amid a slide in the stock prices of the group companies.

The rationale behind the move was to stem a further slide in the stock prices, which would have led to a haircut for the lenders. Also, the assurance by the Essel promoters on an impending share sale gave lenders hopes of full recovery. The move, however, caught FMP investors off guard. FMPs are closed-ended MF schemes, similar to bank fixed deposits.

“Over 60 FMPs have an exposure to Essel group entities. The spotlight is on those that are due for maturity before September 30, when the standstill agreement ends. Sebi is examining the legal tenability of the approach taken by fund houses. The regulator wants to know if fund houses can do more to safeguard investors," said a source privy to the development. According to him, asset management companies have cited Sebi’s 2012 circular on handling toxic assets and recent side-pocketing norms behind their move. The market regulator, however, is probing whether the provisions have been followed. 

Sources say some fund houses have argued before Sebi the action was based on recent guidelines pertaining to segregated portfolios or side-pocketing. Under side-pocketing, a fund house can segregate a bad asset from the good ones. By doing so, there is a hope of recovery.

History of troubled FMPs 

In 2010, closed debt schemes faced repayment crisisSebi found two AMCs defaulting on debt repayment BNP Paribas & Deutsche MF had exposure to Vishal Retail Regulator had then directed fund houses to revise the valuation of debt instruments Troubled FMPs received fair NAV after the revision of the value

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