Debt FundsJust a day after it emerged that IL&FS and Essel debt exposure held up Kotak FMP redemption full payment to investors, the country’s largest fund-house HDFC Mutual Fund announced that it has extended the maturity of HDFC FMP 1168D February 2016 (1) by 380 days. Such extensions are commonplace in the Fixed Maturity Plan (FMP) world, but the Kotak FMP issues have made debt MF investors suspicious. Not without a reason! This is because the HDFC FMP in question also has large exposure to Essel Group firms. Read on to know more.

Essel exposure

The Rs 339-crore HDFC Fixed Maturity Plan – 1168 Days – February 2016 (1) was launched on Feb. 3, 2016. It has generated 9.5% CAGR since launch. Subsequent to the latest announcement of the rollover, the scheme shall mature on April 29, 2020. The existing maturity date of the scheme was April 15, 2019.

“The purpose of the rollover/extension is due to current interest rate scenario and portfolio positioning, the yields prevailing in the short maturity bucket present an option for investors to lock-in their investments at current prevailing yields,” HDFC MF said.

The reason for roll-over on paper may seem ordinary, but a close study of HDFC Fixed Maturity Plan – 1168 Days – February 2016 (1)’s portfolio shows that it has close to combined 20% exposure in two Essel Group firms.

As per March 2019 data, almost 10% of HDFC Fixed Maturity Plan – 1168 Days – February 2016 (1)’s money is in debentures of Edisons Infrapower and Multiventures. Another 10% is in debentures of Sprit Infrapower and Multiventures. This means as much as 20% of the Rs 339 crore of FMP money is in these two Essel Group firms.

HDFC MF has not shared an update on the possible credit issues related to the two Essel Group firms. But it can be said with a fair degree of certainty that the HDFC FMP’s 20% investments being in two Essel Group firms would make it nearly impossible for the companies to repay debt with full interest had the FMP matured on April 15. By extending the maturity period by 380 days, the HDFC FMP technically gets more time to ensure full recovery of any dues.

Lenders, including mutual funds, have already made an agreement with debt-ridden Essel Group to not trigger any default till September 30, 2019. By this time, Essel Group hopes to sell stake in Zee Entertainment. If the stake sale happens and money comes to Essel, everybody including lenders, goes back home happy with their promised amount. If the stake sale does not fructify by that deadline, lenders and Essel group promoters may have to arrive at a new deadline.

Do remember it is likely that debentures issued by Essel Group firms to raise funds may be secured by equity shares of Zee Entertainment. But fund houses, due to the September 30 pact – as per which, in early February, lenders holding shares pledged by Essel Group companies agreed that there will not be any event of default being declared till September 30 – cannot go ahead and sell equity to recover monies. Also, a big wave of unstructured selling of shares will reduce the price of equity and thus realise a far smaller amount than covered.

Choices for investor

Rollover is not mandatory for FMP investors. But, investors may not have much of a choice. We will explain why.

If you agree to roll over – Legally, the rollover / extension of maturity of the plan will be done only for those unitholders who expressly provide their written consent to HDFC Mutual Fund by signing the consent letter and submitting the same latest by 5.30 p.m. on Friday, April 12, 2019 at the nearest Investor Service Centres of HDFC Asset Management Company Ltd. or at any of the service locations of Computer Age Management Services Private Limited.

So, you have virtually a day maximum from today to provide written consent. The consent letters for rollover/extension of the maturity of the plan along with terms and features of the rollover/extension of the maturity of the plan are being dispatched to each unitholder.

If you do not agree to roll over – In case you do not wish to roll over / extend the maturity of the plan, your units will be redeemed at applicable NAV on the existing maturity date (April 15, 2019). If HDFC MF indeed cannot recover its dues from the Essel Group firms by that date, the NAV will reflect it. This means returns will be hampered.

Unitholders are requested to note that rollover/extension of the maturity of the plan will be subject to compliance of SEBI guidelines with respect to:

* Maintaining the assets under management (AUM) of at least Rs 20 crore
* Requirement of minimum investors i.e. a minimum of 20 investors and no single investors shall account for more than 25% of the corpus.

In case the above conditions are not fulfilled, the plan shall not be rolled over / extended and that the maturity proceeds will be paid out to ALL Unitholders, irrespective of their choice exercised.

For any queries or clarifications in this regard, please call HDFC MF on 1800 3010 6767 / 1800 419 7676 or email us on cliser@hdfcfund.com

Previous rollovers

Way back in 2016, many fund-houses had shown a trend of extending the maturity of their FMPs. It was an interesting development at that time because for many FMPs a rollover of mere 7 days made the units of such plans a long term capital asset, thereby improving the tax efficiency of the returns. At that time, the change in debt fund taxation norms prompted fund houses to extend maturity as a small extension made capital gains for less than a three-year holding period liable for taxation at the slab rate.

Additional Read: IL&FS, Essel debt exposure holds up Kotak FMP redemption full payment to investors

However, the maturity extension matter of HDFC FMP, at least on paper, falls under the non-taxation scope. It seeks to provide the opportunity for investors to extend their existing investments by locking in prevailing yields or possible returns for the incremental investment period i.e. 380 days. Be as it may, RupeeIQ believes investors should be cautious about extensions that seek to capture non-tax opportunities. If the higher yield is stated as a reason for maturity extension, investors should understand the risk profile and where the fund intends to invest before taking a final call.

Author
Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. He can be contacted on contact@rupeeiq.com