Debt fund dealings of India’s mutual fund industry are throwing up uncomfortable questions. With shares of Reliance ADA Group stocks falling like nine pins, a few schemes of Franklin Templeton Mutual Fund have come in the cross-hairs for their combined Rs 1,200 crore exposure to promoter entities of the Anil Ambani’s struggling conglomerate.
Maintaining a stoic face, the fund-house is telling investors and distributors that the transactions remain adequately covered and it is in discussion with Reliance ADA Group to decide the future course of action. The AMC has said a few days ago it cut exposure to the concerned debt securities by getting the lien-marked fixed deposits (provided as top-up cash collateral) liquidated. Right now, individual exposure scheme-wise is between 1.7-3.9%.
Lien is a type of charge created by financial institutions, like mutual funds, over fixed deposits provided by borrowers. This is done when a loan/advance is granted keeping the fixed deposit (or shares) as security. Lien gives bank automatic claim over the deposit. If there is any issue with the loan, the deposit/security is liquidated.
The Reliance factor
Business Standard newspaper on February 9 had reported how MFs led by Franklin Templeton, which has the highest exposure of Rs 1,244 crore through its debt schemes in the promoter entities of Anil Ambani group companies, will have to either seek higher collateral by way of topping-up of shares from promoter entities or risk lowering values of their schemes.
The shares of Reliance ADA listed companies started falling due to concerns related to the group’s massive debt pile, Reliance Communications insolvency issues and a growing fear that the group might have to sell off part or full stake in family jewels to raise cash to pay lenders.
Reliance Capital shares have lost nearly 74% value in last one year, with a 19% drop on Thursday alone. Shares of Reliance Communications, which has decided to opt for insolvency proceedings, is down nearly 61% in last one month. Reliance Infrastructure is down 74%, with last one month alone seeing over 48% slump. Reliance Power is down 75% in the last one year, with 54% crash in the last one month. Reliance Nippon Asset Management is down over 38% in the last one year. Reliance Home Finance is down 60% in the last one year.
Mutual funds, like non-banking finance companies, have been financing well-known promoters against their shareholdings in prime group companies. Such lending by a few fund houses recently came under intense scrutiny after the shares that were taken as security against such loans, faced a sharp decline. Yes Bank and DHFL stock drops had caused furore some weeks ago. This prompted many to speculate that mutual fund schemes could take a hit.
Reacting to the Reliance ADA Group exposure, Franklin Templeton MF in an update said: “Franklin India Low Duration, Franklin India Income Opportunities, Franklin India Dynamic Accrual, Franklin Credit Risk and Franklin India Short Term Income have exposure to debentures of Reliance ADA companies. These exposures are secured by way of pledge over shares of listed companies viz. Reliance Capital, Reliance Infrastructure, Reliance Home Finance, Reliance Power. On February 5, the AMC got the lien marked fixed deposits (provided as top-up cash collateral) liquidated to reduce outstanding exposure.”
Take a look below at the Franklin Templeton scheme-wise exposure to Reliance ADA Group securities.
Franklin Templeton MF also said: “In our view the transactions remain adequately covered and we continue to engage with the ADA Group to decide the future course of action.”
Take a look at their funds’ performance
|Fund||1-Month Return||3-Month Return||1-Year Return||3-Year Return||5-Year Return||10-Year Return|
|Franklin India Credit Risk Fund||0.62||3.41||8.58||8.56||9.26||–|
|Franklin India Dynamic Accrual Fund||0.49||3.37||8.39||9.01||9.94||8.12|
|Franklin India Income Opportunities Fund||0.45||2.73||7.89||8.39||9.08||–|
|Franklin India Low Duration Fund||0.74||2.67||8.71||8.85||9.25||–|
|Franklin India Short Term Income Plan – Retail Plan||0.46||3.33||8.76||8.62||9.19||9.1|
Debt MFs tap bonds that are secured by a pledge of shares of listed company promoters. This type of investing in holding companies/group companies is backed by a pledge of promoter shares or promoter guarantee. But, do note that these are not simple loan against shares or LAS. Usually, debt security is issued with collateral of pledge of equity shares. Since ratings of these structures tend to be lower, they earn a higher coupon for the investor. Structure likes these if backed by liquid collateral like promoter shares with a cover of 2-2.5 times are quite easily liquidated in case the borrower delays on payments.
If the share price falls, there are helpful clauses in the agreement that provides for protection by giving more shares to pledge or giving some other security. While this type of lending does involve some risk, promoters do not want to let go of their shares that are in top listed firms, often the flagship.