The country’s largest fund house HDFC Asset Management on Monday said that it has received two show cause notices from market regulator Sebi in relation to the investments of Fixed Maturity Plans (FMPs) of HDFC MF in debt instruments of Essel Group companies.

The notices sent by Sebi come at a time when HDFC MF has been under fire for extending the maturity of HDFC FMP 1168D February 2016 (1) by 380 days citing investment opportunities in the short maturity bucket, when the real reason was that the FMP had close to combined 20% exposure in two Essel Group firms and it was nearly impossible for the companies to repay debt with full interest had the FMP matured on original maturity date of April 15.

HDFC Mutual Fund under a few schemes has debt exposures to Essel group entities secured by a pledge of shares of Zee Entertainment Enterprises Limited (ZEEL) as well as Dish TV Ltd (Dish). It is estimated that HDFC MF has an exposure of Rs 1,100 crore to the Essel Group, one of the highest among AMCs. Debentures issued by Essel Group firms to raise funds are secured by listed equity shares of Zee/Essel group firms.

“We are working with our legal advisors and are in the process of responding to the said show cause notices,” said HDFC Asset Management. The stock exchange communique by the listed company was dated May 11, 2019, but was filed on May 13, 2019.

While RupeeIQ has not reviewed the show cause notices sent to HDFC Asset Management, it is understood that Sebi is unhappy that due to the holding back of payments in the FMPs, the maturity of the underlying paper became higher than the maturity of the debt mutual fund.

Meanwhile, Kotak Mutual Fund has also reportedly received SEBI notice citing violation of mutual fund regulations and investor protection, according to a Mint report. RupeeIQ has asked spokespersons of Kotak MF if they have received any communique from Sebi on FMPs. We will update when there is a response.

Kotak FMP Series 127, a three-year FMP, whose full redemption proceeds are maturing in April-May 2019, was not able to make the full redemption payment immediately. Kotak FMP Series 127’s exposure to Essel Group firm – Konti Infrapower & Multiventures was to the tune of Rs 45.93 crore or 10.36% of assets.

Back story

HDFC MF had reasoned that the option to extend the maturities of Essel group exposures and allowing additional time to complete the strategic stake sale offers a good chance of “higher/complete” recovery against debt exposures.

The top fund house reasoned that the other option to invoke pledged shares of Essel group entities and sell immediately “most likely” would have resulted in significant under recovery.

As the consequence of agreeing to provide additional time to Essel group promoters, the maturity of the debt exposure in Essel group has been extended beyond the maturity of few fixed maturity plans. HDFC MF had said it will adopt either of the following options, which it deems appropriate to safeguard the interest of unit holders:

(1) FMPs that have exposure to Essel Group may be rolled over in accordance with the provisions Regulations 33(4) and other applicable regulations of SEBI (MF) Regulations.

All those unit holders, who do not opt for roll over or have not given written consent, shall be allowed to redeem their units at prevailing NAVs. The valuation of the Essel group exposures / securities will be arrived based on the valuation provided by the AMFI approved independent valuation agencies as on the date of redemption.

(2) The unit holders will receive the maturity proceeds on due date of maturity of the FMPs excluding the value of debt exposures to ZEEL group. The residual amount of the maturity proceeds of the FMPs pertaining to Essel group exposure would be paid on receipt of the dues from Essel group.

On January 25, 2019, share price of ZEEL and Dish fell sharply by 26% and 33%, respectively, primarily on reports of pledged shares of promoters being invoked and sold. This resulted in security cover against HDFC MF exposures falling below the prescribed threshold as per the NCD documents.

As per HDFC MF, the Essel Group promoters conveyed their inability to provide additional equity shares as most of their domestic shareholding was already pledged. Consequently, a meeting was held between the promoters and the group of lenders and it was agreed to provide additional time to promoters to complete their ongoing strategic sale plan of ZEEL shares.

As on date, over 75% of the lenders have agreed to provide additional time to Essel Group promoters to complete the ongoing strategic sale.

Providing a rationale for granting additional time to Essel group promoters to complete the on-going strategic stake sale, HDFC MF said that this is an unprecedented situation and it is acting to the best of judgement keeping in mind the interest of unit holders.

Reliance MF is among top AMCs that did not agree to a standstill agreement with Zee/Essel Group. Reliance MF has also reportedly sold Essel papers last week to raise Rs 400-odd crore.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].

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