Payment dueDebt funds, often marketed as alternatives to fixed deposits, face problems when the underlying securities have issues. In the past we have seen how even the safest of debt funds like liquid funds have been caught on the wrong foot. Now, it is the time for Fixed Maturity Plans (FMPs). Though these close-ended debt schemes are popular with high networth investors for delivering high and ‘fixed’ returns, FMP investors are beginning to realise the pitfalls too.

In the latest instance, Kotak Mutual Fund has been compelled to inform investors of Kotak FMP Series 127, a three-year FMP, whose full redemption proceeds are maturing in April-May 2019, that it may not be able to make the full redemption payment immediately. The FMP series was launched in 2013 for two years with maturity in 2015. It was then extended for a period of three years.

FMP fiasco

Why is the payment overdue? The Deepak Agrawal-managed Kotak MF FMP had exposure to Zee/Essel Group debt in the form of non-convertible debentures (NCDs). It also had exposure to IL&FS Transportation Networks. This investment has not been fully realised. At maturity, all the money invested in different securities is supposed to come back to FMP, who then pay the amount back to investors. An FMP liquidates its portfolio on maturity date. Without doing it completely, it cannot return investor money completely.

Some Kotak FMPs have a lot of Essel/Zee Group exposure. For instance, 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. Till that money comes back, theoretically FMP investors will have to be content with about 10% less maturity amount.

It is unfortunate that the debt MF industry has been caught with bad investments. Truthfully, nobody saw it coming. The IL&FS default thing was unexpected. The NBFC liquidity crisis too came out of nowhere. Corporate debt problems like in the case of Essel/Zee Group just suddenly appeared. It is estimated that mutual funds have invested over Rs 8,000 crore in Essel/Zee group debt securities. Out of this, Rs 1,600-1,700 crore is from FMPs alone.

Do note that mutual funds, as part of larger lender group, have come to an understanding with Essel/Zee Group for debt resolution. So, the group has been given time till September 30 for debt resolution. So, no event of default will be declared till September 30 at least. These lenders have a pledge on shares held by the promoters in ZEE Entertainment Enterprises and Dish TV India. But due to the understanding reached between the lenders and the corporate, pledged shares will not be sold to recover any money.

FMPs are supposed to generate returns through investments in debt and money market instruments with a view to significantly reduce the interest rate risk. They invest in debt and money market securities, maturing on or before maturity of the scheme. But if the investment is not repaid with interest by the company that took the loan, FMP manager cannot do anything. The fund-house has to only hope for better times. So, dear investor pray and hope.

Responding to a RupeeIQ query, Rohit Rao, Chief Communication Officer, Kotak Mahindra Group said: “The 3- year FMP scheme, which matures in April-May 2019, has invested in debt securities, money market instruments and government securities. Amongst other investments, the scheme also invested in Non-Convertible Debentures (NCDs) issued by Edisons Utility Works Pvt Ltd and Konti Infrapower & Multiventures Pvt Ltd (both are Essel Group companies – secured by equity shares of Zee Entertainment Enterprises Limited) and IL&FS Transportation Networks Limited (Credit Enhancement by Parent Support Agreement of IL&FS).”

The three firms are facing headwinds due to company and sector-specific issues. “We are working closely with the Essel Group for optimal recovery from Konti & Edisons for the benefit of our unit holders and believe that such recovery will take place albeit with some delay. For IL&FS Transportation Networks, Kotak Mutual Fund has made a 100% provision for this investment as the company has been classified in the Red category where recovery is uncertain and will be dependent on the resolution plan achieved by the new board / NCLT,” Rao said.

Kotak MF has some more FMPs, including Series 183, 187, 189, 193 and 194, that are exposed to Essel/Zee Group debt and will mature in coming days/weeks. Expect similar communication from the fund-house on redemption proceeds, at least for now.

Watch out for others

The real worry now begins for all FMP investors across different fund-houses. The debt exposure to Essel Group entities will not be treated by AMCs in a different manner. This means if Kotak AMC cannot get the money from Essel/Zee and IL&FS, other AMCs also can’t. Over the next two to six months, many FMPs will hit their maturity date.

Given how the IL&FS saga has played out, it is debt that remains a black box. Funds cannot really offload debt, unless at a huge discount. For problematic debt, there are hardly any buyers too. The actual value of debt securities also drops if interest payments do not happen on time.

Most of the MF debt exposure to Essel Group entities is through debentures and zero coupon bonds (ZCBs). Fund-houses like Aditya Birla Sun Life, HDFC, Kotak, Reliance, ICICI Prudential, SBI, DHFL, Baroda, and Franklin Templeton have taken exposure to debt securities.

Coming to schemes, HDFC FMP – June 2016 (36) – 1 – 1128D has the maximum exposure to Essel Group entity Sprit Infrapower & Multiventures Pvt Ltd. with 11.95% money in debentures. In fact, a raft of HDFC fixed maturity plans are the most exposed from a scheme perspective to Essel Group debt. They have more than 10-11% exposure to each debt security. Other Essel Group entities whose debt is exposed to HDFC FMPs include Edisons Infrapower & Multiventures Private Ltd. and ARM Infra & Utilities Pvt Ltd.

Take a look at the 15 schemes with maximum net asset % debt exposure to Essel Group entities (data as on Dec. 2018)

Essel group debt
Company Name AMC Name Scheme Name FMP / Open Ended Instrument Market Value % of Corpus
Dec 2018
Sprit Infrapower & Multiventures Pvt Ltd. HDFC HDFC FMP – June 2016 (36) – 1 – 1128D FMP Debentures 9.48 11.95
Edisons Infrapower & Multiventures Private Ltd. HDFC HDFC FMP – June 2017 (38) – 1 – 1136D FMP ZCB 10.75 11.68
ARM Infra & Utilities Pvt Ltd. HDFC HDFC FMP – June 2018 (41) – 1 – 1124D FMP ZCB 50.84 11.41
Sprit Infrapower & Multiventures Pvt Ltd. HDFC HDFC FMP – May 2016 (36) – 1 – 1127D FMP Debentures 13.55 11.33
Sprit Infrapower & Multiventures Pvt Ltd. HDFC HDFC FMP – July 2016 (36) – 1 – 1161D FMP Debentures 6.77 11.26
Edisons Infrapower & Multiventures Private Ltd. HDFC HDFC FMP – February 2016 (35) – 2 – 1148D FMP Debentures 44.26 11.04
Konti Infrapower & Multiventures Private Ltd. Kotak Kotak FMP – Series 194 (1099 Days) FMP ZCB 23.62 10.95
Konti Infrapower & Multiventures Private Ltd. Kotak Kotak FMP – Series 183 (1204 Days) FMP ZCB 61.40 10.73
Konti Infrapower & Multiventures Private Ltd. Kotak Kotak FMP – Series 193 (1098 Days) FMP ZCB 26.25 10.53
Konti Infrapower & Multiventures Private Ltd. Kotak Kotak FMP – Series 187 (1146 Days) FMP ZCB 51.06 10.48
Edisons Utility Works Pvt. Ltd. Kotak Kotak FMP – Series 187 (1146 Days) FMP ZCB 50.92 10.45
Konti Infrapower & Multiventures Private Ltd. Kotak Kotak FMP – Series 127 (730 Days) FMP ZCB 45.93 10.36
Edisons Infrapower & Multiventures Private Ltd. HDFC HDFC FMP – February 2016 (35) – 1 – 1161D FMP Debentures 86.09 10.34
Primat Infrapower & Multiventures Private Ltd. ICICI ICICI Prudential FMP – S 80 – 1138 Days – Plan R FMP ZCB 16.81 10.24
Sprit Infrapower & Multiventures Pvt Ltd. Birla Aditya Birla Sun Life FTP – Series OW FMP ZCB 9.39 10.23

Do remember there are many schemes which have two or more debt securities in one scheme. These debt schemes face a higher group risk in case things in Essel Group take a not-so-good turn.

Some examples of such schemes are Aditya Birla Sun Life FTP – Series OW which had a combined 15% money invested in Sprit Infrapower & Multiventures Pvt Ltd. and Essel Lucknow Raebareli Toll Roads Pvt Ltd. Likewise, Aditya Birla Sun Life FTP – Series PN had a combined more than 19% exposure to Sprit Infrapower & Multiventures Pvt Ltd. and Essel Lucknow Raebareli Toll Roads Pvt Ltd.

HDFC FMP – February 2016 (35) – 1 – 1168D scheme had nearly 20% exposure to Edisons Infrapower & Multiventures Private Ltd. and Sprit Infrapower & Multiventures Pvt Ltd.

ICICI Prudential FMP – S 81 – 1100 Days – Plan O had more than 15% combined exposure to Bioscope Cinemas Pvt. Ltd. and Jay Properties Ltd. Both Kotak FMP – Series 127 (730 Days) and Kotak FMP – Series 183 (1204 Days) each had close to 18% combined exposure to Konti Infrapower & Multiventures Private Ltd. and Edisons Utility Works Pvt. Ltd.

RupeeIQ take – Fixed Maturity Plans or FMPs have become popular, at least earlier, partly because of the marketing by MFs and distributor push but also because of the close-ended nature of the product which investors like. An FMP is a closed-end scheme that invests in fixed-income securities and remains invested in them till maturity. Investors who invest in such close-ended structure cannot get out before maturity. While an open-ended structure allows exit freedom, some of such debt funds have also been found as not-so-good investments in the recent months.

In debt mutual funds, it’s important to not chase returns i.e. high yields in these products, but pay attention to safety. Please understand that return is a function of risk. High risk means there are chances of permanent loss of capital. But, debt funds are meant for high safety, and high liquidity. High returns is not part of the debt fund game. The quicker we realise this, the better it will be for all of us.

Update (11/04/2019)

Like for Series 127, Kotak MF has also come out with another, separate investor update for Kotak FMP Series 183. Investors in this scheme were allotted units on 23rd Dec 2015 at Rs 10 NAV. The total collection in this FMP was approximately Rs 457.26 crores and the maturity is on 10th April 2019 . The scheme has exposure to IL&FS Transportation Networks Limited (ITNL) (Credit Enhancement by Parent Support Agreement of IL&FS) as well as Edisons Utility Works Pvt Ltd and Konti Infrapower & Multiventures Pvt Ltd (Essel Group companies – secured by equity shares of Zee Entertainment Enterprises Limited).

Kotak Mutual Fund said it has made a 100% provision by February 12, 2019, for the ITNL investment as the recovery is uncertain and will be dependent on resolution plan achieved by new board / NCLT. In the NAV of 29th March 2019, ITNL is valued at zero as the fund-house has already provided 100% on this investment.

In the case of Essel group firms, Edisons Utility Works Pvt Ltd (Edisons) and Konti Infrapower & Multiventures Pvt Ltd – the scheme had 19.24% of AUM invested in papers of Konti and Edisons. “If we assume that amount invested in Edisons and Konti NCDs is not realised by the maturity of FMP as mentioned above, effect of the same will be reflected in NAV of scheme on the date of maturity,” said Kotak MF.

Author
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 kumarsroy@rupeeiq.com.