Indiabulls Housing FinanceJust when we thought, we were done with the NBFC/HFC crisis situation, there is a new one. Indiabulls Housing Finance Ltd (IBHL) on Monday closed 34% down in its worst-ever session to near a five-year low. There was massive selling in the shares of the housing finance company (HFC), which has a loan book of over Rs 1.1 lakh crore, after concerns emerged over two issues. One, the Delhi High Court has agreed to examine allegations made by an NGO of financial irregularities against the company’s promoters. Two, banking regulator RBI has put Lakshmi Vilas Bank (LVB) under prompt-corrective action, thus muddying the waters for the proposed merger plans between Indiabulls Housing Finance and LVB.

For debt mutual funds, this is another moment of truth. With over Rs 4,300 crore of investor money in 135 debt schemes invested in Indiabulls Housing Finance debt securities, the air is filled with discomfort. With the DHFL crisis unfurling in front of our eyes just a few months ago (and still continuing), the risk of downgrades etc. is huge.

Indiabulls Housing Finance, according to RupeeIQ, now faces a high amount of headline risk given that the media will regularly report on court proceedings as well as track the LVB issue. Such regular reporting tends to bring to light more negative things to light than positive. Read on to know more.

Indiabulls Housing: The court case

The Delhi High court (HC) last Friday issued notices to Indiabulls Housing Finance, Securities and Exchange Board of India (Sebi), the Reserve Bank of India (RBI) and other respondents in a public interest litigation (PIL) seeking a probe into the mortgage lender. A bench of Chief Justice D N Patel and Justice C Hari Shankar issued a notice to the central government, the Reserve Bank of India and Indiabulls seeking their stand on the petition filed by an NGO, PTI reported.

The court also issued notice to the Securities and Exchange Board of India (SEBI), National Housing Bank (NHB), the Serious Fraud Investigation Office (SFIO), Registrar of Companies (ROC) and Sameer Gehlaut, the founder and chairman of Indiabulls group and asked them to file their replies by December 13, the next date of hearing.

The petition has been filed by an organization called Citizens Whistle Blower Forum (CWBF). The PIL alleges inaction of the respondent authorities against Indiabulls Housing Finance, and claims the company — through its promoters and their various group companies and subsidiary companies — has been advancing dubious loans to companies owned by large corporate groups, who have been routing the money back to the accounts of companies owned by the promoters of Indiabulls. Indiabulls has refuted the allegations.

Sometime back BJP leader Subramanian Swamy, in a letter to Prime Minister Narendra Modi, had accused Indiabulls group of misappropriation of funds.

Swamy publicly released a letter he had sent in June to the PM and accused the Indiabulls group of embezzling Rs 1 lakh crore from National Housing Bank (NHB).

The Lakhsmi Vilas Bank issue

Indiabulls Housing Finance has long back applied for regulatory approvals for the proposed merger of the company along with its wholly-owned subsidiary, Indiabulls Commercial Credit into and with Lakshmi Vilas Bank. The company has received the approval from the Competition Commission of India (CCI) for this.

But, other approvals including one from the RBI have not come. The proposed scheme of amalgamation is complex and unprecedented whereby a small-sized bank would be merged into a large sized housing finance company.

The whole situation has become more complicated with the Reserve Bank of India initiating Prompt Corrective Action (PCA) against the bank due to high level of bad loans, lack of sufficient capital to manage risks and a negative return on assets for two consecutive years.

It must be noted that Indiabulls Group, which is actively chasing its merger with LVB, has indicated that if the RBI wishes, then its chairman Sameer Gehlaut will be neither the chairman of the merged entity nor hold a board position.

Debt mutual fund exposure to Indiabulls Housing

When the IL&FS crisis happened around September last year, prominent debt mutual funds had about Rs 3,000 crore exposure. When the DHFL issue came to the fore, it was found that mutual funds had over Rs 16,000 crore exposure. The NBFC/HFC (housing finance company) problems were slowly coming up and that could be why the Indiabulls Housing Finance debt MF exposure is relatively less at about Rs 4,300 crore.

As the spotlight came on NBFCs and HFCs, mutual fund managers have been very cautious about investing that debt. The default by Altico Capital, backed by marquee investors, showed the fragile underbelly of the lending business. Plus, continued ‘news coverage’ on Indiabulls Housing Finance ensured that the company could not be ignored, even if you want to.

The 10 fund houses with maximum Indiabulls Housing Finance debt exposure (in Rs crore) start with Reliance Nippon Mutual Fund (Rs 1,450.5 crore), HDFC Mutual Fund (Rs 1,015.5 crore), Aditya Birla Sun Life Mutual Fund (Rs 724.6 crore), UTI Mutual Fund (Rs 408.3 crore) and SBI Mutual Fund (Rs 286 crore).

The 10 fund houses with maximum exposure to IBH

Indiabulls Housing Finance debt held market value (in Rs Cr)
Reliance Nippon Mutual Fund 1450.5
HDFC Mutual Fund 1015.5
Aditya Birla Sun Life Mutual Fund 724.6
UTI Mutual Fund 408.3
SBI Mutual Fund 286
ICICI Prudential Mutual Fund 65.9
HSBC Mutual Fund 55.7
Axis Mutual Fund 53.6
IDFC Mutual Fund 51.4
Invesco Mutual Fund 50

Data as of August 31, 2019

Fund wise exposure to IBH

Investors would want to know the fund-wise exposure of Indiabulls Housing Finance debt to different schemes.

First, we will tell you about the value-wise exposure to Indiabulls Housing Finance debt. Topping this list are Reliance Credit Risk Fund, HDFC Corp Bond Fund, and Aditya Birla SL Equity Hybrid 95 Fund, due to their own large fund size. A large-sized fund will have large absolute level exposure.

Scheme-wise exposure to IBH

Fund Name Fund AUM (in RsCr) Indiabulls Housing Finance debt % of fund AUM Market Value (in Rs. cr)
Reliance Credit Risk Fund(G) 7008.9 6.61 463.3
HDFC Corp Bond Fund(G) 12910.1 3.33 429.7
Aditya Birla SL Equity Hybrid 95 Fund(G) 11476.5 3.01 345.8
SBI DAF-XXV-Reg(G) 2526.8 7.74 195.6
Reliance FHF-XXXVIII-6-1119D(G) 1807.8 10.47 189.3
HDFC Credit Risk Debt Fund-(G) 14688.1 1.01 148.1
Aditya Birla SL Low Duration Fund(G) 9170 1.47 134.4
Reliance Low Duration Fund(G) 3752.2 3.29 123.6
Reliance Ultra Short Duration Fund(G) 3258 3.79 123.6
UTI Retirement Benefit Pension 2672.1 4.08 109.1

Next, we will tell you about the funds that have the highest percentage (%) exposure to Indiabulls Housing Finance. A high % exposure means the impact to a downgrade/upgrade of the debt security will be amplified. Fixed maturity plans top this list with Reliance FHF-XXXVII-9-1443D, Reliance FHF-XXXVI-5-1294D and UTI FTIF-XXIX-V(1113D) each having 11-12% individual exposure to Indiabulls Housing Finance.

Top 10 debt funds with the highest percentage exposure to IBH

Fund Name Fund AUM (in RsCr) Indiabulls Housing Finance debt % of fund AUM Market Value (in Rs. cr)
Reliance FHF-XXXVII-9-1443D(G) 129.2 12.2 15.8
Reliance FHF-XXXVI-5-1294D(G) 142.1 11.86 16.9
UTI FTIF-XXIX-V(1113D)(G) 52.4 11.36 6
HDFC Charity Fund for Cancer Cure – Debt Plan-Reg-50% Div Donation Opt 183.4 11.18 20.5
HSBC FTS-135-Reg(G) 170.1 11.14 19
HSBC FTS-134-Reg(G) 160.9 10.91 17.6
Reliance FHF-XXXX-19-1184D(G) 32.8 10.78 3.5
Aditya Birla SL FTP-OJ-1136D-Reg(G) 143.5 10.51 15.1
Reliance FHF-XXXVIII-6-1119D(G) 1807.8 10.47 189.3
HDFC FMP-XXXIX-1208D-March 2018(1)-Reg(G) 583.3 10.41 60.7

Where do debt ratings stand

On September 10, 2019, CRISIL had revised its rating on the long-term debt instruments of Indiabulls Housing Finance to ‘CRISIL AA+’ from ‘CRISIL AAA’. The long-term ratings are on ‘Watch with Developing Implications’. The rating on the commercial paper (CP) issue and the short-term non-convertible debenture programme has been reaffirmed at ‘CRISIL A1+’.

As recently as September 24, Care Ratings downgraded Indiabulls Housing Finance’ Non-Convertible Debentures, Subordinate Debt, to CARE AA+ from CARE AAA. The rating agency also downgraded the housing finance company’s Perpetual Debt to CARE AA from CARE AA+, the company’s Long term Bank Facilities to CARE AA+ from CARE AAA, etc.

RupeeIQ take

We are not here to tell mutual fund managers whether or not they know their investing well. Fund managers are supposed to know that.

For investors, exposure to Indiabulls Housing Finance may, over the next few months, become a rough ride. We have already seen that happen in the case of DHFL. If Indiabulls is able to pull it off despite the challenges, then full marks to them. If they don’t, things can become nasty pretty quickly.

If the Indiabulls Housing Finance starts to come apart due to the obvious issues, there may be liquidity events and that could impact the company’s rating. One of the reasons for problems could be on account of overall increased risk perception of the market and a sharp rise in the cost of borrowing and challenges in resource mobilization.

As an investor in a debt mutual fund, you have to ask yourself whether you are okay with any incoming volatility. If you are okay, then stay on.

If you are not, explore other options.

Disclaimer: Views expressed here in this article are for general information and reading purpose only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument.

Author
Kumar Shankar Roy

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