MFs owning Yes Bank shares write down value to zero for 75% of holdings; how will it impact schemes

Mutual funds say the treatment of locked-in shares was also suggested by AMFI for uniform implementation across the industry

Kumar Shankar Roy Mar 21, 2020

Yes Bank websiteWith the Finance Ministry on March 13 notifying the Yes Bank reconstruction scheme, which includes a 3-year lock-in period for 75% of Yes Bank shares from the date of notification, mutual funds have decided to fix the value of these locked-in shares at zero. This is considering the complete illiquidity of the shares due to the long lock-in. The zero valuation for 75% Yes Bank shares is effective March 16, 2020. The lock-in restrictions apply to all those shareholders who own over 100 shares in Yes Bank and automatically affects over 70 mutual fund schemes that held Yes Bank shares. Read on to know more.

What fund houses say

At least five fund-houses have announced the valuation change. These include ICICI Prudential, Aditya Birla Sun Life, Frankin Templeton, Motilal Oswal, and LIC.

Vide gazette notification dated March 13, 2020, the Ministry of Finance (Department of Financial Services) notified ‘Yes Bank Limited Reconstruction Scheme, 2020. As per clause no. 3(8)(a) of the notification, there shall be a lock-in period of three years to the extent of 75% of shares held by existing shareholders as on March 13, 2020. The restriction applies to all shareholders who own over 100 shares in Yes Bank.

In this regard, it may be noted that certain index schemes and Exchange Traded Funds (ETFs) were holding equity shares of Yes Bank, as they were forming part of its respective underlying indices. The scrip of the Yes Bank was excluded from all the above-referred indices as at the close of March 18, 2020, except for one index “S&P BSE 500”, where the scrip of Yes Bank was excluded with effect from as at the close of March 19, 2020.

While the balance 25% of shares of Yes Bank will be available for trading, it will not be appropriate to consider their traded price for valuing the locked-in shares of Yes Bank as they rendered illiquid. In view of the above issues, locked-in shares of Yes Bank were valued at ‘zero’ till the time the lock-in prevails. Equity shares to the extent of 25% were valued as per the closing price as per NSE/ BSE, as may be applicable to the respective schemes.

The aforesaid approach of treatment of locked-in shares was also suggested by AMFI for uniform implementation across the industry.

The position of locked-in Yes Bank Shares is expected to be disclosed separately in all the holding statements separately as “Reconstituted Portfolio”.

Do note that the valuation done for the 75% Yes Bank shares is an exception to the valuation policy of many fund-houses as it’s a valuation of security which is listed but partly traded shares under lock-in due to regulatory action.

How many shares affected

As many as 72 mutual fund schemes held 14 crore shares of Yes Bank as on February 2020 end. The biggest shareholding was by funds like SBI ETF Nifty 50, Kotak Banking ETF, Nippon India ETF Bank BeES, HDFC Balanced Advantage Fund, HDFC Hybrid Equity Fund, HDFC Top 100 Fund, Franklin India Equity Fund, SBI ETF Nifty Bank, UTI Nifty ETF, HDFC Capital Builder Value Fund, ICICI Prudential Pvt Banks ETF etc.

Between Feb. 29 and Mar. 13, mutual funds would have tried to sell off at least some Yes Bank shares. The 75% lock-in rule would mean 10 crore shares of Yes Bank are under lock-in. At current prices, they would be worth about Rs 460 crore. These are estimates.

How lock-in affects funds

ETFs/Index funds holding locked-in Yes Bank shares would face the following issues:

1. Yes Bank scrip moved out of stock exchange indices. If locked-in Yes Bank shares are assigned a value other than “zero”, it would continue to have a weightage in the portfolio, which will lead to tracking error.

2. Market makers / APs (authorized participants) will face challenges in pricing the units, leading to new issues of liquidity, etc.

3. ETFs accepting portfolio deposits will face challenges, as investors will not be depositing Yes Bank shares when the scrip has moved out of the indices.

Will actively managed funds be affected?

Any locked-in Yes Bank shares affect the ultimate shareholder. But it can be expected that some actively managed funds tried to move out of the Yes Bank scrip before March 13.

In case, actively managed funds want to hold on to Yes Bank shares through the lock-in, a write-down will logically diminish the value by that extent.

What will happen when lock-in ends?

Mutual funds have decided that any realisation post the three-year lock-in would be distributed to the set of investors existing as on March 13, 2020, unless directed/ suggested by SEBI/AMFI otherwise.

This means there is good chance money got after selling those locked-in shares can come to MF investor after the 3-year lock-in ends if the mutual fund decides to sell it.

Also read:

Nippon India MF creates side pocket in 5 schemes after Yes Bank downgrade; 4th side pocket in 7 months by AMC

Dismal future of perpetual bonds: Mutual funds may suffer permanent loss of capital in Yes Bank’s AT1 bonds

Mutual funds have debt exposure of Rs 2,800 cr in Yes Bank; Nippon India has the highest


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.

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