Side pocket to be effective from Sept 25; upon recovery of any money from the segregated portfolio, it will be immediately distributed to the investors in proportion to their holding
After UTI Credit Risk Fund created a side pocket to segregate the holding in the defaulted NBFC Altico Capital India Ltd (ACIL), Reliance Ultra Short Duration has also decided to create a side pocket for its exposure to the beleaguered real estate lender. Altico had last week defaulted on interest payments worth Rs 19.9 crore that were to be paid to Mashreq Bank of Dubai, following which the NCDs were downgraded by ratings agencies. This has resulted in NAV erosion in both UTI Credit Risk Fund and Reliance Ultra Short Duration Fund – who were the only two open-ended funds that had exposure to the debt paper – after which both funds have created side pockets.
The side pocket will allow Reliance Ultra Short Duration to separate its about Rs 150 crore exposure to Altico from its main portfolio holdings. Also, the debt fund has suspended subscriptions effective September 13 till further notice. Moreover, no dividend will be declared during this period.
The Securities and Exchange Board of India permits asset management companies (AMCs) to create segregated portfolio of debt and money market instruments of mutual fund schemes, in order to ensure fair treatment to all investors in case of a credit event and to deal with liquidity risk.
On September 12, 2019, ACIL filed on the stock exchanges that it had defaulted on a repayment obligation of Rs 19.9 crore on External Commercial Borrowing (ECB) loan from Mashreq Bank. Subsequently, rating agency CARE has downgraded long term rating of ACIL to “B” with a negative outlook.
Reliance Ultra Short Duration Fund is managed by Anju Chhajer and Vivek Sharma. The scheme’s exposure to Altico debt securities is worth Rs 150 crore. One debt security, worth Rs 75 crore, is maturing on September 26 this year and the other one, worth Rs 75 crore, on March 26, 2021. The exposure accounts for about 4.6% of the fund’s Rs 3,200-crore assets. Unless Altico is able to garner required funds or is able to extend the maturity period within September 26 this year, it can be assumed that there will be technically a default when the debt matures. There is often a grace period of seven days within which if the issuer repays the money, ‘default’ is not said to happen.
In light of the credit event, Reliance Nippon Life Asset Management is creating a segregated portfolio of securities of ACIL held in Reliance Ultra Short Duration Fund immediately from September 25, 2019. Trustees of Reliance Mutual Fund have approved the creation of a segregated portfolio of securities of ACIL held in Reliance Ultra Short Duration Fund.
Reliance Asset Management said that all existing investors in the scheme as on the day of the creation of segregated portfolio will be allotted an equal number of units in the segregated portfolio as held in the main portfolio.
No redemption and subscription will be allowed in the segregated portfolio. However, in order to facilitate exit to unitholders in the segregated portfolio, the AMC will enable listing of units of the segregated portfolio on the recognized stock exchange within 10 working days of the creation of the segregated portfolio and also enable the transfer of such units on receipt of transfer requests.
However, upon recovery of any money from the segregated portfolio, it will be immediately distributed to the investors in proportion to their holding in the segregated portfolio. The AMC will disclose separate NAVs of segregated and main portfolios from the date of creation of the segregated portfolio.
Reliance Nippon Life Asset Management says it has already sent individual written communication as well as released a notice advertisement in newspapers for enabling provision of the segregated portfolio in the captioned scheme. Investors have been provided 30 days load free period to redeem from the scheme. The 30 days load free period will end on September 24, 2019.
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.
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