Many investors prefer FMPs due to their predictability. AMCs disclose maturity date, indicative returns and credit ratings of underlying securities well in advance through SID to create confidence among the investors.
Recently, a few fund houses have proposed to roll over their FMPs due to issues with securities of Essel group. In this context, let us look at the regulations governing FMP rollover or extension.
SEBI Mutual Fund Regulations 1996, as amended till date, has Clause 33(4), which states, “A close ended scheme shall be fully redeemed at the end of the maturity period,
“Provided that a close-ended scheme may be allowed to be rolled over if the purpose, period and other terms of the rollover and all other material details of the scheme including the likely composition of assets immediately before the rollover, the net assets and net asset value of the scheme, are disclosed to the unit-holders and a copy of the same has been filed with the Board,
“Provided further that such rollover will be permitted only in the case of those unit-holders who express their consent in writing and the unit-holders who do not opt for the rollover or have not given written consent shall be allowed to redeem their holdings in full at net asset value based price.”
What we observe from SEBI rules are that:
- In case of rollover, AMC will have to disclose details of FMP to the unit-holders and intimate SEBI i.e. it does not require specific case-by-case approval. However, given the current context of default by one issuer, informal SEBI approval may have been obtained;
- If a unit-holder has not given consent in writing, then that holding has to be compulsorily redeemed i.e. the default option for investors is redemption.
The provisions of Clause 33(4) was used by the MF industry in 2014 when the taxation rules were changed for debt funds. The one-year FMPs that were coming up for maturity were rolled over for another two years to make it a total holding period of three years, and be eligible for long term capital gains taxation. Thereafter, AMCs started floating FMPs having maturity of over 36 months.
However, the recent series of rollover proposals is due to inability of one issuer to honour the maturity and the fact that the AMCs have extended the maturity of this security till 30 September 2019. If your clients do not specifically opt for the rollover, they will get the money back, minus the amount due from the troubled exposure. The question here is: which option is better for your clients: rollover or scheduled maturity? If they require the cash flow, go for scheduled maturity; the balance amount will come as and when the issuer pays up. If they opt for rollover, they are not giving up much; there is interest due on that exposure till the day of repayment.
The other relevant concept here is side-pocketing. SEBI has allowed side-pocketing from 28 December 2018, provided the provision is there in the SID of the fund. However, in close-ended funds, there is natural and informal side-pocketing. If you opt for scheduled redemption, the ‘good component’ comes back and the ‘bad component’ remains pending. The fund will pay the investor the bad component as and when they recover it. Even if it is rolled over, though the ‘good plus bad’ component remain invested, there is no fresh inflow. Only some of the erstwhile investors stay for the extended period – this means that recovery proceeds accrue only to the erstwhile investors who suffered the event of delay by one issuer.
However, the fundamental principal of FMP remains unresolved since the maturity of securities in the portfolio of an FMP should be up to or less than the maturity of the FMP. With one security being extended by the AMC beyond the scheduled maturity date, it becomes a grey area. This issue did not crop up in 2014 as the entire portfolio matured and the AMC constructed a fresh portfolio for the extended period.
From now till 30 September 2019, as more FMPs with exposure to the troubled business group come up for maturity, AMCs are likely to propose rollover of more FMPs. Take your decision wisely.
Debt Guru Joydeep Sen is founder, wiseinvestor.in.
The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.
