HDFC AMC has announced to buy non-convertible debentures (NCDs) of two Essel group companies from some of its FMP schemes. These are the FMP schemes, whose maturity fall between April and September 30, 2019 and which have exposure to NCDs worth Rs.500 crore issued by the troubled Essel group companies.
But, why did HDFC AMC decide to take these troubled securities on its book?
HDFC AMC’s eleven FMP schemes had exposure to debt papers issued by two Essel group companies - Edisons Infrapower & Multiventures and Sprit Infrapower & Multiventures. For lending to Essel group, the AMC kept equity shares of listed entities of the group as collateral. In case of a default, the AMC held the right to sell the shares to get their dues back.
However, earlier this year, when it appeared that the troubled Essel group companies would not be able to pay their dues, some MFs including HDFC AMC decided not to sell shares of Zee group immediately, and gave it time till September 2019 to arrange for funds.
The rationale behind this move was, if all the lenders opt for selling the stocks of the company, it might take a beating and that may lead to under-recovery of their borrowed amount.
Meanwhile, the “standstill agreement” has started to create problems for FMP schemes, which matured before September.
Surprisingly, this is not an unprecedented move by an AMC. Unsurprisingly, the move has become the talk of the town. Here are some mooting points:
Unit holders cheer, shareholders fret
This move brings good news for the unit holders of these schemes. Now, they do not have to worry about what will happen if the troubled Essel Group companies default.
However, the scare of default by the troubled Essel group companies is far from being over. Now that the HDFC AMC has decided to take these securities on its book, shareholders of the HDFC AMC have started to fret. The nervousness among shareholders of the AMC is obvious, as in case of a default, HDFC AMC’s profit will take a beating.
Is it fair to shareholders?
To the fund house’s defence, when it went for its IPO a year ago, it had made a point to its potential shareholders that unit holders of HDFC MF will get priority over its shareholders.
Is not MF supposed to be a pass through vehicle?
Some industry experts have voiced concerns that HDFC AMC is making the MF business complicated. By not passing through the profit or loss, and ensuring a return, it is acting like a bank.
On the other hand, to the AMCs defence, some argue that the fund house hopes this move will help it win the trust of investors, which will eventually result in AUM growth. And in the long-run, this is likely to benefit its shareholders as well. Ultimately, it will be a win-win for both shareholders and unit holders.
Big MFs vs small MFs
A debt fund manager, who does not wish to be named, said that such moves would kill the level-playing field for MFs. While HDFC MF being the largest MF can afford to take Rs.500 crore of troubled securities to its book, smaller fund houses will struggle to do that.
Setting precedent
Some industry experts argued that this does not set a good or realistic precedent. The fact that it was Rs.500 crore of troubled securities prompted HDFC AMC to take it into their book. But, what if the amount is so big that a fund house cannot take it into its book?
