There has been a few instances when fund houses have taken troubled securities onto their books instead of passing the loss to unit holders. When asked about its view on this practice, SEBI said that there is no regulation that stops AMCs from doing this.
At a press conference in Mumbai, SEBI Chairman Ajay Tyagi said, “As of now, there is no regulation that prohibits AMCs from doing it.” The market regulator did not say if it is considering any new rules on this front.
In the past, various stakeholders in the MF industry have raised questions over AMCs decision to take distressed securities on their books.
The latest such incident took place in June, when HDFC AMC announced its decision to buy non-convertible debentures (NCDs) of two Essel group companies from some of its FMP schemes.
The issues that are raised are
- Are such moves fair to shareholders of the AMCs
- Are mutual funds setting the wrong precedent of not acting like a pass through vehicle and
- Does it kill the level playing field in the MF space as the bigger fund houses can take higher amount of losses
On the other hand, it is argued that it is up to the shareholders/owners of the AMCs to protect their reputation.
In fact, there were instances where AMCs have made money in the later stage after absorbing the distressed assets.
However, for now, SEBI’s view is clear – it is the discretion of AMCs if they want to take a potential hit to protect interest of their unit holders.
