While SEBI permitted those mutual funds who had segregated the bad DHFL loans to join the inter-creditor agreement ICA in August 2019 with a conditions of keeping investor interest paramount , many mutual funds had not completed these conditions.
Mutual funds who invested in the debt papers of Dewan Housing Finance (DHFL) are upset that the crisis-hit NBFC is preferring to repay banks first.
The aggrieved mutual funds feel a good chunk of the loans that DHFL gave to realty companies and other firms in distress, may never be repaid. That means lenders to DHFL standing at the back of queue may not be repaid in full, or worse still, not repaid at all.
DHFL has sold some of the good quality loans in its books to banks. Mutual funds are opposed to such deals and are demanding that they are treated as retail bondholders.
“We want to be treated as retail bondholders as our exposure is way less than banks. We have already written off 70-80 percent of our exposure to DHFL," said a CEO from one of the foreign fund houses to Moneycontrol on condition of anonymity.
“MF exposure to DHFL is Rs 3,000-4,000 crore while banks exposure is close to Rs 40,000 crore,” he added.
As on July 6, the company’s total debt stood at Rs 83,873 crore, of which Rs 38,342 crore was owed to banks.
Most mutual funds have, so far, abstained from joining the inter-creditor agreement (ICA) for DHFL. An ICA is a contract between two or more creditors who have given loans to the same borrower. The ICA spells out the rights of each creditor.
Some mutual funds had segregated the bad DHFL loans in their portfolio through a mechanism known as side-pocketing. SEBI had allowed these mutual funds to join the inter-creditor agreement ICA in August 2019.
Subsequently, mutual funds joined the ICA either after segregating bad assets or by writing off part of the unpaid DHFL loan portions in some cases up to 70 percent at the marked to market values.
Meanwhile, the banking group met with DHFL for ICA following the RBI June 2019 guidelines on stressed asset guidelines. Subsequently, banks signed an ICA with DHFL and started getting preference by DHFL in repayments.
One PSU bank is understood to have done a loan takeover altogether instead of DHFL repaying it. This is like the bank getting back its full loan value without a markdown in contrast to mutual funds having already marked down DHFL loans following fair valuation principles under SEBI Mutual Fund Regulations for bad assets.
The MF industry is alleging prejudicial treatment by DHFL in loan repayment and has expressed its angst on the ICA process. The ICA for MFs is pending while some banks have gone ahead with current ICA getting back their loan value.
Fund managers say DHFL appears to be sidelining mutual funds as they are small size lenders compared to banks. Being in the lending business like banks, MFs feel DHFL is being partial to banks.
MFs moved Bombay High Court against DHFL where they got a relief subject to a court decision. Meanwhile, against its retail loan portion assets, DHFL attempted repayment deals with banks through securitisation, keeping MFs out of it.
The twist to the tale brings out a messy picture of the repayment process. Bank group is not on a level playing field with regards to repayment. There have been rumours that some banks want pending debt to be converted to equity as ownership, to which RBI has supposedly objected.
MFs having petitioned in Bombay High Court would have to hold on for final repayment either by a fair agreement with DHFL or wait for the court's directions.
The other route for MFs is to persuade SEBI to impress on RBI that banks should not lobby for preferential treatment, as both banks and MFs are debt lenders to DHFL and enjoy equal repayments rights. Quantity of exposure should not decide preferential treatments.
Mutual funds being regulated institutions, should be standardising their lending to NBFCs and adopt a more robust risk management framework at an industry level instead of trying to outdo each other in NAV yield management, which may have led them to this mess.LIVE NOW... Video series on How to Double Your Monthly Income... where Rahul Shah, Ex-Swiss Investment Banker and one of India's leading experts on wealth building, reveals his secret strategies for the first time ever. Register here to watch it for FREE.