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Mutual Funds may move court over RBI plan of zero valuation for Yes Bank bondholders

On March 5, the Reserve Bank of India (RBI) imposed a month-long moratorium on YES Bank. It has restricted the withdrawals that customers can make from their YES Bank accounts to Rs 50,000 until April 3, 2020.

March 07, 2020 / 11:58 PM IST

The RBI’s draft plan for the rescue of beleaguered Yes Bank has not gone down well with the mutual fund industry, who are perpetual bondholders of the bank.

Fund houses are unhappy with the write-down of bond value mentioned in the draft plan for rescuing Yes Bank and may approach the court for the recovery of their investments in bonds.

“We are not happy with RBI’s decision, why should bondholders suffer? It is unfair. We will go to the court,” said a chief of a fund house.

According to the RBI’s draft plan, “The instruments qualifying as Additional Tier 1 capital, issued by Yes Bank Ltd under Basel III framework, shall stand written down permanently, in full, with effect from the appointed date. This is in conformity with the extant regulations issued by Reserve Bank of India based on the Basel framework.”

MFs are going to court as RBI has taken the decision without meeting MFs and fund houses are as much lenders to Yes Bank as account depositors. So, MFs want court to intervene in RBI’s decision, said a fund official.

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Legal experts said MFs are obligated to take legal route to try and get some money back, because it's not MF’s money, it's investors money handed over to MFs for investment.

So, MFs going to court against RBI is safeguard when investors take MFs to court for capital loss.

As per RBI’s rescue plan,  State Bank of India (SBI) will pick a 49 percent stake as part of as restructuring proposal.

It had increased Yes Bank's authorised share capital, paving the way for infusion of cash by SBI, India’s largest lender.

On March 5, the Reserve Bank of India (RBI) imposed a month-long moratorium on YES Bank. It has restricted the withdrawals that customers can make from their YES Bank accounts to Rs 50,000 until April 3, 2020.

The moratorium comes after the Rana Kapoor-promoted bank failed to raise capital to address potential loan losses and in the wake of deteriorating financials of the bank.

MFs BOND EXPOSURE

As per data sourced from Morningstar India, in all, 11 fund houses had exposure worth Rs 2,819 crore via 30 schemes as on Jan 31, 2020.

Almost all fund houses have side-pocketed their exposures to Yes Bank bonds in a bid to prevent the distressed assets from damaging the returns generated from more liquid and better-performing assets.

The move comes following the downgrade of rating of debt instruments of Yes Bank Limited to D( Default Category) by ICRA on March 6, 2020.

Creation of segregated portfolios is a mechanism to separate distressed, illiquid and hard-to-value assets from other more liquid assets in a portfolio.

Side pocketing for segregating defaulted assets as a provision was allowed by SEBI, which has helped earlier in handling default or late payments in debt papers of ADAG, Essel Group, among others. By this method, the remaining value of MF scheme is safeguarded.

Nippon Mutual Fund has the highest exposure worth Rs 1,806 crore in Yes Bank bonds.

Franklin Templeton MF, UTI MF,PGIM MF are some of the other fund houses that have exposure to perpetual bonds of fifth largest private sector lender.

With RBI appearing more concerned with administering money withdrawal facility for account holders in Yes Bank, the debt providers to Yes Bank, like mutual funds, are in a soup without any saviour, an MF expert told Moneycontrol.

"Seems the investment alert that 'All MF investments are subject to market risk' needs to be read and understood literally by all classes of investors," the expert added.
Himadri Buch
first published: Mar 7, 2020 08:01 pm

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