AMCs will have to take approval from the board and trustees before signing the ICA
The Securities and Exchange Board of India (SEBI) has allowed asset management companies (AMCs) to join the inter-creditor agreement (ICA), but with certain conditions.
This comes in the wake of AMCs, with exposure to debt instruments of Dewan Housing Finance Corporation Ltd. (DHFL), not opposing banks' proposal to pay retail investors and pension funds in full. MFs have refused to be part of ICA for DHFL.
In a letter dated Aug 29, the Association of Mutual Fund in India, SEBI addressed to the mutual fund lobby and said that it had given an option to AMCs to participate in the inter-creditor agreement or give consent to Debenture Trustee to sign on their behalf.
However, SEBI has imposed conditions that the segregation of portfolio pursuant to a credit event must be the precondition for the signing of ICA for the assets in the segregated portfolio.
Further, AMCs must inform rating agencies on intimation of any ICA. SEBI also said, “If the revised credit rating of those securities is downgraded to below investment grade, the AMCs may segregate the portfolio, if not segregated already, following which AMCs can at their option sign the ICA.”
Signing ICA must be in the interest of investors, SEBI said. SEBI also directed that AMCs would have to take approval from the board and trustees before signing the ICA.
SEBI pointed out that, if resolution plan conditions on the AMCs were not contrary to provision of SEBI (Mutual Funds) Regulations, 1996 and circulars issued thereunder, AMCs would be free to exit the ICA altogether with the same rights as if it had never signed ICA. “In such a circumstance, RP (Resolution Plan) would not be binding on the AMCs,” SEBI said.
The Resolution plan will have to be implemented within 18 days from the end of the review period.
However, SEBI said the extension would be done only if it was in investor’s interest, that too subject to approval from the board and trustees.
“Overall AMCs have to evaluate whether it is in the best interest of unit holders to participate in ICA or not, taking in to account the nature of the securities held and other recourse it has in comparison with other lenders/investors, possibility of selling its investments etc,” SEBI said.
So far, based on all the conditions, only Tata Mutual Fund is eligible to join ICA.
What is ICA?
An inter-creditor agreement is a contract between the debtor and all the creditors when the debtor is no longer able to pay its dues.
This agreement pays for some part or percentage of the loan extended by each of the lender, and the debtor receives a final discharge for the remaining amount due.
The debtor can make a new start and the creditors receive their payments immediately.
Lenders to the cash strapped crisis-hit DHFL signed an inter-creditor agreement (ICA) for the resolution of stressed assets on July 5. This will form the basis for putting together a resolution plan (RP) for the DHFL account.
The consortium, comprising about 35 lenders, has moved proactively as per the RBI's June 7 circular on Prudential Framework for Resolution of Stressed Assets. Under the framework, lenders can initiate the process of implementing a resolution plan (RP) even before a default has occurred.
The restructuring plan, which is being prepared under the Reserve Bank of India’s 7 June circular, could include extending the tenure of loans, conversion of debt into equity, fresh working capital and inducting a new management team and financial investors.Once the agreement is in place, DHFL will have to submit a resolution plan.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.