Will investors get their funds invested in FMPs or will SEBI step in?

Following the IL&FS and Essel episodes, SEBI had brought a circular in December 2018 mandating segregation of troubled assets part of the portfolio , cut in investment managers incentives and trustee due diligence.

"SEBI may likely step in to check whether norms of the circular were adhered in Essel case and whether rollover of maturity amount is within a defined timeline to investors," the ex-SEBI official said. He further said that the development exposed MF's diligence on credit risk.

 TROUBLED FMPs

In a written note to investors of Kotak FMP Series 183, the company said that almost 27 percent of the scheme corpus of Rs 457 crore is invested in three troubled entities facing severe liquidity crisis: IL&FS Transportation Networks Limited (ITNL), and two Essel Group companies (Edisons Utility Works and Konti Infrapower & Multiventures).

FMPs are close-ended funds that invest in debt instruments with maturity matching the tenure of the scheme.

HDFC MF on April 11 announced the extension of its fixed maturity plan — Series 35 — a close-ended scheme due for maturity on April 15, by 380 days.

"The purpose of the roll over/extension is due to current interest rate scenario and portfolio positioning, the yields prevailing in the short maturity bucket present an option for investors to lock-in their investments at current prevailing yields," said HDFC Mutual Fund.

The FMPs of mutual fund industry have an estimated exposure of over Rs 7,500 crore to Essel Group debt papers. Of which, 55 close-ended FMPs have over Rs 1,700 crore maturing over the next three months.

According to data from ACEMF, there are almost 100 schemes that have exposure to the beleaguered Essel and its group companies and IL&FS and its subsidiaries.

Total eight fund houses—ICICI Prudential, Reliance, HDFC, Aditya Birla Sun Life, DSP,UTI, Kotak, DHFL Pramerica have exposure to distressed companies from Essel Group and IL&FS.

FLASHBACK

This is not first time that closed debt schemes are facing repayment crisis.

In 2010-11, a SEBI inspection report found two fund houses BNP Paribas and Deutsche Mutual Fund (now DHFL Pramerica MF) to have exposure to  Vishal Retail, which had defaulted on debt repayments.

These debts were transferred from the troubled schemes at lower value to another scheme and to the fund house's own account.

Observing a forced loss to investors without prior adequate disclosure; SEBI directed these two mutual funds to do a revised fair valuation of debt instruments in the loosing FMP schemes under Fair valuation code of Conduct, of SEBI MF Regulations.

That way, investors of those troubled FMPs received a fair NAV value in those schemes after revised NAV.

"In past, the bad debt issue in debt schemes were taken up by SEBI on grounds of fair treatment of NAV (net asset value) in such schemes and diligence by fund houses in treating investors fairly, making good for NAV fall if such assets were not valued fairly and at appropriate time" said the former SEBI official.

Earlier, closed schemes like FMPs did not need to do portfolio disclosure to frequent investors and it was not available for public information like open schemes.

SEBI directive circular dated June 5, 2018, has now made mandatory for all schemes (closed and open) to send portfolio disclosure on email to investors within 10 days of every month-end and also a periodic disclosure on AMFI website.

This empowered the alert investors the exact quality of risk in their FMP portfolios.