SEBI is also said to have had concerns with investment in terms of loan against shares. Along with that, MFs which were supposed to sell the equity at the time of default had given a moratorium in private treaty and extended the timeline until September 2019. This is also under the scanner of SEBI.
The mutual fund industry may be staring at an exodus of top talent amid the debt trap that has been plaguing it since the Infrastructure Leasing and Financial Services' (IL&FS) crisis broke out in September 2018.
Debt funds have been in flux since September last year after IL&FS and its group companies defaulted on their commercial papers, triggering a liquidity crunch in the money markets. Defaults by many other corporate groups, including DHFL, Essel and Reliance ADAG, further soured sentiment for debt funds, prompting investors to pull out nearly Rs 1.5 lakh crore last year from these funds.
In September 2018, IL&FS went bust, ringing alarm bells throughout the industry. In January 2019, Essel group debt papers were reported to have delayed payments by six to nine months after the due date.
Kotak Mahindra Asset Management Company followed soon after, writing to the investors of Kotak FMP Series 127 that it will not be able to pay the entire redemption amount. The scheme, a three-year fixed maturity plan (FMP), was to mature on April 8. This happened because of Kotak’s exposure to debt-laden Essel Group, the promoter of the Zee group of companies. There are 94 FMPs that have invested in Essel Group companies, according to Morningstar data.
HDFC Asset Management Co, that had Rs 902 crore investment in the Essel group companies’ debt securities across all its FMPs also rolled over/extended the maturity of HDFC FMP 1168D Feb 2016 (1) a plan under HDFC Fixed Maturity Plans Series 35, scheduled for maturity on April 15, 2019. FMP investments have been a cause of concern for investors even in the past.
In the latest episode, UTI Mutual Fund increased Dewan Housing Finance Ltd's (DHFL) markdown from 75 percent to 100 percent on debt securities with exposure to DHFL's debt papers. The move comes after delay on interest and principal payout on maturity by DHFL.
Reliance Mutual Fund too had to fully write off its investments in DHFL due to non-payment of dues from DHFL.
DHFL was to make interest and principal payments to the tune of Rs 1,100 crore to the industry/investors but failed to repay on June 04, the scheduled date. Given that such delay warranted mutual funds to mark down the net asset values (NAVs) of DHFL bonds by 75 percent, it led to a 30-40 percent single-day fall in NAV of schemes that invested in DHFL debt papers.
As a result, CRISIL, ICRA and CARE Ratings downgraded their rating on DHFL's Commercial Paper (CP) / Non-Convertible Debentures (NCD) to 'D', based on delay in debt servicing due to inadequate liquidity, modest capital position and modest earnings.
SEBI Keeping a Close Watch
Following the delay in the FMP, the capital market and commodity regulator, the Securities and Exchange Board of India sent notices to Kotak Mutual Fund and HDFC Mutual Fund companies that defaulted on Fixed Maturity Plan payments. SEBI had taken action for not fulfiling the investor protection norms by delaying the payments due on fixed maturity plan and for giving loan against shares.
SEBI is also said to have had concerns with investment in terms of loan against shares. Along with that, MFs which were supposed to sell the equity at the time of default had given a moratorium in private treaty and extended the timeline until September 2019. This has also come under the scanner of SEBI.
SEBI has sought data for the last ten years from asset management companies that invested in loan against shares.
Following the recent crisis in debt mutual funds, capital and commodity markets regulator SEBI is considering a proposal to make fund managers more accountable—by linking their remuneration to the performance of the schemes managed by them.
"Looking at NBFC crisis and pressure on fund managers, I do not think we will get an increment this year," said a fund manager from a private fund house who did not wish to be named.
Attrition not only hurts the firms but also investor interest.
Perform or Perish!
A renowned corporate name who also has a mutual fund arm has been pressurizing the CEO and the fund manager to buck up. As per market grapevine, the head honcho has given a caveat to the top management of the fund house to resolve the crisis at the earliest. The promoter of the company is losing sleep as his name is at stake.
These are days of delegated management wherein the owner is part of MF Board and executive responsibilities are entrusted to professional management.
"There are chances of big exits if SEBI continues to put pressure on fund managers and CEOs," said a chief executive officer from one of the large asset manager.
In the messy saga of debt schemes since September 2018, the professional management of many AMCs are exposed to taking undue risks in debt schemes that have forced redemption delays due to debt issuer defaults. The problem is widespread and humongous. Quite likely, some heads will roll.
In the past too, there have been few silent exits of top-notch fund managers.
The global liquidity crisis of 2008 forced many a fund manager to leave the investment side or wind up their boutique investment firms.
In 2010, at least 35 fund managers left the industry where tighter regulations had increased the pressure on the fund managers and shrinking margins had reduced rewards.
Fears are rife that the liquidity and solvency crisis in the Indian debt market since September 2018 that took ILFS, Essel Group and DHFL group in its toll, is now percolating to fund management teams.
Fund managers of some of the debt schemes with declining NAVs hit by ILFS, DHFL exposures have a deadline to rectify or leave. There are chances of a reshuffle in the mutual fund industry from the persistent crisis.Follow @HimadriBuchSubscribe to Moneycontrol Pro and gain access to curated markets data, exclusive trading recommendations, independent equity analysis, actionable investment ideas, nuanced takes on macro, corporate and policy actions, practical insights from market gurus and much more.