SPV structures should be ring-fenced: UTI Mutual Fund

Ajay Tyagi, EVP and fund manager at UTI Mutual Fund, spoke to CNBC-TV18 about the auto sector and the recent downgrade of IL&FS' Jharkhand project.

Talking about commercial vehicle (CV), Tyagi said, "As far as our view on CV cycle is concerned, I guess we have seen a fairly strong cycle in the last 3-4 years and we are of the view that at some point in time we would see softening of this cycle because this previous cycle over the last 20 years if you observe them haven't really gone beyond 4-5 years so that is the broad view that we too hold on the CV cycle."

On the IL&FS issue, he said, "We have been scratching our heads over the last two days ever since we saw that CRISIL downgrade. Special Purpose Vehicle (SPV) structures are supposed to be ring fenced which basically means that first stride out of that cash flows of that SPV belongs to the bankers and the financiers of that SPV. So we too are a little worried about what has happened in the last couple of days. I think for sure this has to be challenged in the court. Otherwise the entire system runs at a risk. I see very little chances of how this will not be shot down in the court in terms of not allowing the SPV and the cash flows which are sitting with the bankers of that SPV to basically service debt and principal so it has a very poor legal standing in the court of law. It goes against the contract law so to speak."

"The new IL&FS board is also trying to figure out where all are the deficits that are there in terms of servicing of interest and they are just trying to figure out the overall extent of damage before they find a solution to it. Possibly in their interim they have also asked their SPVs to kind of hold on to whatever cash flows that are there. It really doesn't have a very strong case to my mind in the court of law."

Source: CNBC-TV18