We cheer for Batman because how does a bit of vigilantism hurt as long as the culprits are nabbed. But what happens when real-life corporations – especially those who handle public money and have a fiduciary responsibility – decide to take the law in their own hands and act in what they call investors’ interests?
That’s precisely what HDFC Asset Management Co (AMC) and Kotak Mahindra AMC have done. They lent money against shares to the Essel group. When the prices of Essel group shares fell, they didn’t sell these shares held as collateral and take their money back or force the borrower to pledge more shares.
Instead, they entered into a written agreement with the Essel group that they will not sell shares till September 2019. This agreement was supposedly in the best interest of investors.
As a result, Kotak AMC withheld some money in two of its fixed maturity plans (FMPs) that were due for maturity in April and paid investors the remaining chunk of corpus, promising to distribute the rest when they recover the dues.
Similarly, HDFC MF rolled over an FMP that was due to have matured on April 15, 2019, to April 29, 2020. According to Crisil, it wound up two of its other FMPs that had invested in debt securities of the Essel group, presumably because it did not get the required unitholders’ consent.
SEBI, which had been a silent spectator so far as the standstill agreements with borrowers were signed weeks ago -- finally issued show-cause notices to these two fund houses. While Kotak and HDFC are mum about the notices, SEBI reportedly has asked two questions.
One, why did the FMPs invest in securities that mature beyond the FMP maturities? Two, in the case of HDFC, why didn’t the fund house pay the full maturity amount due to investors who chose to get out and not roll over?
According to SEBI guidelines, an FMP must invest in instruments that mature before the FMP itself matures. The extension of the Essel group loans to September 2019 meant that the instrument would be alive till then, beyond the FMPs’ tenures that matured in April-May 2019. That is a clear violation of SEBI law.
That fund houses chose to enter into an agreement with the borrower to give an extension itself amounts to twisting the MF laws in the name of investor protection. But to withhold payment -- even if it is just a part payment -- pending recovery of money in a closed-end, fixed tenured product such as FMP, violates the spirit of the product itself.
Even if fund houses recover the money -- which they are confident they would --- remember that they had about four months to come up with the money. One option for the AMC would have been to buy these securities itself at a haircut – as Franklin Templeton had done in 2016 -- and pay that sum to the investors. Investors would have suffered a loss, but such standstill agreements open up a can of worms and amount to acting in the best interests of the promoters, not investors.
This violation sets a bad precedent.
The second issue is about the HDFC MF’s FMP that got rolled over. Three FMPs, which had exposure to toxic securities, were due for maturity over the past month. One got rolled over to the next year as the fund house got consent from a majority of its unitholders.
The question is, at what value were the outgoing investors of the rolled FMP given back their money? In a note dated April 15, HDFC MF said all the unitholders who did not opt for rollover shall be allowed to redeem their units at prevailing net asset values (NAV). The next line of the same statement reads “the unitholders will receive the maturity proceeds on due date of maturity of the FMPs excluding the value of debt exposures to ZEEL group. The residual amount of the maturity proceeds of the FMPs pertaining to the Essel group exposure would be paid on receipt of the dues from the Essel group”.
This means unitholders who got out did not get their full amount that they expected, despite the fund house claiming they would get at “prevailing NAVs”. Moneycontrol couldn’t independently verify the NAV (net asset value), but has reliably learnt this to be one of the items in SEBI’s show-cause notice.
It is a delicate balance that is bound to leave one set of investors angry. If outgoing investors are not given their entire money back despite wanting to exit, they would rightly feel short-changed. But if HDFC MF had given them the entire value of their holdings, the set of investors staying back would have rightly felt upset too for being left behind while the other set of investors gets away. It is a mess that the fund houses have walked into, without doing adequate due diligence.
Apart from stepping up its vigilance, SEBI should also insist on the spirit of mutual funds being followed. If gains are to be shared by investors, so should the losses, if and when they happen. Vigilantism may achieve short-term goals, but damage the industry in the long run as investors come to understand mutual funds as assured-return products, which they are not.
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