It appears that the high risky route taken by mutual funds in funding Yes Bank’s promoter Rana Kapoor against his personal holdings, without it appearing to be pledged, has also been used by other promoters.
Wadhawan Global Capital (WGCL), the holding company of DHFL (Dewan Housing Finance Limited), has also raised Rs2,125 crore through zero-coupon non-convertible debentures (ZCNCD) maturing in 2019, 2020 and 2021. The takers for the three bond issues? Aditya Birla Sun Life Mutual Fund and Franklin Templeton Mutual Fund. Franklin Templeton had also lent money to Rana Kapoor’s holding company Yes Capital, which has 3.27% of Kapoor’s Yes Bank stake, again through zero-coupon bonds.
The two fund houses around Rs1,391 crore worth of WGCL’s ZCNCDs, as per recent end-October 2018 portfolio data of mutual funds. Shockingly, IDBI Mutual Fund has decided to put this highly risky product in its liquid fund, while Franklin India Debt Fund has put 8.27% of its assets in these ZCNCDs.
The market regulator has specified that mutual funds have to buy only highly rated paper. So, how did the fund houses manage it? With pliant rating agencies, this is no problem. The ZCNCDs have been rated AAA by the same ratings agency, CARE, which also rated the ZCNCDs issued by Rana Kapoor’s holding companies as AAA. Commenting on this a very high net worth investor says “ratings is the biggest scandal going.”
This structure of and start with using for lending against the promoters’ holding is fraught with huge risks. The mutual funds are holding a debt paper of the holding company with no other assets and no capital worth speaking of. They have no recourse to the shares of the promoters either—the only asset of the holding company—because these are not pledged to the mutual funds. The promoters are free to sell them. If they do, fund houses have no recourse.
While rating them AAA, CARE has argued that rating assigned
to the non-convertible debentures (NCDs) of WGCL are due to the credit enhancement in the form of a pledge of optionally convertible debentures (OCDs) and compulsorily convertible debentures (CCD) issued by DAIPL (DHFL Advisory & Investments Private Limited) and DIL (DHFL Investments Limited) respectively (both being 100% subsidiary of DHFL). Also, an unconditional and irrevocable revolving DSRA (debt service reserve account) guarantee and an unconditional put option has been issued by DHFL in favour of the debentures.
Bloomberg’s columnist Andy Mukherjee
was the first to have exposed a backdoor method some promoters use for getting loans against their shares, without formally pledging them. This lending process involves a third company that is either a subsidiary or holding company, which holds the promoters shares and raises capital against these through credit enhancement guarantees such as debt covenants.
The Bloomberg report states that various schemes of Reliance Mutual Fund bought the entire Rs1,160 crore bond issue raised by Morgan Credits Private, a holding vehicle of the Yes Bank’s promoter while Franklin Templeton Mutual Fund bought bonds worth Rs630 crore from Yes Capital India Pvt Ltd, another of Kapoor’s vehicles that holds 3.27% of Yes Bank’s stake.
After Yes Bank’s share price tanked more than 40% recently, it triggered the collateral margin required to maintain in the loan account. The promoter infused cash into the loan-servicing account to maintain the required collateral value, and later, replaced this cash with personal guarantee of more of his own shares.