Mutual Funds Have Also Lent to DHFL Promoters' Holding Company Just Like Yes Bank’s Rana Kapoor
Debashis Basu  and  Clinton Fernandes 27 November 2018
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.
Mohammed Raza
5 years ago
All the Franklin funds investing in WGCL debt are more or less managed by same set of people and same goes for ABG funds !!
Research Guru
6 years ago
I did go through the covenants of the WGC as structured papers, mentioned in the article, as one of the frequent advisor of these fund schemes. Deal structure is very much in line with this category, nothing unusual. One has to understand the layers of security covers these investment managers insist and secure before buying such customised deals in their portfolios. People who are used to FDs and off the rack NCDs these custom deal structures are complex to understand and hence these kind of apprehensions and sensationalism. Investors can stay put in those fund schemes as long as schemes suit their risk profile.
Abhinav Kapur
6 years ago
Its unethical on part of mutual funds to subscribe such issues. Don\'t see any wrong on part of promoters who are raising funds through such transactions.
Pranav Phalgun
6 years ago
Fingers crossed for today's NAVs of these funds
6 years ago
Does this mean that if YES Bank's shares tank more, the O-NCD's issued by Morgan Credit's Pvt Ltd on behalf of Rana, to the Debt mutual funds will go bad and the MF's may have to write off this loss by reducing the NAV?
Replied to tanay comment 6 years ago
Or is this only a reporting/corporate governance issue?
Dayananda Kamath
6 years ago
So even the resolution process under NCLT may be through this route by promoters of acquirer of assets. So you are doing iski topi uski sir uski topi iske sir game. So investor is being cheated.
Ramesh Bajaj
6 years ago
This seems to be unethical. But what I am concerned about is the FD s by retired senior citizen s, in Yes Bank. I sincerely hope that these are not at risk.
Research Guru
Replied to Ramesh Bajaj comment 6 years ago
Your deposit money is nothing to do with this transaction, Sir, you don't need to worry. This is a transaction between Promotor family and his lenders. They have borrowed money for his family office. His stake in the bank is limited to less than 10%. It does not have any bearing on deposit holders. From fund scheme investors perspective too, this NCD is well secured. Concerns are misplaced.
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