HDFC Asset Management Company (AMC), which manages the schemes under HDFC Mutual Fund, on Monday told its investors in fixed maturity plans (FMPs), that it will purchase up to Rs500 crore worth non-convertible debentures (NCDs) of Essel group companies held in the FMPs.
These debt papers have matured in April 2019, and to mature till 30 September 2019, when the standstill agreement ends.
The notice stated that the asset manager, “has decided to provide a liquidity arrangement to certain fixed maturity plan schemes of HDFC Mutual Fund to deal with the illiquidity faced by such FMP schemes due to their exposure to the non-convertible debentures issued by Edisons Infrapower & Multiventures Private Limited and Sprit Infrapower & Multiventures Private Limited, companies promoted by the Essel Group.”
“Provision of such liquidity arrangement entered into by the company of NCDs issued by the Essel group companies held by such FMP schemes at the prevailing valuation as on respective maturity/purchase dates. The liquidity arrangement may involve an aggregate outlay not exceeding Rs500 crore and will be put in place shortly.” the AMC added in the notice.
The Essel group, which is a promoter of Zee Entertainment Enterprises Ltd (ZEEL) and other companies, found itself amid financial troubles and allegations, unable to service outstanding debt obligations. Two of its companies, viz., Konti Infrapower and Multiventures and Edisons Utility Works, also failed to repay the investment in FMPs.
Many fund houses who sold FMPs with a promise of high returns in debt securities found themselves unable to recover a portion of the schemes’ portfolio, which was exposed to the debt papers issued by Essel group companies.
As a result, the Essel group got into a ‘standstill’ agreement with the mutual funds (MFs) in January this year, promising to resolve its financial troubles by September 2019. Affected FMPs that matured at the time of the default or were to mature until the standstill agreement date were not able to pay back the entire value at maturity.
HDFC MF, which also has exposure to Zee group, told investors that it was extending the redemption date in some of its FMPs by a little over a year to 29 April 2020. The fund house had sent out a letter to investors that it was extending redemption date for its series 35 FMP, which matured on 15 April 2019.
The market regulator Securities and Exchange Board of India (SEBI) took note of the event and sent show-cause notices (SCN) to HDFC MF and Kotak Mahindra MF in connection with the default of payment on maturity of FMPs. The provision to recover the dues through the sale of pledged shares was not adopted by these fund houses. According to SEBI, investors are suffering losses due to the inability of these fund houses to sell the pledged shares of Essel group, which stands as an important reason for issuance of SCN’s.
HDFC AMC’s decision to take the affected debt exposure into its own books is probably a result of the show cause-notice. The AMC had stated in the recent notice that the “liquidity arrangement is in the larger long term interest of the company.”