SEBI Denies Advising Mutual funds to Reduce Exposure to DHFL and Indiabulls
Moneylife Digital Team 28 September 2018
Securities Exchange Board of India (SEBI) has clarified that it has not advised Mutual Funds to not rollover their current exposure to Indiabulls Housing Finance and Dewan Housing Finance Corp (DHFL).
In a release, the regulator termed a news report likely published by Zee Business as ‘false’. The news report’s sources stated that SEBI has advised mutual funds to not rollover their current exposure in these two companies.
Rolling over of a stock position happens in the derivative market, and equity arbitrage schemes of mutual funds have significant futures positions in DHFL and Indiabulls Housing Finance.
Equity arbitrage schemes purchase shares in the cash market, and hedge their cash position by selling ‘short’ the futures position of the same stock, at a higher price. The difference in the cash-futures price is the arbitrage profit for the scheme.
False news stating that these schemes will not be allowed to rollover their stock position would mean that fund managers in the schemes would have to sell-off all shares held in cash, of the two non-banking finance companies (NBFCs).
A huge sell-off in the cash market would drag the stock prices of the two NBFCs even deeper than current levels.
Open-ended equity arbitrage schemes hold nearly 10% of the floating shares of DHFL and 3.50% of Indiabulls Housing Finance. 
If the news were true about restriction on rollover of the stock position by mutual funds, equity arbitrage schemes would have no choice but to sell off the shares in the market as they enter these shares for arbitrage, and not for growth.
Industry sources and various news agencies had reported that SEBI had sent letters to mutual funds seeking details about their exposure to all NBFCs and housing finance companies.
However, there was no restriction given for rollover of stock position of DHFL and Indiabulls Housing Finance shares.
Shares of DHFL and Indiabulls Housing Finance have plunged 57% and 25% respectively in September until the publication of this article.
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