Franklin India Mutual Fund lent investors’ money, who had invested into their debt schemes, to Anil Ambani group by taking the promoters’ listed shares as collateral. The fund had lent more than Rs1,000 crore to the group, as per data provided by the fund’s press release, through five of its debt schemes.
Since mutual funds cannot lend money outright to promoters against their pledge of shares as finance companies or banks can, Reliance and Templeton created a fig leaf of investing in debentures issued by ADAG companies against which promoters shares were pledged.
The four debt schemes holding the group’s debt papers have reduced their exposure in the scheme now. The fund house liquidated the lien marked fixed-deposit to reduce its outstanding exposure. It still a remaining exposure of Rs872 crore in debentures of Reliance ADAG, as per the fund houses’ latest press release.
The mutual fund (MF) had lent to Reliance ADAG through debentures, which are secured by way of pledge over shares of Reliance ADAG’s listed companies – Reliance Capital, Reliance Infrastructure, Reliance Home Finance and Reliance Power Limited of Reliance ADAG. There was also a loan provided, which was backed by a fixed deposit (provided as top-up cash collateral) which Franklin MF recently liquidated to reduce its exposure.
While the reason behind Franklin MF’s decision to reduce its exposure is the financial turmoil in Reliance ADAG companies, starting with the filed bankruptcy of Reliance Communications, the deal raises a crucial question. Is it the job of mutual funds to fund promoters and provide what looks like an intercorporate loan under the garb of investing in rated securities?
As a domino effect of the bankruptcy news, shares of Reliance ADAG’s other listed firms, which Franklin MF holds as collateral for the loan, have declined 40% to 60% year-to-date. This sharp decline in the share price of these companies panicked mutual fund companies who have collateralised these shares against the debentures held by them.
MFs lending against securities has recently become widespread and common. Fund houses enter into private transactions with promoters of companies, and become victims whenever the pledged shares decline drastically in value. The exposure of MFs to such risky loans has risked investors’ money invested in MFs.
Following sharp declines in share price below the margin required for such type of loans, the creditor i.e. the fund house in this case, should ideally ask the borrower to fill in additional capital or shares for maintaining adequate margin, or simply sell off the shares in the open market to recover the outstanding loans.
When they have not been able to do so, such as the recent case involving Essel group promoter Subash Chandra, fund houses allowed moratorium of a few months to the promoter, instead of selling the shares to recover the loan.