Top Mutual Funds Say They Cannot Redeem FMPs, Which Have Exposure to Zee Group!
Fund houses have been aggressively selling fixed maturity plans (FMP) with a promise of high returns in debt securities. Some are now saying that they will not be able to pay the full amount on redemption because they are stuck with debt securities of the Zee group.
On Monday, Kotak Mutual Fund informed its investors that it would not be able to redeem the FMPs, which matured this week, because of their exposure to debt papers issued by companies belonging to the Zee group that are backed by the shares of the Zee group and the fund cannot sell these shares.
The Zee group had got into a ‘standstill’ agreement with the mutual funds (MFs) in January this year, promising to resolve its financial troubles by September. Kotak’s FMP series 183, which matured on 10th April, has an exposure of Rs108 crore to the Zee group’s debt, while the FMP series 127, which matured on 8 April 2019, had an exposure of Rs81 crore.
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 sent out a letter to investors that it was extending redemption date for its series 35 FMP, which matures on 15 April 2019.
“The purpose of rollover/ extension is due to current interest rate scenario and portfolio positioning, the yields prevailing in the short maturity bucket present an option for investors to lock in their investments at current prevailing yields,” HDFC MF told its investors.
According to media reports, among the major fund houses that have an exposure to Zee group are: Aditya Birla Sun Life (Rs2,588 crore), HDFC MF (Rs1,152 crore), Franklin Templeton MF (Rs994 crore), ICICI Prudential MF (Rs782 crore), Reliance MF (Rs430 crore), Kotak Mahindra MF (Rs372 crore), SBI MF (Rs371 crore) and Baroda MF (Rs284 crore).
According to the mutual funds database of rating agency ICRA, as of end-February, the MF industry’s total exposure to Zee group’s debt papers was nearly Rs7,000 crore.
As the name implies, fixed maturity plans, or FMPs, are supposed to be debt funds to be redeemed after a fixed term, which usually lasts for less than two to three years. The name itself is a misnomer of sorts because it is sold as a ‘fixed income’ product, but the returns are not fixed. It is the tenure of investment that is fixed. Not being able to pay back the investment plus the returns after the fixed term means a clear breach of trust.
FMPs are sold as offerings with lucrative post-tax returns and, therefore, are sold more aggressively to high net worth individuals (HNIs) and corporates. They invest in debt instruments (which are indicated to investors), with maturity matching the period of the scheme. In this case, the loan was given against pledged shares of Zee Entertainment Enterprises Ltd (ZEEL), the flagship company of Subhash Chandra’s Essel group.
But FMPs are not transparent products and are close-ended. Hence, they have a knack for getting into trouble especially after a long bull market. In the aftermath of the 2008 financial crisis, it was found that many FMPs have a direct and indirect exposure to stock markets, finance companies and real estate companies and to hybrid, securitised paper representing unknown pools of mortgage-backed receivables.
When mutual funds invested money in Zee group's debt, they accepted Zee group's shares as a collateral. The problem is that almost 40 fund houses and finance companies did the same. If they all collectively sell Zee group shares to recover their investment of Rs13,000 crore, the share price would crash.
Hence, fund houses have been saying that in the interest of financial prudence they are not selling Zee shares in the open market. Unfortunately, this is a false and post-facto justification of irresponsible lending by mutual funds which, instead of acting as investors, were competing with finance companies as lenders.