The Big Picture: Easel Debt Crisis & FMPs The crisis in the Essel group has led to ripples in the market with short-term debt investors facing heat as the some of the country’s leading mutual fund houses like Kotak Mutual Fund delaying full redemption in six of its fixed maturity plans (FMPs). The HDFC Mutual Fund too has announced plans to roll over one of its fixed maturity plans that is coming up for redemption. This is due to delay in recovering money lent by the schemes to two Essel Group companies, Edisons Utility Works Pvt Ltd and Konti Infrapower & Multiventures Pvt Ltd. In a statement the Essel group has said that it “has reached at an arrangement with the lenders with a resolution time frame of September 2019. The lenders have unanimously extended support to the group and the same has positively resulted in saving the loss of public money” The mutual fund industry has a debt exposure of Rs 7,500 crore to the Zee/Essel Group. Of this, around Rs 1,500 crore is in fixed maturity plans with the rest in open-ended debt mutual fund schemes. Kotak and HDFC Mutual Fund hold most of the debt in fixed maturity plans. Last October’s non-banking financial sector crisis sparked by the collapse of Infrastructure Lending and Financial Services (IL&FS) led to serious liquidity crisis and the Essel Group’s private unlisted infrastructure companies were among those affected impacting the shares of Zee Entertainment shares which saw a collapse. What is a fixed maturity plan?
What is the issue?
- Fixed Maturity Plan (FMP) is a fixed tenure mutual fund scheme that invests its corpus in debt instruments maturing in line with the tenure of the scheme.
- It is a three year plan in most of the cases as there are long term capital gain benefits in fixed mutual funds.
- Usually after the tenure of the FMP, the money gets redeemed automatically with an interest amount added to the principal amount after the fixed tenure.
- Under the SEBI rules, payment of FMP can be deferred which means the company can withhold payment to the investors for a certain period of time. This is called side pocketing.
- Side pocketing allows the company to keep that part of the portfolio as a side pocket and money can be given to the clients later on as and when they expect money to be received.
- It should be kept in mind that deferment is different from default where the company fails to pay money due to debt issues in the latter.
Challenges It is not clear how good a decision it was to defer payment by 6 months as there is no surety on
- Most of the exposure was to non convertible debentures of the Essel Group. The NCDs were supported by the equities of the Zee group.
- When a mutual funds buys NCDs of a company, they are lending money to that company but the securities for the loan is given by the parent company which is Zee group here.
- In January, due to issues in the companies, the share prices crashed and the value of shares of the Zee group fell below the rate that was worth the share when the FMP was made.
- The investors like Kotak Mahindra had the option of selling Zee group shares and recover the money or they had the option of asking Zee Group to give them more shares to support the loans to Essel Groups as allowed in the agreement.
- But Kotak Mahindra group held discussions with the company and arrived at a decision to defer the payment by 6 months.
- So Zee/ Essel group has deferred payments to the FMP investors till September 2019 which was decided in consultation with the investors.
- what the share prices would be after six months
- what interest rates would be paid for the FMPs for an additional period of six months
- the confidence of FMPs in future
- Investors are given an option to trade in FMPs but they chose to remain blue to the fund till the end to recover the principal and the interest.
- SEBI also says mutual funds should be allowed only to invest in very well rated companies.
- SEBI also allows mutual funds to extend the repayment period by one year which gives enough time for the mutual funds to negotiate with the borrowers. This time period can be used by the companies to sell their shares or gather funds to repay to the mutual funds.
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- People should have faith in SEBI and its regulating mechanism.
- People should have faith in the system itself as the extended time period would give time for the company to sell shares or gather funds to repay mutual funds and in turn the investors.
- Having learnt from the experience, people should start trading in the market when the funds have been mandatorily listed on the exchange.