Essel default pushes mutual fund investors to edge

Mutual Fund investors in debt schemes are facing a scare as the asset management companies have started delaying redemption in many of the fixed maturity plans (FMPs), due to their exposure to Subhash Chandra-led Essel Group.

The FMPs of mutual fund industry, led by Aditya Birla Sun Life, have an estimated exposure of over Rs 7,500 crore to Essel Group debt papers. Around 55 close-ended FMPs have over Rs 1,700 crore maturing over the next three months. Aditya Birla Sun Life has over Rs 2,500 crore exposure in Essel Group.

The issue started with one of the Kotak Asset Management’s fixed maturity plans (FMP), that matured on April 8, deferred the payment to investors. The delay in the repayment to the investors came on the back of the asset manager not able to collect payments from three stressed firms.

In a recent note to investors of Kotak FMP Series 183, the company said that almost 27% of the scheme corpus of Rs 457 crore is invested in three troubled entities facing severe liquidity crisis: IL&FS Transportation Networks Limited (ITNL), and two Essel Group companies (Edisons Utility Works and Konti Infrapower & Multiventures).

"We are working closely with the Essel Group for optimal recovery from Konti and Edisons for the benefit of our unit holders and believe that such recovery will take place albeit with some delay," Kotak spokesperson told DH.

The company also claimed that for IL&FS Transportation Networks, it has made a 100% provision for this investment as the company has been classified in the Red category where recovery is uncertain and will be dependent on the resolution plan.

FMPs are close-ended funds that invest in debt instruments with maturity matching the tenure of the scheme.

The two FMP series – 187 and 127 – that are maturing this month has cumulative Assets under Management (AUM) of Rs 951 crore and exposure of Rs 186 crore to the Subhash Chandra-owned Zee Group.

Other than this, six FMPs of Kotak Mutual Fund with AUM of Rs 2,094 crore maturing in the next one month, have invested Rs 358 crore in the debt papers issued by the Zee Group.

A cross spectrum of market traders and Mutual Fund analysts that DH spoke to said that it was Chandra who is to blame for the mess. "He raised money from banks on personal name. How can we justify now that he's a willful defaulter or not," said a top executive of an AMC, wishing anonymity.

However, the banks, who have an exposure of almost Rs 13,000 crore to Essel Group, in late January, had stopped short from liquidation of the stake in the stressed companies, fearing a drop in the valuation.

A liquidation of about Rs 200 crore worth of Zee shares resulted in a drop of 3% in its value.

On the other hand, the country’s largest fund house HDFC Asset Management Company has extended an FMP that was supposed to mature on April 15 to April 29, 2020, as the liquidity crunch continues to cripple the market.