Essel bonds cause jitters, yet again

Subhash Chandra-owned Essel Group's debt is causing jitters in markets yet again, with shares of its listed entity Zee Entertainment tanking by over 10% in the past two weeks.

The sources familiar with the development told DH that the mutual funds are divided over granting yet another extension to the company for repaying the debt. The company had got an extended deadline of September 30 after it defaulted over the non-convertible debentures (NCDs) worth Rs 7,500 crore.

"We have been divided over our exposure to the Essel Group. While some are completely against the extension of the deadline, half of the mutual funds have already extended their deadline," a CEO of a mutual fund, with huge exposure to the group, said.

In return, some of the mutual funds agreed not to sell pledged shares of the group’s flagship Zee Entertainment. Essel has paid a total of Rs 3,356 crore out of its outstanding ₹7,500 crore, that it owed to the mutual funds.

After Essel defaulted on its NCDs in January, the mutual funds, with exposure to the company, also defaulted on their fixed maturity plans (FMP) that were linked to the Essel group's debt. The prominent defaults included some series by Kotak AMC and HDFC AMC.

The market insiders, however, are pointing at the regulator Sebi, for being 'complacent' about such issues. "Ideally these bonds should have been declared as non-performing assets and pledged shares should have been sold. But Sebi didn't make any such move, nor did MFs sell the pledged shares -- just to earn that extra 2% rate of return on expense of retail investors," a CEO of an investment firm said.

Many also blame the lack of valuation techniques in the mutual funds, which is leading to such kind of crisis time and again. "There is no proper value to debt instruments by the mutual funds as of date. They should ideally go for the mark to model approach," a market insider said.

Under FAS 157 of International Financial Reporting Standards, the Mark-to-model is a pricing method for a specific investment position or portfolio based on internal assumptions or financial models.

This method contrasts with traditional mark-to-market valuations, in which market prices are used to calculate values as well as the losses or gains on positions.

As of date, the debt papers with a maturity of over 30 days need to be valued on a market-to-market basis. Most fund houses value the rest of the papers based on amortisation.