MF defaults: was SEBI in slumber?

Stress and mismanagement in corporate debt seems to be taking a toll on debt-based mutual funds leading to underperformance and defaults. While a string of defaults by debt-based mutual funds happened, market regulator Securities Exchange Board of India (SEBI) is yet to act decisively to minimise the risks to small investors. By now, SEBI should have taken the lead to stem the rot that’s prevalent in several listed companies, with implications for debt-based mutual funds and their investors. For instance, the junk-rating accorded to Anil Ambani’s Reliance Home Finance and Reliance Commercial Finance has shaved off Rs 2,700 crore of mutual funds investments. The junk status of Ambani’s financing arms did not come by overnight. SEBI seems to have been a silent spectator while mutual funds lost investors’ money. It’s mostly small investors not willing to take risk in securities that park their savings in debt funds that offer returns better than banks’ fixed deposits. With Reliance group firms getting the shove, investors in mutual funds managed by SBI, UTI and Reliance are in a quandary.

After the collapse of Infrastructure Leasing & Financial Services (IL&FS) last September under the weight of the group’s over-leveraged balance sheets and mismanagement, over Rs 1 lakh crore in borrowings turned into non-performing assets overnight. The collapse of the ‘systemically important’ IL&FS has had a contagion effect on other non-banking finance companies (NBFCs) and dragged several debt funds down the drain. Kotak Mahindra MF, for instance, took a big hit in IL&FS. With home finance companies like DHFL and media conglomerate Zee Group’s debt paper turning sticky, several mutual funds were forced to write off their investments, and investors lost.

Why did SEBI fail to put in place ‘early warning’ systems to alert investors and mutual funds managers? The nexus between internal auditors, promoters and related parties that seem to have suppressed vital price-sensitive data needs to be broken to trim investors’ losses. The downgrade in ratings of some companies has come too late, leaving little or no room for investors to exit from funds with exposure to the debt of mismanaged companies. One corrective could be to limit exposure taken by mutual funds in a particular company’s debt paper below 20– 25%. SEBI could have tightened the norms for debt funds, as has been done for equity funds. Lazy contemplation of tweaking the norms post-damage may not help. SEBI as the market watchdog, boards of companies, auditors and rating agencies may have to own up the responsibility for losses to investors. So much for India’s tryst with free market dynamics, riddled with speculation and manipulation.

Narendra Modi or Rahul Gandhi? Who will win the battle royale of the Lok Sabha Elections 2019

Get real-time news updates, views and analysis on Lok Sabha Elections 2019 on 

Like us on Facebook or follow us on Twitter and Instagram with #DHPoliticalTheatre for live updates on the Indian general elections 2019.

Comments (+)