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Zee effect will force MFs to reconsider promoter lending: Dhirendra Kumar


Troubles in the debt market jolted mutual fund investors when Kotak Mahindra Asset Management Co. Ltd


deferred part of redemptions from one of its fixed maturity plans (FMP) as two Essel Group companies in which the FMP had invested, had not repaid in full. Dhirendra Kumar, CEO, Value Research, in an interview with ETNOW, said that in the worst case scenario, there will be a gradual sale of the collateral and investors will end up with 6-9% returns.

Edited excerpts:

The mutual fund could clearly say that look all investments are subject to market risk, please read the offer document and FMP is nothing else but an investment into debt and if the borrower does not pay up, it is the investor who has to take a hit.

Yes it has always been so and in equity funds, investors take it. In fixed income, there is an understanding that things cannot go horribly wrong and it has not. Even here people are getting 80-85% of their money in this particular transaction. These kind of things cannot be eliminated. Investors invest in such investments to optimise returns. If mutual funds do not take measured risk, there is no point of investing in a mutual fund. If a very safe mutual fund will get you just as much return as a fixed deposit, then what is the point?

So from that standpoint they are expected to take that risk. But they are also expected to spread their risk. Having a significant allocation to such securities which go wrong is lack of prudence to an extent. Also this is something which eventually may not turn out to be bad as it is looking right now. Investors are quite used to FMPs as FD and they are not getting all their money back on the date of maturity. But yes, mutual funds are subject to market risk and this is a grim reminder.

When the IL&FS crisis happened, most of the mutual funds re-assessed their risk to NBFCs. That also changed the way NBFCs are taking money from mutual funds. Can this be an isolated case or this will force mutual funds to assess the kind of lending they have been doing to promoter groups?


Yes definitely. This particular experience, in fact, is not as bad an experience except for the fact that the mutual fund industry has a Rs 13,500-crore exposure to the promoters and the Zee promoters’ exposure are actually dual. One is that they have lent to some companies of Zee promoters and they have kept an extra collateral of the Zee Enterprise stock.

On January 25, there was Rs 200-crore worth of sale and the decline in price was nearly 30%. So you can have a price but it may not be a realisable price. Kotak has some exposure, HDFC has some exposure, somebody else has some exposure…the exposure is spread over 25-30 companies. I cannot figure out what is the total exposure and the impact even if as of now every mutual fund company has been able to aggregate it and are trying to decide a strategy to wriggle out of this problem. That is why they had the meeting on 26th or 27th or 28th of January with Mr Chandra.

They arrived at a consensus that if they try and act in a hasty manner, they stand to lose. They were able to work on a deadline of 30th September. It looks like although it is still a probability, there are no guarantees in life when it comes to investments, because you do not have the money. Since the collateral is good enough and if they are able to find a buyer, all these things will actually pass over but this particular experience will force mutual fund companies to reconsider whether they should be doing promoter lending.

But for an investor, I guess you have no option but to stay put.


Yes you have to stay put and you are getting 90% of your money and the money is not vaporising. Very likely, in the worst case scenario, there will be a gradual sale of the collateral and 150% of the underlying value will be realised. So investors will end up with a return ranging between 6% and 9% anyway and at deferment. But it is not something where the money has completely disappeared and we know the reasons.





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