Kotak Mutual Fund may honour only partial redemption

Mumbai: Investment in debt papers of companies like Essel Group and IL&FS has come to haunt the mutual fund industry, with Kotak Mutual Fund becoming the latest casualty. Kotak Mahindra AMC has written to investors that it may not be able to pay the entire redemption amount on its FMP Series 127.

According to sources, several other asset management companies (AMCs), or mutual funds, are also facing similar issues in their fixed maturity plans (FMPs) owing to their exposure in non-convertible debentures (NCDs) of the troubled companies.

In a communication to investors of Kotak FMP Series 127 that matured on April 8, Kotak AMC said it may face a delay in recovering its money that it had invested in the NCDs of two of Essel Group companies—Edisons Utility Works Pvt. Ltd. and Konti Infrapower & Multiven-tures Pvt. Ltd. The FMP was launched around November 2015.

Mutual fund investors in FMPs are badly hit by reckless investments made by fund managers in NCDs backed by promoter shareholdings, experts said.

“There's no fixed maturity now in FMP because of the kind of investments mutual funds have made, which have turned non-performing assets. There’s no guarantee that the difference in amount--promised and paid--will ever be paid,” said an analyst with a leading domestic brokerage house.

“The FMP category will now be under question. Investors will think twice before investing in them. These (NCDs) were structured “loan against shares” in the first place, not market investments,” the analyst added.

“The FMP segment, about 15 per cent of the total bond funds AUM, would now be diseased for a very long time until Sebi intervenes and stem the root cause of this malaise,” the analyst added.

Although the NCDs are backed by equity shares of Zee Entertainment Enterprises Limited (Zee), most lenders and mutual funds who had lent money—in other words, bought the debt securities—to the Essel Group had chosen to not sell the shares to recover the money if there is any default. Lenders have granted this moratorium till around September 2019, by which time they, including Kotak AMC, expect the group to repay all its dues.

Amongst other investments, the Kotak scheme also invested in NCDs issued by Edisons Utility Works and Konti Infrapower & Multiventures-- secured by equity shares of Zee---and IL&FS Transportation Networks Limited (Credit Enhancement by Parent Support Agreement of IL&FS).

NCDs or debt securities that are backed by the group companies’ equity shares come with a cover that is agreed upon at the time of agreement.

Several investors are demanding that all debt MF managers must now disclose all the structured deals involving investments in securitised debt paper/bonds--issued by promoter/related/associate entities--that have just promoter shares as underlying asset.

The amount involved in these effectively loan-against-shares transactions is estimated to be in the region of Rs 1.5 lakh crore-Rs 1.7 lakh crore, that is about 10 per cent of the entire asset under management (AUM) of Rs 17 lakh crore in the debt funds category and almost as much as a fifth of the banking industry non-performing assets, or NPAs.

Investors pay the price

• Kotak Mahindra AMC has written to investors that it may not be able to pay the entire redemption amount on its FMP Series 127
• AMC says it may face a delay in recovering its money that it had invested in the NCDs of two of Essel Group companies
• The Fixed Maturity Plan was launched around November 2015