The Essel Group Loan Againt Shares Default has to loss for Investors in FMPs of Kotak MF and opportunity cost loss in HDFC MF. FMPs are closed ended structures, and are treated like bank FD alternative by investors, with a tax advantage.
Investors in these FMPs need not have borne losses if the MFs had sold the collateral, which is ZEE shares, but a moratorium agreement that is not vetted by SEBI or RBI kept the MFs from selling the shares.
The FMP looses raises serious concerns on the relationship between the MF and the investors and this in turn brings in the role of the Trustee and SEBI on investor protection.
10 Questions Investors Should Ask on the FMP Losses
- Why should a regulator unvetted moratorium concern the investors as they are invested in a scheme that is supposed to pay back all proceeds on maturity? The shares are a collateral and on default they have to be sold to recover dues.
- What is the guarantee that money will be recovered later and investors will be paid at a later date? AMCs do not have balance sheets or insurance cover to compensate for credit risk.
- How will investors be compensated for receiving capital at a later date than promised? What will be the penalty imposed by regulators?
- How will investors be compensated for the trauma of losing capital in a FMP, sold as an alternative to bank deposits?
- What is the right value of the Essel Group companies that have defaulted on debt? What are they valued at in other schemes that hold the debt and where investors may have invested in?
- Do the MF actions on FMPs have Trustee and Regulatory approval?
- Legally what can be the options for investors?
- How may more such structures are lurking around in FMPs and other schemes?
- What is the role of the Trustee and rating agencies in this whole fisaco
- What is SEBI doing to protect investors interest?
Kotak FMP Series 127 Not Able to Pay Entire Redemption Amount
Table 1
Zee/Essel group is back in the news, On 8th April, Kotak FMP series 127 matured, but the scheme was unable to pay the entire amount, as it had exposure to Zee/Essel group debt. FMP Series-127 holds Konti Infrapower & Multiventures (10.4% of NAV), Edisons Utility Works (7.57% of NAV) Table 1, for this two ZCBs ( Zero Coupon Bonds), it may face a delay in recovering its money, hence it was not able to pay the entire redemption amount to its investors. Separately, HDFC AMC extended the maturity of one of its FMPs maturing on 15 April 2019 to 29 April 2020.
This two ZCBs are secured by Equity shares of Zee Entertainment Enterprises but the lenders had an agreement with the Zee promoter that they will not sell the shares to recover money till September 2019. Kotak AMC, in its note to investors, said the majority of lenders have decided not to declare an event of default as it may result in steep fall in price given panic selling in the Zee stock thereby eroding collateral value and resulting in a sub-optimal recovery. Essel promoters are working for the resolution through a strategic sale of Zee in a time-bound manner. The above resolution is likely to be achieved by September 2019. Total 6 FMPs of Kotak have exposure in Zee/Essel group debt and all of these FMPs will mature in the month of April-19 and May-19 (Table 2).
More than Rs 80 billion worth of bonds and debentures were issued by Essel group companies. Altogether, nine AMCs have lent to Essel Group across 87 schemes, including FMPs and open-ended debt funds.
Table 2
Table 3
How Will Zee Pay to its Lenders
Promoters had announced that they will offload 20-25% stake from their stake to a strategic partner. Earlier there was news that Sony Corporation and Comcast-Atairos were the frontrunners in the race for the Zee promoters stake. But in April it was reported that the stake sale process with Sony has failed and now promoters are planning to take the PE route to raise money. At CMP if promoter sells 25% share it can fetch around Rs 99 billion.
Debt Burden
More than Rs 80 billion worth of bonds and debentures issued by group companies are held by 150 debt mutual funds
The real worry for Mutual funds lies in the debt exposure to Essel Group entities. Funds cannot really offload debt, unless at a huge discount. The actual value of debt securities drops significantly in case of default.
However, Zee group Chairman Subhash Chandra in his letter has mentioned till December 2018 the Essel group has paid due interest and principal and said that it had reached an agreement with lenders on servicing its debt. The agreement includes lenders, comprising banks, mutual funds, and NBFC firms, not invoking their pledge on promoter shares of ZEEL, DishTV, and other listed group firms, which had been pledged for the loan’s, promoters had taken for their privately owned infrastructure firms.
