Should investors be bailed out by the AMC?

By Larissa Fernand |  04-07-19 | 
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Investors who bought Fixed Maturity Plans, or FMPs, thinking they are a substitute to fixed deposits, got a reality check.

Numerous fund houses (ABSL, HDFC, Franklin Templeton, ICICI Prudential, Reliance, Kotak Mahindra, SBI, Bank of Baroda) have exposure to the Essel Group, which began to default on its obligations.

In April, Kotak Mutual Fund informed its investors that it would not be able to redeem certain FMPs maturing then, because of their exposure to debt papers issued by companies belonging to the Essel Group.

HDFC Mutual Fund extended the redemption date in some of its FMPs by a little over a year. The fund house then decided to provide a liquidity arrangement to certain FMPs that have exposure to the NCDs of the Essel Group. This is for the NCDs that matured in April or will mature as long as the standstill agreement is in force. The decision by HDFC AMC to buy Rs 500 crore worth of bonds issued by the Essel Group from its FMPs raised a debate amongst industry experts.

Must shareholders bear the responsibility of wrong investment calls? Or, in this case, is it required because of the breach of contract with FMP investors, with regards to non-payment on due date. Is this now going to be a precedent? Will investors expect this going forward?

ADITYA AGARWAL, Managing Director and Country Head, Morningstar India shares his views.

These views originally appeared in The Economic Times along with those of Arun Thukral of Axis Securities, Vijayakumar of Geojit Financial Services, and Nikhil Kamath of Zerodha.

The acquisition of a troubled debt issue by HDFC Mutual Fund has evoked conflicting views in the market and asset management industry. The argument that a precedent has been set to the effect that all bad investments will have to be covered by fund houses is rather stretched to the point of being fantastical. The responsibility of the mutual fund trustees is to the investors of the schemes.

Moreover, if the perceived integrity of the AMC had taken a hit, it could be detrimental in the future, to the fund house and its shareholders. The fund house has made an attempt to restore faith in the investing public, and we believe it is the right thing to do but should be viewed as an exception rather than the norm.

It is also not the first time an AMC is doing this. In 2016, Franklin Templeton Asset Management had taken bad debt issued by Jindal Steel and Power on to its own book. Three years later, HDFC Mutual Fund has acted in a similar fashion. These are more the exception than the norm. The proponents of the view that a bad example has been set are ignoring the unique circumstances that have led to this decision by the AMC.

From a mutual fund investor’s perspective, this is a good move, especially in the case of FMP investors who were expecting full maturity proceeds to be returned back to them on time. We do believe that HDFC Mutual Fund acted keeping in perspective the current market environment and the expectation from its FMP investors. The sentiment, when it comes to debt funds, is bleak. Most fixed income fund categories have witnessed outflows, with the exception of Liquid, Overnight and Money Market funds. The AMC has sought to tackle the negative sentiment that is persisting in the market with regards to their initial decision to rollover the FMP maturities due to the standstill agreement.

The views of Kaustubh Belapurkar, Morningstar India’s head of fund research, Rajat Sharma, founder of Sana Securities, and Manoj Nagpal, can be viewed here: Has HDFC Mutual Fund acted wisely or unfairly?

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