Kotak FMP Series 127 and 183 that matured on April 8 and April 10 had an exposure of nearly 18 percent and 19 percent, respectively, to the Essel Group.
The scheme said it may face a delay in recovering its money that it had invested in the non-convertible debentures (NCD) of two of Essel group companies, namely Edisons Utility Works Pvt Ltd and Konti Infrapower & Multiventures Pvt Ltd.
As a result, investors may get their part redemption proceeds upon the scheme’s maturity and the rest will come to them as and when the fund house recovers the money from the companies.
Investors may get part redemption, rest when fund house recovers money scheme facing delay in recovering money from NCDs of two Essel group company. The FMP was launched around November 2015.
Although the NCDs are backed by equity shares of Zee Entertainment Enterprises Limited (Zee), most of the 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.
The 3- year FMP scheme, which matures in April-May 2019, has invested in debt securities, money market instruments and government securities. Amongst other investments, the scheme also invested in Non-Convertible Debentures (NCDs) issued by Edisons Utility Works Pvt Ltd and Konti Infrapower & Multiventures Pvt Ltd (both are Essel Group companies – secured by equity shares of Zee Entertainment Enterprises Limited) and IL&FS Transportation Networks Limited (Credit Enhancement by Parent Support Agreement of IL&FS). The three firms are facing headwinds due to company and sectoral-specific issues. For IL&FS Transportation Networks, Kotak Mutual Fund has made a 100% provision for this investment as the company has been classified in the Red category where recovery is uncertain and will be dependent on the resolution plan achieved by the new board/NCLT.”
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 the agreement.
Total of 10 fund houses namely ICICI, HDFC, KOTAK, FRANKLIN, UTI, L&T, RELIANCE,SBI etc..had lent to 16 companies belonging to Essel Group. Some of this money lent was backed by shares of the above companies that were pledged.
Overall the mutual fund industry has an exposure of around Rs.8000 crs to Zee/Essel Group in deb across mutual funds and schemes. Of this around 1700 cr is in FMPs and the rest in open-ended debt funds.
Detail portfolio of Kotak FMP S127
Detail portfolio of Kotak Fixed Maturity Plan S183
Totally around 55 FMPs have exposure to Zee/Group Debt. The maturities have just started. In the next 2-3 months, almost 30-40 of these FMPs will mature. So all the investors in such FMPs may be impacted
“This has resulted in a breach of top-up covenants…there were a lot of deliberations with the promoters of the Essel Group along with other lenders (Mutual Funds, NBFCs etc). A supermajority 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 thereby eroding collateral value and resulting in sub-optimal recovery,” said the note by Kotak AMC to its investors.
The fund house added that “Essel promoters are working for the resolution of above through a strategic sale of Zee in a time-bound manner. The above resolution is likely to be achieved by September 30, 2019 as per communication from Essel promoters.”
Meanwhile, the FMP is due for maturity. How it pays back to the investors remains to be seen, as the fund house has not done side-pocketing yet for this particular scheme. Side pocketing is a practice whereby the bad asset- the debt security that defaulted- in a scheme is segregated from the rest of the scheme. Once segregated, a set of units will contain investments made in the troubled paper, while the other set of units will contain all other investments and cash holdings. The good part of the scheme is open for sales and repurchase, but the bad portion is frozen. If and when the fund house recovers the money from the bad assets, it pays off the money to unit holders whose investments were stuck in the fund before the default.
Conclusion: You have to wait and hope the problem resolves. The probability of the problem resolving is high and you may get your total money back. And also interest for this period.