SEBI intends to bring in a new regulation to curb Mutual fund lending to
promoters. According to reports published by The Times of India, SEBI is looking
to tighten the norms to protect the interests of retail investors. So what
exactly is SEBI up-to?
One case worth mentioning here pertains to loan against pledged shares taken by
Essel group to expand its footprint into Infrastructure financing sector. Ever
since IL&FS crisis, things are already going south for this sector. Subhash
Chandra led Essel group has taken loans to the tune of 7000 Cr from various
mutual funds including HDFC MF and Kotak MF. Now with recent crisis, Essel is
not being able to repay the monies to these Funds.
Promoters have reportedly
entered into Standstill agreement with Fund houses to extend the maturity of its
fixed maturity plans (FMP) till September. SEBI has already sent show cause
notice to fund houses to explain their stance. Fund houses are somewhere trying
to protect the stability of Essel group companies in the otherwise volatile
equity share market. But it has still not prevented the erosion of shareholders
money in Essel group companies.
Learning from this current issue, SEBI wants to tighten its noose around Mutual
funds who facilitate such loans. Current norms for promoters to pledge their
shares as security to borrow loan from mutual funds is to keep 1.5-1.7 times
cover against the loan sought. For example, if an Organization wants 100 Cr
loan, it needs to pledge shares worth 150 Cr to 170 Cr with mutual funds.
NBFCs, the norm is to keep 2 times cover for the loans. SEBI wants this norm to
increase to 4 times meaning for a loan of 100 Cr, 400 Cr worth shares are to be
pledged. Prima facia, it looks like a protectionist measure taken by SEBI to
safeguard the interests of investors particularly debt schemes.
wants Mutual funds to be investors into markets and not become the lending
institutions. But what needs to be seen is will it really serve its purpose.
Certain arguments need to be answered before we reach any conclusion.
·Promoters will now look to get such loans from NBFCs who are already grappling
with the liquidity crisis. The overall scenario of NBFCs doesn’t look promising,
at least currently.
·Instead of bringing in measures to evaluate risks associated with such
transactions, increasing the cushion looks more like a stop-gap arrangement.
·Mutual funds have already burnt their fingers dealing in such transactions.
Costly lessons learnt. They must improve their mechanism to avoid such cases.
They can look to study market segment in which borrower operates, the current
health of the sector, future look out, competitors, etc.
But one thing is for sure, for a naïve retail investor who has been very
recently educated on merits of Mutual funds and now so-famous SIPs, such cases
are real dampeners. For a seasoned investor, it might be an opportunity to
invest. So what is it for you; Risk or Opportunity?
Written by: Priyanka Kumari - BBALLB (int.), LLM
For feedback: [email protected]
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