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SEBI to tighten noose around loans by Mutual Funds - Promoters in jittery

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.

With 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.

SEBI somewhere 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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