HDFC AMC Sets A Wrong Precedent

In an unprecedented move, HDFC AMC decided to offer Rs 500 crore liquidity from its own book to some of its FMP schemes that have exposure to the NCDs issued by the Essel Group. On the surface, this move by the company appears to be a right move in favour of the unitholders as it will give them their money back in time and removes any uncertainty. Nevertheless, if we look at the event that led to such a decision by the AMC and the other options that were available to the AMC and what other AMCs had done earlier in a similar situation, you might think otherwise.

The company would have provided this liquidity earlier in April 2019, when some FMP schemes came up for maturity. The company, however, decided to roll over one of its FMP by 380 days. This sudden change in the stance of the company can be attributed to the legal notices sent earlier this month by the market regulator to some of the top officials of the company as well HDFC Trustee Company for extending the maturity of its FMP. This may have led to such a decision.

The best and cleanest option for dealing with such a situation has been already provided by the regulator. In December 2018, SEBI allowed fund houses to adopt the mechanism of segregating distressed assets to limit the impact on the rest of the portfolio. This is better known as side pocketing. So what stopped HDFC AMC from adopting this mechanism for these FMPs?

Firstly, adopting side pocketing would have meant reduced performance incentives for the fund managers attached to such schemes. Secondly, the AMC needs to amend the scheme information document, which allows all investors a 30-day exit option without paying an exit load. This would have given investors a chance to exit from the troubled fund that would have reduced the AUM of the AMC. There are examples in domestic mutual fund industry where AMCs have gone ahead with side pocketing. One such example is that of Tata AMC, which notified the creation of segregated portfolios in the affected schemes. Before that, in September 2015, JP Morgan AMC did a similar thing when Amtek Auto defaulted on its debt papers when nobody had heard of side-pocketing.

This is not the first time the HFDC AMC is resorting to unprincipled action. During its IPO, the AMC had made a private placement of shares to mutual fund distributors, which was later on cancelled after SEBI intervened. Although the funds managed by this AMC might be doing good, I believe being a listed company and the largest AMC in the country, it should have acted responsibly and set an example for others to emulate and not act in way that sets a wrong precedent.