Is your FMP exposed to Essel group?

Even after the ILFS, Essel and DHFL fiasco, where the commerical papers of these companies were downgraded, debt funds are still going through a rough path. This time due to difficulty in recovery from Essel group many FMPs (Fixed Maturity Plans) which are soon going to mature won’t be getting the entire amount. Six FMPs from HDFC AMC (Asset Management Company), one from Kotak AMC and remaining two from Reliance AMC have the highest exposure to the Essel group.

So, is your money lost or you have a chance to recover it in future? As far as FMPs of Kotak AMC is concerned, you will receive part payment of maturity. They will arrive the amount by reducing the exposure towards Zee (Essel) group. The remaining amount would be paid if and whenever the AMC recovers the amount from the companies in question. However, in case of HDFC AMC, investors have an option to extend the maturity date or exit on the original maturity date. The maturity amount that you would receive will be excluding the exposure to Zee group.

What is the actual matter? Why these AMCs are not able to recover the amount? AMCs had lent money to Essel group companies against the collateral of shares of Zee Entertainment Enterprises. While lending when the shares are pledged, typically fund houses enter into covenants with the issuer of the debt instruments, where the issuer agrees to pledge shares which are 1.5 to 2 times the loan amount. If the prices of the shares fall sharply, the fund houses ask the issuer to top up the pledged shares for covering shortfall in margin. If the issuer doesn’t do the same, fund houses can recover the money by selling the pledged shares. However, in this case, despite of sharp fall in the share price of Zee, fund houses didn’t call the covenants. Fund houses entered into an agreement with the group promoter till September 2019, where the promoter has promised to sell its stake in few key group companies and repay the debt. Until then fund houses have agreed not to call the covenants.

Now what should you do in this case? As an investor in FMP which is a closed-ended fund, you cannot exit during the tenure of the scheme. Though they are listed on the exchanges, making them eligible for trading, the volumes are very poor to fetch you a fair exit price. Some fund houses are offering to extend the maturity of the scheme. It would be better for you to agree on extending the maturity of your FMP. Doing so will give you a chance to recover the full amount on maturity. If that’s not the case then you would get a reduced value of the maturity proceeds. However, if your fund house is partially paying on the maturity, you have no option apart from waiting for the fund houses to recover the remaining amount.