CG Power financial fraud stumps mutual funds, poses risks for industry

The mutual fund (MF) industry is grappling with troubles in another exposure. While the exposure levels are not as large as some of the other stressed investments, the disclosure of employees-led financial fraud at CG Power and Industrial Solutions (CGPIL) poses a different set of risks for the industry. 

As many as 20 MF schemes had equity exposure to CGPIL. The latter's share price declined 20 per cent, leading to mark-to-market hit on these schemes' CGPIL exposure. 

According to sources, fund managers are seeking clarity from the company's new management on potential recovery of funds routed out of the company. 

"Prima facie, it doesn't seem to be a case of a misstatement of a revenue item. There is only misstatement of liabilities by the previous management of the company. But even then, the disclosures have come as a shock," said another fund manager.

"We are engaging with the company to understand how much recovery is possible. The positive part is that lenders such as KKR have already put in place new management. Moreover, it is in the best interest of both minority shareholders and the lenders -- who have gained majority ownership -- to revive the value of the company," said a fund manager.

According to people in the know, if the company's share price reaches Rs 60-Rs 70 per share, it will help lenders recover their dues. At the end of Tuesday's battering, the company's share price stood at Rs 14.7. Private equity firm KKR and YES Bank were among the major lenders to the company. 

According to data from Value Research, MFs' aggregate equity exposure to the company stood at Rs 283 crore at the end of July. HDFC MF had Rs 104 crore of exposure to the company. HDFC Equity Fund, which is among the larger-sized schemes with the exposure, accounted for Rs 62.8 crore of exposure or 0.28 per cent of scheme assets. Overall, seven schemes of the fund house held exposures to the firm. 

Aditya Birla Sun Life MF had Rs 101 crore of exposure. Birla Sun Life's Frontline Equity and Equity Hybrid '95 Fund accounted for Rs 30 crore of exposure each -- 0.3 per cent and 0.15 per cent of scheme assets, respectively. Six more schemes of the fund house were exposed to the company, with their exposure ranging between Rs 1 crore-Rs 20 crore. 

Franklin Templeton MF (Rs 36 crore), Reliance Nippon Life AMC (Rs 23 crore) and IDFC MF (Rs 17 crore) were other fund houses with exposure.

E-mail queries sent to the fund houses and CGPIL didn't elicit any response. 

According to the company's disclosures on Tuesday, certain employees (past and present) purportedly carried out transactions that were not in the interests of the company. 

The Risk and Audit Committee (RAC) of the company found out that the company's related and unrelated party transactions were potentially understated as the company dealt with entities owned by employees, who didn't declare their ownership status. RAC also stated that the company's assets were placed as collateral by certain employees and the company was made co-guarantor or co-borrower. However, as these transactions were not reported, the company's liabilities were also understated.