Shares of HDFC Asset Management Company (AMC) fell 6 per cent on Tuesday after the fund house decided to offer exit to investors of some of its fixed maturity plans (FMPs) by transferring Rs 500 crore of Essel Group exposures onto its books.
The move drew mixed response, with analysts concerned about risks getting transferred to shareholders, while the mutual fund (MF) advisors see the move as a positive for unitholders.
Tuesday’s share price drop was the largest single-day fall for the AMC in nine months.
As part of the liquidity arrangement announced by the AMC, it would acquire non-convertible debentures of Essel Group firms held in FMPs that mature between April and September. These investments are expected to be around Rs 500 crore, amounting to 16 per cent of the AMC’s net worth and more than half of the firm’s 2018-2019 net profit.
“Why should shareholders be bearing this risk? The AMC should have gone ahead and invoked the pledged shares of Essel Group firms when the FMPs matured in April. However, the standstill agreement prevented the fund house from doing so,” said an analyst of domestic brokerage.
On Tuesday, shares of HDFC AMC ended 6.3 per cent lower at Rs 1,807 per share.
However, MF experts say protecting unitholders’ interest is also important in the current situation. “While hopefully this doesn’t set a precedent, the move could help in improving sentiments of investors on debt schemes. The debt category has seen sharp investor outflows in recent months. To that extent, protecting unitholders’ interest is important for long-term growth of industry participants,” said Kaustubh Belapurkar, director-fund research, Morningstar India.
He added that growth of debt schemes (excluding liquid and overnight funds) was also an important factor in an AMC’s overall profitability.
Earlier in the year, MFs and other lenders exposed to Essel Group firms had entered into standstill agreement with the group companies. Under this agreement, Essel firms were given time till September to make the repayments. In the interim, MFs and other lenders were to hold selling of promoter shares placed as collateral.
According to sources, creditors are likely to invoke the pledged shares and recover their dues after the September deadline.
However, sources add if Essel Group promoters fail to make payments in time, the recovery would eventually depend upon prevailing share price of collateral shares.
“On an average, if share price of Zee Entertainment stays above Rs 300, MFs should be able to get full recovery. However, if the price slips below these levels, fund houses would have to accordingly take haircuts on their exposures,” said senior executive of a wealth management firm.
On Tuesday, shares of Zee Entertainment — the flagship company of Essel Group — closed at Rs 339 per share, marginally higher than the previous day’s close. In year-to-date, the company’s stock price is down 30 per cent. While these risks could come into play if Essel payments are delayed beyond September, MF advisors feel the move taken by HDFC AMC could remove regulatory overhang on the stock.
HDFC AMC has offered exit to FMP investors
It has taken Essel exposures on its own books
The AMC's stock saw largest single-day fall in nine months
Fall in Zee share below ~300 could impact recovery after September
Essel group is seeking to monetise assets to pay creditors before September