MFs' Essel group exposure likely to fall by 30-50% after Zee stake sale

The mutual fund (MF) players are expecting the proceeds from the Zee-Oppenheimer deal to significantly reduce their outstanding debt exposures to the Essel Group entities. According to people in the know, the deal could potentially reduce MFs’ exposure to the group entities by 30-50 percent.  

Sources suggest that the fall in exposure would depend upon whether the MFs’ exposure is pledged by Zee shares or any other group company.

“We will see our exposure to the Essel Group go down by half, as our exposure was pledged by Zee shares. From Rs 1,500 crore, we should see it fall to Rs 750 crore as a result of this deal. Our full exposures will get cleared once the promoters sell the balance stake in Zee as was envisaged,” said A Balasubramanian, chief executive officer, Aditya Birla Sun Life MF.

The fund house would be among the major beneficiaries, given the size of its exposure.  

In response to an email query on how the deal proceeds will be shared with lenders, a company spokesperson for Zee said, “The value generated from ZEEL’s (Zee Entertainment’s) 11-per cent promoter stake sale to Invesco Oppenheimer Developing Markets Fund will reduce the exposure of MFs and non-banking financial companies. At this stage, we cannot comment on the proportion.” 

The MF industry had Rs 5,000 crore to Rs 6,000 crore exposure to Essel Group entities, which were loan against share exposures. HDFC MF (Rs 750 crore exposure as of June-end), ICICI MF (Rs 718 crore), Franklin Templeton MF (Rs 613 crore), SBI MF (Rs 260 crore), UTI MF (Rs 98 crore), and Kotak MF (Rs 65 crore) are among the other fund houses exposed to the Essel Group entities. 

“While most fund houses had lent against Zee shares, few MFs had also lent against Dish TV shares, combined with the pledging of Zee shares. In such cases, the fund houses concerned would not benefit to the same extent as others from the Oppenheimer deal,” said a fund manager. 

“We understand that the group will engage with lenders in the coming weeks to release their pledged shares, which will be transferred to Oppenheimer,” Citi analysts said in a note. According to the management of ZEEL, once the pledged shares are transferred to an escrow account, Oppenheimer will pay for the shares.

Earlier in the year, MFs and other lenders had entered into a ‘standstill’ agreement with promoters of Essel Group to give them time till September to repay their dues. 

Most MFs entered into the agreement as they took the stand that selling the pledged shares would lead to ‘sub-optimal’ recovery and was not in the best interests of investors. However, the market regulator, Securities and Exchange Board of India, had pulled up fund houses and questioned the legal basis for such arrangements with promoters. 

On Wednesday, Essel Group said it was offloading 11 per cent of the nearly 36-per cent promoter stake in ZEEL to the existing investor, Invesco Oppenheimer, for a consideration of Rs 4,224 crore. According to the management, the deal proceeds would amount to Rs 4,000 crore after adjusting for tax liabilities. The promoters are aiming to close the deal in August.

“The promoters are backing up their resolution plan with action. They are looking at resolving the situation by monetising their assets in a phased manner,” added Balasubramanian.