Sebi to tighten norms for MF industry's loan-against-shares exposure

The Securities and Exchange Board of India (Sebi) is likely to lay down a slew of measures to improve transparency and risk-management practices for the mutual fund (MF) industry’s loan-against-shares (LAS) exposure.

Recently, the stress in LAS exposure prompted fund houses to take divergent action, in the absence of formal norms governing such investments.

According to people in the know, the market regulator is considering mandatory listing of LAS-related debentures, so that these entities are required to disclose financials and keep investors abreast of company-specific developments.

“There are many LAS-related entities that are unlisted. Currently, there is no such requirement for listing these instruments,” said a fund manager.

According to industry sources, the market regulator also wants MFs to provide more clarity to investors on LAS exposure in their portfolios.

“The proposals include colour-coding of LAS investments in the portfolio and highlighting sensitivity of such exposure vis-à-vis price movement of promoters’ collateral shares,” said a senior industry executive, privy of the development.  

Besides disclosures, Sebi wants MFs to follow tighter risk-management practices. “The regulator could look at some of the norms laid down by the Reserve Bank of India (RBI). For instance, the RBI requires non-banking financial companies to ensure at least 2x equity cover for loans given against shares. MFs have given such loans for a lower share cover,” said another executive.

Lending to promoters — with already high levels of pledging and leverage — has compounded matters for MFs; the promoters are left with little financial flexibility when collateral shares see sharp value erosion. Sources say the regulator could set norms to curb or limit exposure to such promoters.  

The stress in LAS exposure came under the spotlight in the early part of this year when MFs and other lenders entered into a standstill agreement with promoters of Essel Group. While most MFs entered into this agreement, there were some who opted to stay out of it.

According to this agreement, MFs and other lenders would hold off selling promoters’ pledged shares till September. Essel promoters were given the extended timeline to settle the dues and seek strategic investors to monetise their assets.

This standstill agreement delayed full redemption for some fixed maturity plan (FMP) investors. In April, some FMPs belonging to Kotak MF and HDFC MF were unable to give full maturity amount to the investors, as Essel-related maturities were effectively extended till September.

Initially, the two fund houses took different approaches. HDFC MF proposed rolling over of the FMPs, while Kotak MF decided to pay the realisable amount to investors and balance when Essel payments come through. According to sources, the regulator had questioned MFs on their approaches.

In May, Sebi sent show cause notices to the two fund houses in relation to the FMPs’ investments in Essel Group companies. The following month, the regulator initiated adjudication proceedings against the officials of the two fund houses.  

Earlier in the year, the fund houses were also caught off-guard on their LAS exposure to Anil Ambani group firms following a sharp fall in share price of the group’s listed companies. The price fall dented the value of promoters’ shares placed as collateral with various lenders.  
Tightening the screw
  • Listing of loan-against-shares (LAS) debentures for reducing information gaps 
  • MFs’ colour-coding LAS so investors understand risks
  • Flagging sensitivity to price of promoters’ shares in schemes
  • Minimum equity cover of two-times for LAS, similar to the RBI’s norms
  • Curbing exposure to promoters with already high levels of pledging

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