HDFC Mutual Fund’s FMP bailout unfair?

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HDFC Mutual Fund’s FMP bailout unfair?

HDFC Mutual Fund has acquired all exposure to Essel Group companies in a big move of relief to holders. The troubled debt in Fixed Maturity Plans (FMPs) issued by Essel group equal to Rs 500 crores of debt is now in HDFC’s books. The announcement is valid for maturities in April and before September 30.

Essel Group has been one of the companies which have bad debt and is on the verge of non-payment. HDFC AMC along with Kotak Mahindra AMC had received notices a month back from SEBI (Securities and Exchange Board of India) on their high exposures to these papers.  While it is certainly a relief in the interim, in case Essel Asset Management goes bust, the entire profit after tax (PAT) will be wiped out. The trailing 12-month PAT is Rs 931 crores. However, the purchase by HDFC allows the investors to exit this investment on maturity. Essel (Zee Group’s) consortium of lenders such as other mutual funds and banks have agreed to not sell the troubled instruments in the market so that HDFC has some time to repay its customers.

The fixed date of maturity of FMPs does not allow investors to sell anytime and have to wait for values to recover, thus increasing the downgrade risk. Another option given by HDFC to customers was an extended maturity period (roll-over) and the other customers can get their money back at prevailing NAV.

Takeaway- 
  • While this is a goodwill gesture from HDFC, the FMPs maturing after September 30 are still left hanging. This will leave legal hassle in place.

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