A key consequence of the debt market concerns surrounding groups like IL&FS, DHFL and Essel is that schemes exposed to these groups have seen significant outflows. As more liquid holdings were sold to meet redemption pressures, the share of relatively illiquid DHFL papers that they owned soared. So much so that they have crossed the limits prescribed by the Securities and Exchange Board of India (Sebi) on the amount of exposure a mutual fund can take to a single group or its securities.
Despite this extraordinarily high exposure, these schemes remain open for subscription.Although there have been no explicit defaults, various DHFL papers have been subject to downgrades. In the latest such development, CRISIL on 17 April downgraded commercial papers worth ₹850 crore from CRISIL A2+ to A3+. The paper continues to be on a “ratings watch with negative implications”. A comparison of average assets under management (AUM) of DHFL Pramerica Asset Managers Pvt. Ltd for January-March 2019 with the same quarter in the previous year reveals a staggering 68% (almost ₹16,000 crore) drop. The asset management company’s (AMC) average AUM fell from ₹23,595 crore to just ₹7,627 crore as investors, alarmed by the ongoing debt crisis, exited the AMC’s schemes. As investors booked out, exposure of three schemes of DHFL Pramerica Asset Managers—DHFL Pramerica Ultra Short Term Fund, DHFL Pramerica Floating Rate Fund and DHFL Pramerica Medium Term Fund—to the securities of DHFL Group jumped from 7.5-8.5% in June 2018 to 29-37% in March 2019 (see graph). This is because the AMC was forced to sell other, more liquid securities to meet redemption pressure. This caused a “passive” breach of Sebi rules that cap exposure of a scheme to a single group at 20% of assets, which can be extended to 25% with approval from the board of trustees. At the end of March 2019, the exposure to the sponsor DHFL Group was 29.5% in DHFL Ultra Short Term Fund, 36.74% in DHFL Pramerica Medium Term Fund and 29.24% in DHFL Pramerica Floating Rate Fund. In fact, in DHFL Pramerica Medium Term Fund, there were only three securities, two from DHFL (accounting for 36.74%) and one from Indiabulls Housing Finance accounting for a huge 53.54% of the portfolio. Between March 2018 and March 2019, DHFL Pramerica Ultra Short Term Fund and DHFL Pamerica Medium Term Fund saw a 91% drop in AUM and DHFL Floating Rate Fund saw a 94% fall. The remaining investors are left exposed to extremely risky portfolios, while fresh buyers of the scheme who may not be clued in to what’s happening are likely to be walking into a very dangerous situation.
As of now, there has been no attempt to warn them. “This situation should not have been allowed to arise,” said Amol Joshi, founder, Plan Rupee Investment Services. “Mutual Funds are diversified instruments and a scheme holding just three papers goes completely against this spirit. The AMC should have closed these schemes to fresh subscription,” he added. Motilal Oswal Ultra Short Term Fund which was hit by exposure to IL&FS closed itself to fresh subscription in September 2018. “Closure would have been the prudent course of action. It may have hit the AMC’s image but it would have stopped new investors in the scheme from entering a high-risk situation,” said Srikanth Meenakshi, founder and chief operating officer (COO) at FundsIndia, an online mutual fund investment portal. “Sebi has observed that there are investment norm breaches in DHFL Pramerica’s three debt funds,” said a person familiar with the regulator’s thinking, on the condition of anonymity. “Sebi has issued a letter to DHFL seeking explanation. For passive breach, DHFL Pramerica will be given time to remedy the situation. But if the situation continues, then the fund house will be penalised,” he said.
In an emailed statement to Mint, DHFL Pramerica AMC said it had taken steps to reduce its schemes’ exposure to the DHFL group. “In the last three months, the funds have reduced exposure to DHFL bonds by almost ₹108 crore. Post this reduction, the aggregate exposure of the various funds of DHFL Pramerica Mutual Fund to the securities of DHFL as on date stands at about ₹274 crore. A large part of this holding is short-term in nature, with almost 63% maturing in the next five months until September 2019,” the AMC said. “All the holdings in all of these funds, including DHFL, are well in ‘investment grade’, and have met all of their debt servicing obligations in a timely fashion and completely on schedule. Besides the relatively shorter tenor of DHFL bonds in these funds should generate natural liquidity in the funds in the coming months,” it added.The lack of defaults in DHFL papers so far is a huge relief for India’s beleaguered debt investors.
However, the surge in exposure to the paper in question serves as a wider lesson to investors. Investors who aren’t quick on their feet can be left holding the troubled paper in question and can take a hit from any eventual default. A point for those invested in schemes exposed to securities of IL&FS and Essel groups to note.