SEBI Letter Ends MF’s Hopes Of Joining DHFl Resolution Process
Under the inter-creditor agreement(ICA) framework, Dewan Housing Finance Corporation (DHFL) resolution process got rejected on Thursday. After knowing the announcement from SEBI(Security and Exchange Board Of India) Mutual funds felt regretful, why because it hopes to become part of the resolution process. Mutual Fund Scheme which has already side-pocketed the affected debt exposure can take involvement in any ICA process.
Security Exchange was responding to a representation done by the Industry body Association of Mutual Funds in India(Amfi), which already requested the regulator if the action of merging DHFL-ICA can itself be sufficient movement to side-pocket exposure to the troubled housing finance company.
Apart from that, SEBI shares its response that more than 100 open-end schemes exposed to DHL’s debt papers were not ready to merge DHFL’s ICA as they are still yet to complete the stipulated process before the side-pocket option can be availed of. The Mutual Fund industry exposure to DHFL stood at over Rs 4000 crore. Overall, the systemic exposure to DHFL is Rs 90000 crore which is the same quantum to that of IL&FS.
According to the SEBI notice, inspection by Business standard, “Segregation of Portfolio pursuant to a credit event, in terms of Sebi circular dated December 28, 2018, should be pre-condition for signing ICA for the assets in the segregated portfolio”
As per the SEBI rules on ICA, only three schemes of the Tata Mutual Fund may have a chance to involve in the resolution process, Tata Corporate Bond Fund, Medium Term Fund, and Treasury Advantage fund is the only Mutual Fund schemes that have so far side-pocketed the exposure. While email query sent to tata MF on whether they would join the ICA framework for DHFL didn’t elicit any response at the time of going to press.
Meanwhile, the legal route will continue to be an option on the table even for those MFs that initially opt for the ICA framework for any distressed exposure.
“Suppose the Resolution plan(RP) imposes a condition on the asset management companies(AMC’s), which are not in accordance with the provisions of Sebi(Mutual Fund) Regulations and circulars. AMC’s would be free to exit the ICA altogether with the same right as if it had never signed the ICA,” Sebi’s letter read.
Amfi got a response from SEBI on what should MF’s do if RP terms restrict MF’s From selling the debt securities to infuse further funds into the borrower. Moreover, Mutual fund can quit from its terms are not in-line with Sebi norm’s, MF can also exit ICA if the RP is not implemented within 180 days of the review period.
This provision under the line of Reserve Bank of India’s(RBI) June 7 circular.
Topic to accept from the board and trustees, Mutual Fund can at the most give an extended timeline of 365 days for RP’s implementation. As per RBI norms, the review period starts on the recommended date, which is the date when the borrower is suggested to ICA(i.e. June 29, 2019, in DHFL’s case).
Previously, the MF’s holding debt papers of DHFL were finding one-time relaxation from Sebi on different regulatory provisions to side-pocket exposures to the debt-riddle company.
The standards expect MFs to take side-pocket choice upon the arrival of the credit occasion. In any case, when DHFL was minimized to underneath speculation grade on June 5, 2019, MFs were not in a situation to utilize the alternative as they had not finished the due systems required according to Sebi guidelines.
Aside from making the choice to side-pocket on day of credit occasion, the arrangements additionally expect MFs to allow a 30-day load-free window to speculators. Further, MFs need to set up a point by point approach on the production of an isolated portfolio, which is accepted by the trustees.
A couple of years back, the Insurance Regulatory and Development Authority of India had permitted safety net providers presented to DHFL to turn out to be a piece of the ICA. The move had made MFs circumspectly positive that Sebi would likewise enable them to join DHFL-ICA.