SEBI allows AMCs to join inter-creditor pact with riders

Suresh P Iyengar Mumbai | Updated on August 30, 2019

SEBI's decision to allow mutual funds to be part of inter-creditor agreements could raise many questions.   -  iStockphoto

AMCs must segregate stressed assets through side-pocketing, says regulator

In a move that could raise more questions than provide answers, capital markets regulator SEBI has allowed mutual funds to be part of inter-creditor agreements (ICA) being signed by banks with defaulting corporates.

The direction comes in the wake of a letter earlier written by Association of Mutual Funds in India (AMFI) seeking clarification on entering ICAs on the back of a series of debt defaults by IL&FS, Zee Group, Reliance Capital and DHFL.

In a letter addressed to AMFI on Thursday, SEBI had said that asset management companies (AMC) should have segregated stressed assets through the side-pocketing process before opting to be part of an ICA.

It also said AMCs needed to get Board and trustee approval before signing an ICA.

Clarity needed

However, it is not clear whether mutual funds will be allowed to pump in more funds if banks decide to provide risk capital to revive the prospects of the defaulting entity as part of the ICA, said a senior official at a mutual fund house.

Moreover, he wondered whether banks would allow mutual funds to be part of the ICA if they were not willing to share a part of the risk capital.

SEBI is also silent on whether AMCs can be part of the ICA, which recommends a standstill as part of the resolution plan, he said.

The Asset Management Company has to inform the credit rating agencies about any proposal from debenture trustees signing an ICA and get it rated separately.

If the resolution plan (RP) puts conditions on an AMC that are not compliant with mutual fund norms, it has the option of exiting the ICA, as if it had never signed the agreement, said SEBI.

The resolution plan has to be implemented within 180 days from the end of the review period.

However, with the approval of the board of the AMC, and in the interest of investors, the overall plan can be implemented within 365 days from the date of commencement of the review period.

Overall, SEBI said the AMC has to evaluate whether it is in the best interests of unit holders to participate in the ICA, taking into account the nature of securities held and other recourse avenues in comparison with other investors besides the possibility of selling the investment.

Coming down heavily on AMCs, Ajay Tyagi, Chairman of SEBI, recently said the AUMs of debt-oriented schemes as a whole fell 18 per cent last September and October and that of money market schemes tumbled 25 per cent.

This was despite the total exposure of all mutual fund schemes to the stressed securities being only around 1 per cent of all debt-oriented schemes’ AUM.

While it has been around a year since the defaults started, the AUM of open-ended debt schemes is yet to reach the level seen at August-end. Such instances do not reflect well on the industry practices, he had said.

Published on August 30, 2019

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