SEBI issues show-cause notices to MF arms of HDFC, Kotak over FMP payments default

The mutual fund arms of HDFC and Kotak are facing the ire of SEBI for defaulting on their Fixed Maturity Plan (FMP) payments.

In a filing to the stock exchange, HDFC on Monday said it had received two show-cause notices (SCNs) with regard to its debt investments in Essel Group.

More notices likely

Another notice was sent to Kotak MF, sources said. It is likely that SEBI may also issue more SCNs to other fund houses for their practice of loans against shares, the sources added.

In April, investors in the FMPs of two of India’s leading MF houses received a rude shock after they were informed that the proceeds/returns they were expecting on their maturing schemes wouldn’t be immediately forthcoming, thanks to their exposure to the troubled IL&FS and Essel groups.

While Kotak Mutual Fund repaid the principal and offered to pay the returns later, subject to realisation of debt, HDFC Mutual Fund sought investor permission to extend its maturity date by a year, ostensibly to ‘lock into’ higher yields.

Exposure details

SEBI’s SCN is now seeking details of the fund houses’ exposure to the debt instruments of Essel Group, sources said.

HDFC Asset Management Company on Monday said: “We are working with our legal advisers and are in the process of responding to the said SCNs.” Kotak did not comment on the SCN.

Two Essel Group companies, Konti Infrapower and Multiventures and Edisons Utility Works, did not repay in full the investment of the FMPs.

In January, the asset management companies that had exposure to Essel group papers decided to not sell the promoters’ pledged shares to recover their dues.

Reliance MF was among the top AMCs that did not agree to a standstill agreement and sold Essel papers on May 8. India’s MF industry has an exposure of ₹51,000 crore to such papers.