There is a such a big hue and cry today about HDFC AMC doing what could be termed as the best solution in the given circumstances. Instead of leaving its investors in a lurch, it has decided to step up and the market is punishing the AMC for this.
From a situation where some of its Fixed Maturity Plans (FMPs) were stuck, today they have been given an exit. HDFC AMC plans to transfer Rs.500 crore worth of the FMPs exposure to Essel Group firms to its own books. The company has said that such liquidity arrangement was in its larger long term interest, purely as a measure to provide liquidity to the relevant unitholders.
Explaining the terms of this plan, the AMC has said:
- Applicable to NCDs issued by Edisons Infrapower & Multiventures Private Limited and Sprit Infrapower & Multiventures Private Limited, companies promoted by the Essel group.
- This liquidity arrangement shall only apply in case of FMP Schemes (having an exposure to the NCDs issued by the Essel Group Companies) which have either already matured in the month of April, 2019 and/ or will mature till the standstill arrangement entered into by the Company with Essel Group Companies is in force.
- Provision of such liquidity arrangement will entail acquisition by the company of NCDs issued by the Essel Group Companies held by such FMP Schemes at the prevailing valuation as on respective maturity/purchase dates.
Cutting through all this mumbo-jumbo, what this means in simple terms – the FMPs had acquired NCDs of the two Essel group companies. There are investors who have invested in these FMPs and given the liquidity crisis at Essel group, they are stuck. To give them an exit, HDFC AMC will buy these NCDs from its mutual fund's FMPs and pay off its investors. The AMC had time till Sept 2019 to recover the money but it decided to take this preemptive step and compensate its investors. Maybe because the NCDs have not yet been downgraded – there hasn’t been a payment default yet.
The AMC will be buying these NCDs from the FMPs at market prices and once the FMPs receive the money, they can choose to either repay the investors or credit the amount to the FMP that got rolled over. For schemes that will mature after Sept 2019, the AMC has decided to wait.
It is to be applauded that the AMC has put its foot forward to build trust in its company; this move shows that it cares about its investors and will not leave them high and dry because some of its calculated risks did not pan out the way it should have.
HDFC AMC is expecting the tab of this rescue plan to be about Rs.500 crore. But that’s good money spent to protect the interest of the FMP investors; the best action in fiduciary mature that any mutual fund is supposed to play. Next time, when an investor wants to decide on which mutual fund to go for, HDFC is sure to rank higher. That’s what this rescue action has built - faith in times of rampant fraud and cheating.
This tab of Rs.500 crore is being perceived as a loss for the AMC and this is the main reason why the stock price tanked today.
But many in the industry say that it’s too premature to label this as loss. For now, it will be a transfer of Essel NCDs to the books of AMC and will stand as an investment with adequate cover. HDFC AMC is said to have more than 1.7 times cover for its exposure to Essel group. Around Rs.400 crore is covered under the liquidity window. Thus there is no hair cut – transfer is happening at face value to AMC and FMPs get their full money back – they are likely to get back the amount they invested.
At this juncture, the AMC has not revealed when and how this rescue plan is going to happen. But one should draw comfort from the fact that there is enough collateral if push comes to shove.
Of course, shareholders of the company are mighty angry that HDFC AMC is going to be using their, shareholders money, to buy the NCDs.
Thus such kind of rescue plans, which have happened many a times in the past too, always work in favor of the unit holders but goes against the shareholders of the AMCs. This is probably what they mean when they warn you, “subject to market risks.”
For a mutual fund, everything is reputation and HDFC mutual fund just built up on that!