According to Ashish Pyasi, principal associate with Dhir and Dhir Associates, if mutual funds sign the inter-creditor agreement then they may not be going against provisions of the law.
By Chirag Madia
& Mitali Salian
Dewan Housing Finance Corporation (DHFL) on Monday issued a statement to clarify that it was working to ensure that there is a comprehensive resolution in place so that no lender would have to take a haircut. The plan is currently in the works and specifics have not yet been shared by the company with all the lenders. Mutual funds told FE that they had not seen the resolution plan during the meeting with other lenders. Bankers had earlier indicated to FE that DHFL has been granted until later this week to submit its final proposal for the resolution plan.
Fund houses have to decide whether they want to sign the inter-creditor agreement (ICA), as fund houses are not directly covered under the prudential framework for resolution of stressed assets issued by the RBI on June 7, 2019. Nor is it mandatory for them to sign such an agreement to be part of any resolution plan. Apart from this, mutual funds also have to evaluate if the resolution plan makes commercial sense. Mutual funds are not sure if the prevailing law allows them to sign the ICA along with the banks and if they can agree to certain commercial terms mentioned in the ICA.
According to Ashish Pyasi, principal associate with Dhir and Dhir Associates, if mutual funds sign the inter-creditor agreement then they may not be going against provisions of the law. But while taking a haircut they may have to see whether the applicable regulations permit them to take such a haircut. Once the ICA is signed, it will become a binding contract upon the parties signing it. However, ICA is an agreement under aegis of RBI guidelines therefore it will be difficult for mutual funds to find a place among lenders who are directly covered under the new Prudential framework for resolution of stressed assets.
The head of fixed income at a leading fund house said: “As of now we have not seen resolution document. A final decision would be taken only after we see the resolution plan.” He added that there are a few major issues which need to be first addressed by the fund houses. First being regulatory clarity. Fund houses are not sure if there is a provision under the law that can allow them to join the ICA signed by the banks.
The second issue is a commercial one that fund houses will need to take if there is any requirement of a conversion of debt to equity or extension of maturity of the paper. Market regulator Sebi had recently came down heavily on the standstill agreements that mutual funds have entered with certain corporates. The fund manager added that mutual funds would also need to see the resolution plan to take any commercial decision. However, most fund houses agree that a resolution is in everyone’s interest. Data from Value Research showed that mutual funds have invested around Rs 3,300 crore in debt papers issued by DHFL as on May, 2019.
A source from the Indian Banks’ Association, who did not wish to be named, said: “As on date, it is only mandatory for banks to sign the ICA. If an MF is to sign the ICA, my understanding is they would not be violating any regulations, it is merely to protect the interest of their investors. The signing of the ICA would, among other things, only mean that those signing it would not be able to invoke any legal means for resolution.”