Sundaram withdraws DHFL side-pocket

By: |
Published: August 23, 2019 7:22:36 AM

Taking the fact into consideration, the company decided to treat it as an event of default for its schemes and also decided to write off the principal and interest aggregating to Rs 52.21 crore on August 16, 2019.

Sundaram, DHFL, industry news, Sundaram equity fund, Sundarammutual fund, Sundaram finance, DHFL share,DHFL  news, DHFL  NSEAccording to the regulations, a credit-event is when a company’s debt papers are downgraded to below-investment grade and that the decision to side-pocket has to be taken on the day of the credit-event.

By Mitali Salian
& Chirag Madia

Sundaram Asset Management Company withdrew its proposal to side pocket debt instruments of Dewan Housing Finance Corporation (DHFL) across various schemes on Wednesday, stating that the move was breach of existing regulations of the Securities and Exchange Board of India.

Earlier this month, the mutual fund advertised creation of segregated portfolio for investments in the non-convertible debentures of DHFL after being “informed by the custodians of the schemes not to recognise the interest on the NCDs of DHFL falling due on August 16, 2019”. It also stated that investors would have 30 days’ load free exit period to redeem from the schemes, which would expire on August 30.

Taking the fact into consideration, the company decided to treat it as an event of default for its schemes and also decided to write off the principal and interest aggregating to Rs 52.21 crore on August 16, 2019.

However, according to sources, an interpretation of the market regulators norms would indicate that rating agencies’ downgrade of instruments held by the fund to ‘D’ or default grade on June 5, 2019, should be deemed a ‘credit event’ given the consequential impact on valuations.

According to the regulations, a credit-event is when a company’s debt papers are downgraded to below-investment grade and that the decision to side-pocket has to be taken on the day of the credit-event.

A source privy to the development said, “According to the regulator, the credit event was when rating agency downgraded the NCD of DHFL on June 5. But Sundaram’s NCD got matured on July 16 and they thought it’s a credit event and announced side-pocketing.”

Sundaram’s announcement to side pocket had created confusion among other fund houses with exposure to DHFL since they have themselves been unable to side pocket owing to regulatory restrictions.

According to Sundaram’s releases, four if its schemes — Sundaram Short Term Debt Fund, Sundaram Low Duration Fund, Sundaram Short Term Credit Risk Fund and Sundaram Debt Oriented Hybrid Fund — have exposure to DHFL. Mutual funds have an exposure of Rs 2,200 crore to the cash-strapped home loan financier via NCDs and Rs 180 crore of commercial papers.

Mutual funds, that are currently awaiting the market regulators nod on signing the inter-creditor agreement that will help take forward the resolution plan for DHFL as drawn up by bankers, the company’s officials and SBI Capital.

On Wednesday, Sebi said it was still contemplating on the Association Of Mutual Funds in India’s recommendation to allow MFs to become signitories to the DHFL inter-creditor agreement (ICA).

Sources have told FE that the markets regulator may have concerns that the terms of the resolution process could end up violating the mandate of some of the schemes. Sources also stated that they were awaiting clarity on whether any restructuring would happen before side-pocketing or after.

According to some of those who have written to Sebi, the regulator may be comfortable allowing funds to sign the ICA provided there are some pre-conditions attached to it and also that it may not be a blanket permission to MFs to sign similar such ICAs. Permission may be granted on a case-to-case basis.

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