Essel exposure: Kotak FMP investors may lose a portion of their money at maturity

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Updated: April 11, 2019 11:17:01 AM

Investors in Kotak FMP Series 127, a fixed maturity plan (FMPs), which have invested in debt instruments of Essel Group companies, may not receive the full amount on maturity of the scheme.

Industry players estimate that debt mutual funds have an exposure of around Rs 7,000-8,000 crore to debt instruments of Essel Group companies.

Investors in Kotak FMP Series 127, a fixed maturity plan (FMPs), which have invested in debt instruments of Essel Group companies, may not receive the full amount on maturity of the scheme. This is because Essel Group is understood to have delayed repayments. Kotak Mutual Fund is understood to conveyed to its investors that the fund might not be able to pay entire redemption amount for the Kotak FMP Series 127, which matured on April 8.

Industry players estimate that debt mutual funds have an exposure of around Rs 7,000-8,000 crore to debt instruments of Essel Group companies.

Rohit Rao, chief communication officer of Kotak Mahindra Group, said, “We are working closely with the Essel Group for optimal recovery from Konti & Edisons for the benefit of our unitholders and believe that such recovery will take place, albeit with some delay. For IL&FS Transportation Networks, Kotak Mutual Fund has made a 100% provision for this investment as the company has been classified in the ‘Red’ category where recovery is uncertain and will be dependent on the resolution plan achieved by the new board/NCLT.”

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“Amongst other investments, the scheme also invested in non-convertible debentures (NCDs) issued by Edisons Utility Works and Konti Infrapower & Multiventures (both are Essel Group companies – secured by equity shares of Zee Entertainment Enterprises Limited) and IL&FS Transportation Networks (credit enhancement by parent support agreement of IL&FS). The three firms are facing headwinds due to company and sectoral-specific issues.”

According to the portfolio disclosure of Kotak FMP Series 127, it has investments worth Rs 80 crore in Konti Infrapower & Multiventures and Edisons Utility Works. The total assets of the schemes as on February stood at approximately Rs 450 crore.

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Even as debt instruments are backed by equity shares of Zee Entertainment Enterprises, most of the lenders and mutual funds who had lent money to the Essel group had chosen to not sell the shares to recover the money if there is any default. Debt securities that are backed by the group companies’ equity shares come with a cover that is agreed upon at the time of agreement and officials in the industry say Kotak Mutual Fund had lent money to two Essel group companies for minimum share cover of 1.50 times. Market participants say lenders have granted this moratorium till around September 2019 by which time fund houses expect the group to repay all its dues.

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