Rating agency ICRA downgraded various debt instruments of The Industrial Finance Corporation of India (IFCI) due to its sharp deterioration in its asset quality. Few of the arbitrage funds in the Indian mutual fund industry continue to hold stocks worth R38 crore of IFCI. However industry participants say that arbitrage funds are less risky compared to pure equity funds as their mandate is to exploit arbitrage opportunities between cash and derivatives market.
Schemes such as Birla Sun Life Enhanced Arbitrage Funds, ICICI Prudential Equity Arbitrage Fund among others held less than one percent of the stocks of IFCI as on January 2017, shows data from Value Research. On February 27, ICRA downgraded the long-term rating of various debt instruments such as long term bank borrowings, long term bonds (including subordinated bonds) and bonds/NCD programmes to ‘negative’ from ‘stable’.
“The rating downgrade is driven by the sharp deterioration in IFCI’s asset quality (gross NPAs at 25.8% and net NPAs at 21.4% as on December 31, 2016), and the continued stress on the entity’s loan book with very high proportion of loan book being in the 120-150 days past due and under the stand-still clause and hence not recognised as NPAs so far,” said ICRA in its report.
Manoj Nagpal, CEO of Outlook Asia Capital said, “Unlike in pure equity schemes, fund managers have to look at management quality, growth prospectus and other valuation matrix before investing in a stock. But here in arbitrage funds they are just looking for opportunities between cash and derivatives market, so its not big concern for investors as of now.” Even Reliance Arbitrage Advantage Fund and SBI Arbitrage Opportunities Fund hold less than a percent of IFCI stock in their portfolio.
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Stock of IFCI which is state owned financier on Wednesday closed at R29 down by 0.51% against previous day. According to Value Research, arbitrage funds have on an average given returns of 6.95% in the last one year. Spokesperson of ICICI Prudential Asset Management Company (AMC) said, “In line with applicable regulatory provisions, we refrain ourselves from commenting on a particular stock forming part of our portfolio.”
