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DHFL Downgrade: Tata Mutual Fund Side Pockets Its Exposure To DHFL Securities

Tata Corporate Bond Fund, Tata Medium Term Fund, and Tata Treasury Advantage Fund hold papers of DHFL.

2000 rupee notes. (Bloomberg)
2000 rupee notes. (Bloomberg)

Tata Asset Management Company Ltd. has decided to segregate its investments in Dewan Housing Finance Corporation Ltd. from rest of its portfolio as credit rating agencies downgraded the home financier’s debt papers to default.

The asset manager is the first to use side-pocketing, or the mechanism to separate distressed and illiquid assets from other more liquid assets in a portfolio, after the market regulator allowed it last year. It proposed to separate the securities of DHFL that the mutual fund house held in Tata Corporate Bond Fund, Tata Medium Term Fund and Tata Treasury Advantage Fund schemes, it said in a statement.

The segregated portfolio will be created immediately after the expiry of mandatory load free exit period of 30 days, subject to approval by trustee of Tata Mutual Fund. The fund house has suspended ongoing subscription to these three schemes, the statement said. The load free exit period—provided to investors to redeem from such schemes—will expire on June 14. That means Tata AMC may have initiated this the move mid-May.

Also, the asset manager will list the segregated portfolio on the stock exchange within 10 days and will provide a separate net asset value for this portfolio to the investors. While investors will be able to buy and sell on the exchange, the fund house will not allow any fresh subscription or redemption in the portfolio till the time it recovers money partly or completely, it said.

Mutual funds having exposure to DHFL’s commercial paper and non-convertible debentures have taken write-downs after the mortgage lender delayed the interest payment worth Rs 1,000 crore on certain debt-market instruments. People in the mutual fund industry who were aware of the development told BloombergQuint that it translates to a write-down of 75 percent of their exposure.

Crisil Ratings and ICRA Ltd. downgraded DHFL’s commercial paper to default, citing delays in debt servicing by the home financier on some of its NCDs because of inadequate liquidity. CARE Ratings downgraded all outstanding borrowings of the mortgage lender to default.

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