Essel Group Exposure: Kotak FMP Investors May Not Be Able To Fully Redeem Funds
Indian rupee banknotes and coins are arranged for a photograph. (Photographer: Adeel Halim/Bloomberg)

Essel Group Exposure: Kotak FMP Investors May Not Be Able To Fully Redeem Funds

Kotak Mahindra Asset Management Company said investors of its fixed maturity plans may not be able to redeem their entire amount because of its exposure to debt-laden Essel Group, the controlling shareholder of the Zee Group of companies.

Kotak FMP Series 127 and 183 that matured on April 8 and April 10 had an exposure of nearly 18 percent and 19 percent, respectively, to the Essel Group, according to the website of India’s seventh-largest asset manager.

“We will repay that money when we receive it from the Essel Group companies,” Nilesh Shah, managing director of Kotak Mahindra AMC, told BloombergQuint in an interview. The decision to give time to the promoters of Essel Group companies, according to Shah, was taken collectively by 44 lenders on Jan. 26. “This isn't us working for promoters to help them, this is us working for our unit holders because it will help in recovering their dues.”

Both the schemes have invested close to Rs 190 crore in non-convertible debentures of two Essel Group companies—Konti Infrapower & Multiventures Pvt. Ltd. and Edisons Utility Works Pvt. Ltd. Mutual funds and non-bank lenders had earlier agreed not to sell shares of Zee Entertainment Enterprises Ltd., pledged by the Essel Group against non-convertible debentures, fearing that may trigger a sharp decline in the stock price.

In all, we have eight FMPs where Zee or Essel group companies are there in the portfolio or ITNL is there in the portfolio. In seven FMPs, we are returning more than the amount we had collected along with some appreciation. It is only in one FMP which has matured today where I am returning about 0.6 percent less.
Nilesh Shah, MD, Kotak Mahindra AMC

Kotak Mahindra Group said they’re working closely with the Essel Group for optimal recovery from the group companies for the benefit of unit holders and that the recovery will be delayed. It said the promoters of Essel Group have assured a resolution by September-end. Any realisation from these investments will be shared proportionately with the unit holders subsequently, it said.

Kotak has also managed to take personal guarantees from the promoter along with an upside sharing arrangement if there is a strategic stake sale in Zee Entertainment, Shah said. “We are better secured, we have been better rewarded and we are giving promoters time because it is in the interest of our unit holders.”

Fixed maturity plans are considered a low-risk alternative to fixed deposits. At least over 50 fixed maturity plans—some of which will mature over the next few months—have exposure to the Essel Group companies, according to BloombergQuint data.

After Kotak’s plans, HDFC Mutual Fund and Reliance Mutual Fund’s FMP schemes with exposure to the Essel Group are coming up for redemption in the next couple of months, according to Value Research data. BloombergQuint has emailed queries to the two asset management companies and the story will be updated once they respond.

HDFC AMC informed investors through newspaper advertisements that one of its FMP schemes—HDFC FMP 1168D—which has nearly 20 percent exposure, or Rs 66.5 crore, to Edisons Utility Works, has been rolled over by 380 days. The scheme, which was supposed to mature on April 16, will now mature in April 2020, the asset manager said.

“With this incident the hypothesis that FMPs which were looked upon as a substitute to fixed deposits would come under question,” Amol Joshi, founder of PlanRupee Investment Services, told BloombergQuint. “Second, for products like FMPs the industry must stick to AAA-rated securities and highly liquid portfolio.”

There may not be a full recovery of investor money, said Dhirendra Kumar, founder of Value Research. “But I don’t see the money disappearing or vaporizing and the investors being completely out of pocket on that front."

Also read: Brickworks Reaffirms Ratings On Essel Group Firms

Watch the discussion with Dhirendra Kumar here.

Also read: Financial “WMDs” And Mutual Funds’ “Agnipariksha” - With Nilesh Shah, Anil Singhvi

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