28 July 2019: Asset management companies that have an exposure to debt instruments of Dewan Housing Finance Corporation (DHFL) have not been involved in the working of the resolution plans nor have they received the resolution plan. Funds had indicated that during the informal conversations held a couple of weeks ago, they had been asked to take a haircut. However, mutual funds want the resolution plan to follow the law. In case of insolvency proceedings, losses are apportioned between equity shareholders, preference shareholders, perpetual-Tier II bond holders and unsecured lenders. After these four categories have apportioned the losses, then the secured lenders also end up taking a similar proportion of haircut.
In this case, lenders do not wish to give a haircut to the Employees’ Provident Fund Organisation, PF Trust and retail investors. Mutual funds are protesting against this formula. A CEO from the leading fund house who has investments in DHFL says, “This waterfall mechanism is standing the test of time for past many centuries.”
The CEO added: “But here banks are saying that Employees’ Provident Fund Organisation (EPFO) and PF trust should not take any haircut, as they cater to retail investors. They are saying that unsecured FD holders will be protected. We only have retail investors in the mutual fund schemes that has exposure to debt papers of DHFL. We need same protection that will be granted to retail lenders.” If the resolution plan persists with this formula, then the fund houses may litigate.
Fund houses have been talking to lenders that they have asked for a fair resolution plan and equal treatment with other retail investors. One of the fund houses has even suggested that one of the ways to create a level playing field without any haircut to PF lenders could be to achieved via extending the tenure of the paper, while lowering the coupon. Mutual funds have exposure of over Rs 2400 crore in paper issued by DHFL.
What has made matters worse is the the mutual fund industry is yet to get any resolution plan from either the DHFL or intermediary like SBI Caps, said another fund manager. “We are hopeful to get the resolution plan in next few days and final decision will be taken once we read the plan. Right now there is no uniform view among the fund houses on what are the next steps should be taken in this matter. But we are very clear that, we will support the resolution plan if it benefits us and our investors. If we are not satisfied with the resolution plan, we have to look at other options like litigation.”
Another head of fixed income at a fund house said that they would like to work with banks to arrive at a quick resolution. “We have to work together with banks and find a solution. In the days to come we will get in touch with the senior officials of State Bank of India (SBI) as they have highest exposure to DHFL and put forward our views on this matter,” he said.