Mutual funds may no longer be able to sweep private funding deals with listed company promoters under the carpet. SEBI is likely to tighten the disclosure norms for MFs that lend to company promoters and may prescribe a cap on concentration of such deals, sources close to the development told Business Line.

Also, the regulator will ask MF trustees to be diligent on structured exposure, which is nothing but loan against shares (LAS).

It is estimated that MFs had extended in excess of ₹25,000 crore as LAS to a few corporates. Aditya Birla Sun Life MF, DSP MF and Franklin Templeton are among the top funds having high exposure via LAS. Such deals, wherein a few large MFs had indulged in non-banking finance company like financing, came to light just days ago. These funds are now stuck as the promoters have told MFs that they may immediately not be able to fulfil margin calls as the value of their shares, kept as collateral, has declined sharply. Loan to Zee group promoters falls under this category. MFs have now asked SEBI to let them give promoters more time to fulfil their obligation. The regulator is as of now is just watching the situation and has asked MFs to do their best to avert a crises and recover their money.

“The promoters have played enough games with the markets for long now. The new disclosure regime should also force promoters of listed companies to give reason for cutting such deals. Small investors will be reassured about buying stocks of such companies and know the risks fully,” said Arun Mukherjee, partner, SA Investments.

MFs mostly fund company promoters under debt segment schemes such as credit risk, medium term plan and dynamic bond funds by accepting their listed shareholding as collateral.

Interestingly, in most cases, the treasury funds of companies have subscribed to the debt schemes of MFs and the same fund house has extended LAS to the promoters. In effect, this is roundtripping of money that moves out of the company’s treasury and goes to the promoter via MF, which needs to be cracked down, experts told BusinessLine. “Even MF trustees should be accountable. Disclosures should involve amount of money borrowed and number of shares pledged with full details of other terms of the deal. Such enhanced disclosure can reassure markets,” said Anil Singhvi, founder, Ican Investment Advisors.

Apart from company treasury, many investors put money in certain categories of debt funds to earn higher returns than traditional fixed income instruments. Such debt schemes look for a number of investment options that can earn higher returns for their unit holders. LAS has a potential to generate return of anywhere between 8-24 per cent annually. But without adequate risk management such lending can put the fund under high pressure. Funds may have a cover of 1.5-2.5x on the money it lends and shares can be sold in case the borrower delays payment. Fund house asks the promoter to top up the collateral or give some other liquid security like a fixed deposit.

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