Sebi initiates adjudication proceedings against HDFC AMC

The Securities and Exchange Board of India (Sebi) has issued two fresh showcause notices to HDFC Trustee Company and its managing director and other officials initiating adjudication proceedings in relation to investments of fixed maturity plans (FMPs) in debt instruments of Essel Group companies. Earlier on May 10, 2019, the market regulator had sent two showcause notices on the same matter to HDFC AMC.

In an exchange filing on June 1, 2019, HDFC AMC said: “We now wish to inform you that SEBI has issued 2 (two) additional show cause notices initiating adjudication proceedings against HDFC Trustee Company Limited, i.e. the trustee company of the HDFC Mutual Fund, and our Managing Director, Mr. Milind Barve and few other officials of the Company on May 31, 2019 in relation to the same subject matter.”

“We are working with our legal advisors and are in process of responding to the said adjudication notice,” HDFC AMC said. The AMC had rolled over one of its FMPs, which has investments in two Essel group companies.

According to the portfolio, as on March 2019, HDFC Fixed Maturity Plan — 1,168 Days – February 2016 (1) which was extended by over a year has invested around `66.49 crore in Edisons Infrapower & Multiventures and Spirit Infrapower & Multiventures, group companies of Essel.

Earlier, Kotak Mutual Fund had conveyed to its investors that the fund may not be able to pay the entire redemption amount for the Kotak FMP Series 127, which matured on April 8. Industry players estimate that debt mutual funds have an exposure of around Rs 6,000-7,000 crore to debt instruments of Essel Group companies.

In January, the share prices of Zee Entertainment Enterprises Limited and Dish TV Ltd fell sharply by 26-33% primarily on reports of pledged shares of the promoters being invoked and sold. This resulted in the security cover against the exposures falling below the prescribed threshold as per the NCD documents.

HDFC AMC had said in a note on April 15, 2019 that the promoters had conveyed their inability to provide additional equity shares as most of their domestic stake was already pledged.

Consequently, a meeting was held between the promoters and group of lenders and it was agreed to provide additional time to the promoters to complete their ongoing strategic sale plan of a stake in Zee Entertainment Enterprises. Lenders are understood to have granted the Essel Group companies a moratorium till around September 2019 by which time fund houses expect the repayments.

The data from Association of Mutual Funds in India (Amfi) shows that HDFC mutual fund has average assets under management of Rs 3.42 lakh crore, the highest in the industry as in the January-March quarter. The share price of HDFC AMC on Monday closed at Rs 1,780.35 up by 0.43% on BSE.