Sebi has also asked firms to disclose if an instrument was downgraded by their internal credit teams
The Securities and Exchange Board of India (Sebi) has asked fund
houses to furnish data on all debt-oriented schemes launched in
April-December 2008 as the capital market regulator suspects that many
may not have adhered to proper accounting norms, said three persons with
direct knowledge of the matter.
At least 870 fixed maturity plans
(FMPs) were launched during this period by fund houses. Apart from
them, other debt schemes, too, are being scanned by the regulator.
Debt
funds invest in instruments such as certificates of deposit, commercial
paper and pass-through certificates issued by banks and corporations.
Sebi
has directed fund houses to furnish details of the types of instruments
bought or sold, the names of the issuers of such instruments, the total
amount invested and the amount rescheduled.
Typically, when a
firm is not able to meet redemption of its debt paper placed with a fund
house, it rolls it over for a fresh tenure and a revised interest rate,
which is typically termed as “reschedulement”. During such events,
investors may suffer as redemption payouts may get delayed.
Sebi
has also asked fund houses to disclose whether an instrument was
downgraded by their internal credit teams due to such rescheduling.
Mint has reviewed a copy of the letter sent by Sebi to the fund houses.
“Apart
from managing assets, the asset managers also have a fiduciary duty.
Sebi wants to ensure that none of the fund houses has transferred any
loss to any scheme while handling the redemption pressure during that
period,” said one of the persons.
None of the three officials
wanted to be identified as the matter is a regulatory one and the letter
sent to the firms is not in the public domain.
A Sebi official declined to comment for this story.
Sebi
has also sought details of all non-performing assets under
debt-oriented schemes and the provisioning made by the fund houses. The
letter was sent to the fund houses in February and the process of
evaluation is still on.
In the wake of the liquidity crisis that
hit the global financial system in 2008, all categories of investors
preferred to get into cash, leading to large-scale redemptions by mutual
funds (MFs). To honour this, fund houses extensively used inter-scheme
transfers. “While doing such transfers, it is possible that the fund
houses may not have strictly adhered to all the rules,” said one of
three persons cited above.
There are 43 fund houses in the Rs.
7 trillion Indian asset-management industry. Traditionally, 60-70% of
the industry’s assets have always been debt-oriented schemes.
In
the second half of 2008, all cash-strapped financial services firms,
including banks and asset management funds, were offering high returns
on debt-oriented products to attract money from customers.
Real
estate firms, among the hardest hit at the time and facing an acute
shortage of working capital, floated debt paper offering high returns.
MFs had, in fact, started increasing their exposure to the sector even
before the global meltdown sparked by the fall of Lehman Brothers. For
instance, LIC Mutual Fund Asset Management Co. Ltd’s FMP Series 35
invested 86% in construction. About 25% of the corpus was invested in
assets with a rating of less than AA.
There were several FMPs in the market that had their investments in low-rated scrips.
They
also invested in scrips with maturities longer than the schemes
themselves. For instance, a three-month FMP used to invest in scrips
maturing after six months, technically causing asset-liability
mismatches. To be sure, there was no ban on such investments at the
time, but Sebi subsequently clamped down on them.
Real estate
developers’ problems got compounded when investors made panic
withdrawals from debt schemes that had exposure to the sector. This
forced the realty firms to opt for a rollover of debt as they did not
have enough money to return to bondholders.
When an FMP matures,
it redeems underlying securities and pays the money back to investors.
For FMPs and interval funds (closed-end income schemes that allow fresh
inflows and redemption's at regular intervals), the crisis intensified
when underlying assets weren’t enough to repay the principal at
redemption time.
“Sponsors of the affected fund houses had to
compensate the investors by paying them from their own pockets,” said an
income fund manager, who did not want to be named. He also said some
interval funds suffered from asset-liability mismatches as many
investors used to roll over investments beyond the interval.
Source: Live Mint
