Sebi begins probe into DSP Mutual Fund’s sale of DHFL bonds
News of DSP Mutual Fund's sale of the AAA-rated bonds had triggered a 60% intraday crash in HDFL share price on 21 September
Mumbai: The Securities and Exchange Board of India (Sebi) has initiated an enquiry into DSP Mutual Fund selling bonds of Dewan Housing Finance Ltd (DHFL) in September, two people aware of the matter said. News of the sale had triggered a 60% intra-day crash in DHFL share price. “The market regulator wrote to the fund house earlier this month probing whether there was a violation of model code of conduct by the fund house, when it sold the highly rated paper at a loss,” said the first of the two people cited above, both of whom spoke under condition of anonymity.
“In the letter, the market regulator has sought details of the transaction, the rationale of the sale and whether there was any other information that prompted the sale,” said the second of the two people.
In an emailed response, the DSP Mutual Fund confirmed that it received a Sebi query. “We have received and replied to a query from Sebi regarding specifics of the DHFL transaction. However, we believe that this is routine and we have answered similar queries from Sebi in the past,” a spokesperson wrote.
An email sent to a Sebi spokesperson was not answered.
When DSP sold the bonds, they were rated AAA.
The case is also being viewed by the finance ministry, the first person added.
According to a report in the Hindu Business Line on 21 November, the prime minister’s office is also examining the matter.
“The asset manager sold DHFL bonds at a net yield of 11% compared with a coupon rate of 9.1% at the time of issue. The bond was sold at a steep discount in third week of September of 18% ( ₹ 100 bond sold at ₹ 82),” according to a finance ministry note to corporate affairs ministry in September. A copy of the note has been reviewed by Mint.
The abrupt sale set panic in the market, which was already volatile due to the defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS) and some of its entities.
Shares of DHFL fell by 60% on 21 September and finally closed 43% lower, dragging other non-banking finance companies (NBFCs) as well.
DSP Mutual Fund’s decision to sell DHFL paper was supposed to be due to redemption pressures after the IL&FS defaults. The mutual fund industry cumulatively held ₹ 2,800 crore worth of the paper belonging to IL&FS and its related entities.
However, DSP has refuted that the sale was a distress sale due to redemption pressures. In a note, the fund house said that “there was speculation that the DHFL bond sale and spike in yields on Sep 21st was due to redemptions in DSP Credit Risk Fund. This is completely untrue.”
“Post the downgrade of IL&FS group companies, the fund has witnessed redemption of only 4% of the fund’s AUM of Rs. 6882 cr. This signifies there is no material redemption pressure on the fund,” said the fund house in the note.
DSP also refuted that the yields the prevailing yields for DHFL bond were already at elevated levels of 10.5-11.0% (bid-ask) and not 9% as speculated, the fund house added.
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