JP Morgan AMC to move Amtek Auto investments into separate units

Mumbai: In a first in the ₹ 13 trillion Indian mutual funds (MF) industry, JP Morgan Asset Management (India) Pvt. Ltd aims to carve out the troubled portions of two of its schemes—JP Morgan India Short Term Income Fund (JSTI) and JP Morgan India Treasury Fund (JTF)—into separate units. One set of units will contain the investments made in Amtek Auto Ltd while the other set of units will contain all other investments and cash holdings.

The fund house has sought unit holders’ approval for the move. Only if it gets a simple majority—both in terms of the number of unit holders as well as the value as a percentage of their overall corpuses—will it go ahead with this split. Called the side-pocket concept, the move is popular abroad but is being tried out for the first time in India.

On 27 August, the net asset values (NAV) of JSTI and JTF sank sharply on back of a downgrade in one of their underlying stocks’—Amtek Auto—credit rating. A day after that, the fund house restricted redemptions in these schemes to 1% of the corpus in each of the two schemes.

As per the fund’s August-end portfolio on its website, JSTI and JTF hold 10.78% and 5.87% of their corpus in Amtek Auto.

The average assets under management (AUMs) in the two schemes for the month of August was ₹ 2,760.93 crore.

The fund will send out a communication to all unit holders whose names appeared in the company’s books on the morning (opening of business hours) of 14 September. Unit holders will have time till the morning (opening of business hours) of 28 September to give or refuse consent.

The split, if approved, will happen the next day.

Subsequently, the split versions of the two schemes will be open for subscription and redemptions, as usual, while the segregated portions with the Amtek investments would be closed for subscriptions as well as redemptions. The fund house aims to return this money as and when it recovers it.

The segregation will take into account Amtek Auto’s proportion in the scheme as on 28 September. Depending on its weightage in the scheme, the NAV will fall and get bifurcated.

“We are making a 100% effort in reaching out to all our investors of these two schemes. We will reach out to advisors as well because they in turn can then reach out to their JP Morgan investors. What’s more important is that we are seeking a positive consent. So, investors have to explicitly say ‘yes’ to us for us to go ahead. We want to do that because we want to clearly communicate to our investors what we want to do,” said Nandkumar Surti, managing director and chief executive officer, JP Morgan Asset Management.

“This is a good move. You shouldn’t hold up entire assets. The bulk of the portfolio could still be liquid. Just because a part of the portfolio is illiquid, isn’t reason enough to hold up redemptions”, said R. Sivakumar, head (fixed income), Axis Asset Management Co. Ltd.

But is this enough?

Jayanth R. Varma, professor at the Indian Institute of Management, Ahmedabad (IIMA), said more needs to be done to build confidence among investors in the Indian mutual fund industry.

“There should be a regulatory obligation to make a side-pocket when this sort of thing happens. Besides, getting a unit holder’s vote may not be a practical thing at all times”, he said.

Varma said that in this case, the fund house should have implemented the side-pocket earlier, instead of restricting the redemptions. “Sebi (Securities and Exchange Board of India) should make it obligatory for fund houses to be more vigilant when the NAV starts diverging from the economic reality. For example, when Amtek Auto’s share price deteriorated so sharply in August, that ought to have given cues to the fund house,” added Varma.

In August, Amtek Auto shares fell by almost 78% on the back of weak financials and concerns about the debt on the company’s books.

The automobile components maker is looking to raise $1 billion in the next 12-18 months through stake divestments in overseas businesses and asset sales in India, Mint reported the company’s management as saying on 11 September.

Note: This story has been modified from its original version to clarify how JP Morgan AMC will be separating its mutual fund investments in Amtek Auto.