Photo: Mint
Photo: Mint

HDFC AMC’s liquidity arrangement for FMP investors sets a bad precedent

  • HDFC AMC’s decision to provide ‘liquidity’ to its investors in some fixed maturity plans has come as a shock to its shareholders
  • HDFC hopes that the gesture will help it win the trust of MF investors, which will eventually result in higher growth of assets under management, and ultimately benefit its shareholders

MUMBAI: Investments in mutual funds are subject to market risks. Investments in shares of mutual fund companies are subject to those risks as well and more.

HDFC Asset Management Co. Ltd’s decision to provide ‘liquidity’ to its investors in some fixed maturity plans (FMP) has come as a shock to its shareholders. The AMC’s shares nosedived 6.3% on a day when it became clear that the tab of protecting these FMP investors will be picked up by shareholders.

This wasn’t how it was supposed to be. The cost of bearing market risks was meant to be at the door of mutual fund investors. One concern among investors is whether there will be a repeat.

In the current instance, HDFC AMC’s arrangement to provide ‘liquidity’ of about 500 crore entails taking over the non-convertible debentures (NCDs) issued by firms promoted by the Essel group on its books. This liquidity will be used to fulfil obligations to the unitholders of the FMPs under which these debt instruments were held.

As HDFC and other mutual funds have a standstill arrangement with the Essel group until September, the value realized from the NCDs will be known only then.

If there is an under-recovery, the cost will be borne by shareholders, rather than the FMP unitholders. The NCDs are backed by collateral of Zee Entertainment Enterprises Ltd shares. If the Essel Group is unable to redeem the debentures by September, the AMC will have to offload the stock in the market. Normally, large stock sales in the market tend to have a high impact cost during the offloading process. It could also mean that HDFC AMC recovers far less than the 500 crore it has provided in liquidity. Any under-recovery can also directly impact its bottom line.

HDFC AMC is one of the largest fund houses and should ideally be leading from the front. However, according to experts in the mutual fund industry, it is doing the opposite and setting a wrong precedent. Perhaps it hopes that the gesture will help it win the trust of mutual fund investors, which will eventually result in higher growth of assets under management, and ultimately benefit its shareholders. However, as the Roman poet Ovid said: “The end doesn’t justify the means."

Besides, it unnecessarily complicates a simple and elegant fee-based business model.

Graphic: Vipul Sharma/Mint
Graphic: Vipul Sharma/Mint


“AMCs might be tempted to take such stressed exposures of their investors to preserve their reputation. This would eventually devolve their simple agency model to a far more complex structured financing business," according to analysts at Ambit Capital Pvt. Ltd in a recent note to clients.

It’s little wonder that shareholders are revolting.


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