Mumbai: UTI and Nippon India Mutual Fund separately side pocketed their respective exposures to Vodafone Idea on 17 February.
Side pocketing is creation of segregated portfolios in lieu of bad debt.
The mutual funds’ side pocketing actions followed a downgrade of Vodafone Idea debt by CARE Ratings to BB- (which is below investment grade) from BBB-. A downgrade of debt below investment grade allows mutual funds to side pocket their exposure to the concerned debt.
However, it is important to note that CRISIL had previously downgraded Vodafone Idea debt to BB on 24 January. The downgrades follow adverse rulings by the Supreme Court which has placed an adjusted gross revenue (AGR) liability of about ₹50,000 crores on Vodafone Idea.
On 17 February, the Supreme Court also refused to extend the deadline for Vodafone to make good on AGR dues.
On 16 January, following the initial Supreme Court ruling on Vodafone Idea's AGR dues, Franklin Templeton AMC wrote off 100% of its Vodafone Idea exposure. Following a downgrade by CRISIL of Vodafone Idea debt on 24 January, Franklin Templeton AMC had side pocketed its Vodafone Idea exposure.
Other AMCs with exposure to Vodafone Idea, including UTI, Nippon India and Aditya Birla Sun Life AMC, have written down part of their exposure. As a percentage of scheme assets, exposure was highest in UTI Credit Risk Fund at 17.55%. This scheme saw a fall of about 10.42% on 17 January, wiping off part of its exposure.
In the latest set of such actions, UTI AMC has side pocketed exposures in UTI Credit Risk Fund, UTI Bond Fund, UTI Dynamic Bond Fund, UTI Medium Term Fund and UTI Regular Savings Fund. These exposures are 9.9%, 3.91%. 1.79%. 0.69% and 2.58% respectively as a percentage of scheme assets in each of the respective schemes mentioned previously. In absolute terms the UTI MF exposure amounts to ₹186 crores.
In case of Nippon India, exposure is in Nippon India Hybrid Bond Fund, Nippon India Credit Risk Fund and Nippon India Strategic Debt Fund at 3.15%, 0.56% and 0.37% of scheme assets respectively. In absolute terms, the Nippon India Mutual Fund exposure is ₹227.3 crore. There has been no side pocketing announcement from Aditya Birla Sun Life Mutual Fund on its Vodafone Idea exposure so far.
Side pocketing allows investors to exit the remaining portfolio without giving up the chance of recovery in bad debt. Such investors are given units in the side pocketed portion of the portfolio and are paid back when there is recovery against the bad debt. Fresh investors in the concerned schemes do not get the side pocketed units allocated to them preventing speculators from taking advantage of recovery in the debt.