HDFC Asset Management Company has in a filing with National Stock Exchange (NSE) and the BSE disclosed that it is making a provision of up to 500 crore to provide liquidity to the unit holders of fixed maturity plans (FMP) of HDFC Mutual Fund that were affected by exposure to the non-convertible debentures (NCD) of Essel group companies, Edisions Infrapower& Multiventures Private Limited and Sprit Infrapower & Multiventures Private Limited.

Under the liquidity arrangement, HDFC AMC proposes to buy out or take on its own books these debentures that the issuer could not redeem on maturity in April of this year. It also applies to FMPs that hold these NCDs, which will mature by September 30, 2019. This is the date up to which the Essel group has been given time to make good their dues under the ‘standstill’ agreement entered into between lenders, including mutual funds, and the Essel Group in January 2019. The NCDs will be acquired by HDFC AMC at the current valuation on the respective maturity/purchase date.

The impact of the ‘standstill’ agreement was first felt by mutual fund investors in April of this year when FMPs of HDFC Mutual Fund and Kotak Mutual Fund matured and could not be redeemed because of their exposure to these NCDs. Three FMPs of HDFC mutual fund were affected by this in April of this year and HDFC AMC gave the investors the option to rollover or extend the maturity of the scheme giving the issuer the time to make the repayments.

The market regulator, Sebi, had sent show cause notices to HDFC AMC and Kotak Mutual Fund over their handling of the FMPs. There are five more FMPs of HDFC mutual fund alone maturing over the next three months. Under all these FMPs, the exposure was to the tune of around 430 crore.

While this move by HDFC AMC does give the schemes the liquidity necessary to redeem the units, the impact on the investors will depend upon the price at which the NCDs are transferred. Since the rating agency, Brickwork Ratings, reaffirmed the ratings of Edison Infrapower and Multiventures Pvt Ltd and Sprit Infapower and Multiventures Pvt Ltd. in April 2019, there may not be write down in the value of the NCDs held by the FMPs. In that case the FMP investors will not see a cut in the NAV at which their units are redeemed. But if the value of the instruments has been marked down then the transfer will take place at the lower value and investors will see a lower redemption value.

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