Mutual funds reduce exposure to promoters’ shares

Mumbai: The Securities and Exchange Board of India (Sebi) may tighten disclosure norms for asset management companies (AMCs) to curb lending to company promoters against pledged shares, two people with direct knowledge of the matter said.

Mutual funds, under increased scrutiny from regulators, have already cut their exposure to such schemes. A Mint analysis of fund house fact sheets and data from Prime Database shows that such exposure has come down by 10% at the end of January from September end. Data also showed that mutual fund lending to promoters against pledged shares has fallen steadily over the last three quarters.

At the end of January, mutual funds had ₹51,506 crore in such schemes compared with ₹57,408 crore in October. The figures include pledge of listed and unlisted shares. Loan against shares of promoters of little-known companies has, however, been rising for the past seven years.

“Sebi in the board meeting is planning to increase disclosures for promoters to recognize what is the objective of the pledge. In case of structured obligation or loans it should be clear where the exposure actually lies,” said a person with direct knowledge of the matter.

According to Prime Database’s analysis of Nifty 500 companies, mutual funds accounted for 3.45% of all pledged shares by value at the end of December, down from the all-time high of 4.01% at the end of September. Promoters’ pledged shares to mutual funds had seen a rise from the September quarter of 2015.

“This was expected as the prices were correcting in some instances, and there was a sharp fall in share prices, which brought some promoters on the brink of defaulting on their debt obligations. Moreover, Sebi expressed concern that whether such products have adequate disclosures and whether the risk management of fund houses is adequate to handle systemic concerns,” a debt fund manager said, requesting anonymity.

The exposure has reduced because of three reasons—valuation of shares correcting, fulfilling debt obligations, and fund houses selling pledged shares. In January, the BSE Sensex gained 0.52% and Nifty fell 0.29%, while the Nifty 500 shed 1.81%.

Due to the issues affecting NBFCs, exposure to Wadhawan Global Group, the promoter of Dewan Housing Finance Corp. Ltd, reduced nearly three times from the estimated ₹1,787 crore last October to ₹553 crore in January. Similarly, in case of companies where shares of Zee Entertainment Enterprises Ltd were pledged, the exposure has reduced marginally. In case of shares pledged by the promoters of Sun Pharmaceutical Industries Ltd, the exposure has reduced during the period when Sun’s stock fell sharply on allegations of governance lapses.

A CEO of a large AMC said such exposure to debt has been given against the strongest promoters. “Fund houses have been careful in investing is papers with shares of good promoters where the chances of default is only due to a business cycle and not any underlying issue with the company.”