Reliance Mutual Fund has reportedly asked Yes Bank promoters to top up their collateral by 500 crore after a precipitous decline in Yes Bank shares. As Mint reported here, the promoter family has pledged a stake amounting to about 7.34% in Yes Bank to Reliance Nippon Life Asset Management (RNAM) as collateral against debt issued to the mutual fund house by Morgan Credits Pvt Ltd, a firm owned by the promoter family. A Mint questionnaire to Reliance Mutual Fund on its exposure and action asking for a collateral hike went unanswered.

Reliance Mutual Fund has an exposure of 2,177 crore (as of July 31st 2019) to Yes Bank debt according to data from CRISIL. It is unclear how much of this debt is of the nature described above. However according to the Mint report cited above, Non-Convertible Debentures (NCDs) worth around least 1,160 crore were issued to Reliance Mutual Fund, secured by shares of Yes Bank. Out of this a prepayment of 200 crore worth debt was made to Reliance Mutual Fund in November. However, the steep decline in the Yes Bank stock would have eroded the value of the balanced debt held against shares-based collateral. Yes Bank shares are down 80.31% over the past year and 23.19% over the past month alone.

Exposure to Yes Bank in individual schemes of Reliance Mutual Fund has also reached alarming levels. According to data from CRISIL at the end of July 2019, Reliance Strategic Debt Fund had an exposure of 13.89% of scheme assets followed by Reliance Credit Risk Fund at 8.66% of scheme assets. The paper is currently rated BBB+. Paper rated BBB and above is considered investment grade. A fall below this level (BB and below) requires mutual funds to write-down its value in their portfolio as per a schedule laid down by the Association of Mutual Funds of India (AMFI). It also makes such paper eligible for side pocketing, a procedure created by SEBI under which mutual funds can separate out a portion of their schemes in lieu of poor quality or defaulted paper. Reliance Mutual Fund recently amended the Scheme Information Documents (SIDs) in its debt schemes to enable side pocketing to be carried out.

Reliance Mutual Fund’s risk is further complicated by a SEBI Board decision taken in June 2019. In that meeting, the regular mandated mutual funds buying debt secured by shares as the collateral to have a cover at least 4 times the debt issued. No implementation time-frame has been set but the regulator is likely to operationalize it soon. Other mutual funds have an exposure of around 1,242 crores.

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