Reliance Nippon Life Asset Management Ltd has moved to create a segregated portfolio (side-pocket) in lieu of its exposure to erstwhile owner Reliance Capital, which defaulted on its debt. Reliance Capital missed a coupon (interest) payment due on 9 September and made delayed payment on 11 September. However a delay constituted an event of default and CARE Ratings downgraded Reliance Capital to D (default) on 20 September, after business hours. Reliance Capital is in the process of completing its stake sale in Reliance Nippon AMC to its minority partner, Nippon Life of Japan.
Side-pocketing is a procedure that capital markets regulator Securities and Exchange Board of India (SEBI) introduced in December 2018. A side-pocket is a part of a mutual fund’s portfolio that is set aside in lieu of bad debt. Existing investors cannot redeem this portion, except by selling units on a stock exchange and fresh investors cannot enter it. However existing investors can exit their remaining investment in the affected scheme. These investors are paid back money against this portion when there is recovery in the bad debt in question.
Earlier in August, Reliance Nippon AMC amended its scheme information documents (SIDs) to incorporate side-pocketing. This entailed giving investors an exit load-free window period in which to move out of the scheme. This window period ends on 24 September. Trustees of Reliance Nippon Life AMC have approved the creation of a side-pocket with effect from 25 September.
Reliance Nippon Life AMC is exposed to Reliance Capital through two of its schemes–Reliance Equity Savings Fund (5.25% of the portfolio) and Reliance Equity Hybrid Fund (0.23% of the portfolio). In absolute terms, the exposure stands at ₹60.1 crore and ₹21.7 crore in the two schemes, respectively. “There are three lessons from this crisis for investors. First, the quality of the promoter of the mutual fund and of the investee company matters. Second, diversification matters–earning a few basis points through concentrated exposures tends to backfire in debt schemes. Third, cyclicality of the borrower’s business matters. Cyclical and leveraged business tend to default in bad times," said Amol Joshi, founder, Plan Rupee Investment Services, a financial planning firm.
Reliance Group companies have sued HT Media Ltd, Mint’s publisher, and nine others in the Bombay high court over a 2 October 2014 front-page story that they have disputed. HT Media is contesting the case.