Retained Zee portion plus accrued interest to be paid to investors by Sept 30: Lakshmi Iyer, Kotak AMC

I would not be 100% certain how much money could have been recovered from the sale of Essel group shares, said Lakshmi Iyer, CIO-Fixed Income & Head-Products, Kotak Asset Management Company, in an interview with ETNOW. The Zee portion that has been retained back will be returned in principal plus accrued interest on or before September 30, says Iyer.

Edited excerpts

People are afraid that their investment may not be safe in debt mutual funds with Kotak Mahindra AMC deferring part of redemptions from one of its fixed maturity plans (FMP) that had invested in two Essel Group companies. What exactly is going on and how are you ring-fencing and protecting their investments?

I need to break this answer into two parts. First, with respect to the FMPs specifically, we have paid out the money with respect to our exposure to certain promoter entities of the Zee Group. The total outstanding debt of the Zee promoters is about Rs 13,500 crore, of which mutual funds, in a combination of open-ended and close-ended schemes put together are holding close to Rs 7,000 crore.

This Rs 7,000 crore are with eight asset management companies including Kotak AMC. We are not the only one, there are seven others with us. That is number one. Number two, of this Rs 7,000 crore, there are several FMPs including two of ours which had matured and returned the money back to the investors.

In this particular case, we decided to hold back the Zee or the promoter part of it and returned the rest of the money. We were collateralised in terms of security. This particular debenture was backed by Zee shares at the time of entering into the transaction around three years back. It was 1.4 times at the time of the deal, The idea was always to protect the interest of the unit holders. Invoking the collateral and selling off the shares and giving the proceeds back to the investors could have been a possibility. It would not have made headlines but it may not have protected the interests of the unit holders because I would not be 100% certain how much money could have been recovered from the sale of shares.

So we decided to take a slightly more difficult path. If we had to walk that path and I call it the agni pariksha (trial by fire), it was purely in the interest of the FMP unit holders at this point in time. And that is exactly what we have done. The two fixed maturity plans have returned the principal plus some returns. Yes, the portion of Zee has been retained back which will be returned in principal plus accrued interest on or before 30th of September as per what we have communicated to the unit holders.

You are guaranteeing on ETNOW that as far as fixed maturity product goes, the money that you have got with respect to Zee, will be returned to the unit holders with accrued interest. Is that accrued interest the rate of interest or pre-decided? Are you going to compensate for a late redemption?

So, let me clarify. Can there be any guarantee whether it is for an open-ended scheme or a closed-ended scheme? What we are doing or what we have communicated which is what I am sharing with you is that we have been engaging with the company. There is intrinsic value in the company. They have come back to us saying that they require some time allowance to be able to sell their company stake and with the proceeds, the debt will be repaid to us.

Of the Rs 13,500 crore of debt, we own a very small portion -- less than 2.5%. That portion will be paid to us as also to other mutual funds. We have given a time extension until 30th of September which means if this sale deal or whatever transaction gets consummated before that and we get the money, we would give the money. Till that date, whatever the accrued interest (the rate at which I would have transacted that bond when I first bought it into the fixed maturity plan -- from today’s date till the day it happens -- say 60 days from today, the principal plus the coupon on that portion) will be given to the unit holders.

We do not intent to keep anything with us. Is that a guarantee? As I said, there is no guarantee for life. There is a way a mutual fund can really give a guarantee but given the considerations, given the way things are panning out and obviously the active dialogues we have with the company, we have certain fillers in terms of what could be the best possible way forward now that we have given a time allowance of 30thSeptember. We would be very happy to give the money much before that if possible.

Even if the transaction does not go through say till September, you still have the pledged shares. Maybe, a hit could be taken?

The security is collateralised, in fact the security is more fortified once we have allowed for the extension. That makes it a secured transaction. In no form or manner is there an unsecured holding as far as this debenture is concerned. .

Let us talk about the overall FMP industry. They always talk about mutual fund investments being subject to market risk. Do you think this is that risk that they are talking about and people have just forgotten about it?

There are three types of risk when you are making an investment in fixed income; a) The interest rate risk which is the market fluctuations on account of various news; b) Liquidity risk and of course, c) credit risk.

In a fixed maturity plan which is the subject of discussion right now, you are almost mitigating the interest rate risk because you tend to lock the assets almost till the maturity date of the scheme. The liquidity is available only on the exchange. You cannot transact with the mutual fund. So, there is that element of liquidity risk and yes of course the credit risk. Even 10-15 years ago, the credit risk was always live. It ultimately depends on the underlying quality of the portfolio. Yes there has not been a precedent. But this is not a case of having excess liabilities, excess leverage and less of assets. This is the problem of liquidity which will be resolved within time. It is only imperative that we give the time.

As I said, if it were a non-mutual fund consideration, you know we are in the fiduciary business of managing unit holders’ money. So, on anything and everything we take a call. Again, just selling off the shares would have been so easy and would not have created headlines and nobody would have come to know, especially the broader audience at large. It is important for us to reiterate that when we are taking an action, we do it with the unit holder’s interest first. Yes there could be an opportunity loss, but it is better to live with the mark to market loss.

What is Kotak Mutual Fund thinking about flows into FMP, balanced funds and various instruments that invest into different corporate bonds. There has been issues with investors when they do not get the money on time or when they get money delayed. Do you think there could be redemptions in such schemes now?

I do not think so. Let me give you an illustration. Every chest pain need not be a heart attack, it could be something else. It could be a gastro problem. Also, my limited submission is that if you have invested money in say a sovereign FMP, is that going to default? Sovereign rated as in you are investing in central government securities and state loans. If you have invested in quasi sovereigns, are they going to default like the public financial institutions? I do not think we should paint the entire canvas with the same brush for the simple reason that every chest pain is not a heart attack!

My only submission is let us try to understand that this is not an en masse situation which can be plugged and played for everything and probably trigger the panic button. There is a collateral. It is just that we need to give time allowance to resolve this issue favourably.

In terms of the collateral that you have for Essel Group, what is the way forward? What if the collateral has to be liquidated? Secondly like you have decided to extend the payment and give a part payment, some other fund houses have extended the timeline for paying back. What stopped you from doing that?

We have also extended FMPs earlier. There is nothing. In fact, when regulation offers you both alternatives on the maturity, you can either decide to remit the entire money to unit holders or you can offer an extension subject to 20-25 rule which means that the rolled over portion should have at least 20 investors with no investor having more than 25%.

In this particular case, we thought it fit that when you are actually not rolling over, you are not taking the second option, you have decided to wind down the scheme on its maturity date. The second rule says that you will act in the interest of the unit holders while liquidating the assets. Which is why we have taken this option. There is nothing right or wrong about any option but as I said there was always a risk, what if I did not get 20 investors? If I got 20 investors, what if I did not get no investor beyond 25%? Then obviously, the entire money have to be remitted.

The moment I say BUY, it is being construed as BYE. So in that kind of a market scenario, if I offer or make an offer for rollover, who knows who is confident how much money will actually be agreed to roll over? It was a prudent step to actually give the money back and we were not sensing that investor mood to really offer for an extension. Again, both are legitimate ways. There is nothing right or wrong about which path individual AMC can take.

What happens to lending on promoter basis? Overall, do you expect mutual fund industry to lower their exposure to various promoter groups?

Again what happens is the situation tends to get generalised. Loan against shares is nothing but a non-convertible debenture (NCD) which has a very liquid asset called shares as collateral. Of course, there have to be checks and my sense is that going forward maybe the industry will become slightly more picky, choosy about how they want to transact in this particular area.

But shunning this entity or this particular category completely may not be a very prudent way to look at it. In a basket of grapes. not every grape is sour. It is very important to identify the root cause and try to work around that rather than generalising the entire thing.

Ten of you together got it wrong with Essel Group. You can call it agni pariksha today with that exposure of Rs 7,000 crore but obviously investors are worried. What happens in case the promoters are unable to sell the entity by the deadline?

So a) I would disagree that is a call gone wrong for the simple reason as that when a transaction of this sort is undertaken, there is enough due diligence done on the underlying business fundamentals. In this case, it continues to be a very solid, well- run entity. I do not take that it was a wrong decision to invest in the Essel Group companies which were backed by Zee shares, point number one.

Second, these investments were made two, two and a half years back when the situation was much different. There have been cases based on the share movements. The share collaterals have been topped up and topped down. In the process, as a mutual fund manager, those responsibilities have been judiciously met and these are those kind of scenarios post the IL&FS saga where there has been a complete V-turn on sentiment.

There is an intrinsic value in the company and we have to give it time. Yes, the question is very valid what happens in a case where there is no resolution in sight...we do have the share collaterals.