Exposure to unlisted cos may hit MFs' fortunes

MUMBAI: More than anybody else, mutual funds would be eagerly awaiting a revival in the primary market that would help them free up their investments in equities of unlisted companies.

A look into the factfiles of mutual funds reveals that several of them have exposure to unlisted companies through various schemes. Most of these privately-held companies are unable to hit the market, as the business environment remains tough.

Fund managers buy stakes in unlisted companies (usually at very low prices) to boost their returns whenever these companies go public.

���Fund managers buy unlisted equity because of the expectation of huge gains at the time of listing,��� said Crisil Fund Services head Krishnan Sitaraman.



���If the company in question opts for an IPO in a bullish phase (with the Sensex gaining more than 25% a year), the fund manager would expect to make a 35-40% gain. Return expectations on unlisted equity are always relative to market conditions,��� Crisil Fund Services head Krishnan Sitaraman said.

According to data collated by mutual funds tracker Value Research, ICICI Prudential's 1.6% (of net assets) investment in Quality Assurance Institute, Birla Sun Life Advantage Fund's 0.1% investment in Dharti Dredging & Infrastructure, JM Agri & Infrastructure Fund's 0.15% investment in Pipavav Shipyard, DSP Blackrock Tech Fund's 0.1% investment in City Online Services and Canara Robeco Equity Fund's 0.04% investment in Kudremukh Iron Ore Company are some of the reported (September quarter figures) unlisted equity investments by mutual funds. Quite a few of these investments are more than five-years old.

Many fund houses do not reveal specific details of their investments in unlisted companies, clubbing them under one sub-head as 'others'.

Investments by mutual funds in these companies should not be compared with venture funds. Mutual funds pick up unlisted securities only for a short duration, say, a few months before the company is poised to hit the IPO market. Currently, Sebi allows open-ended mutual funds to invest 5% of their net assets in unlisted securities.

ICICI Prudential claims to have redeemed its 13.06% investment in Subhiksha Trading by exercising a put option (in the case of company not going public or in the event of it turning bankrupt) it had entered into at the time of picking the stake.

While top ICICI Prudential officials say there are no major losses on their investment, not many are willing to buy the fund house's version.