Mutual funds ask SEBI for time to save Essel’s world

MUMBAI: Mutual funds have approached the Securities and Exchange Board of India to allow them to alter the terms of Essel Group debenture trust deeds to give the promoters time to bring in a strategic investor instead of having to offload pledged shares as there is a drop in the security cover, said people aware of the matter. The capital market regulator will seek to determine whether the mutual funds are acting in the best interests of the investors while deciding on the matter, they said.

The Subhash Chandra-led group had reached a formal pact with lenders, including MFs and non-banking finance companies (NBFCs), to this effect after shares of Zee Entertainment and Dish TV plunged 26% and 33%, respectively, in a single day on January 25. Essel Group had sought time until September end.

That had sparked panic about forced selling by lenders as promoters were unable to provide fresh shares to cover the shortfall in collateral.


Lenders, including mutual funds and NBFCs, had agreed in principle to hold off from selling shares of the companies in the event of a further drop in prices. The promoters have pledged almost 60% of their 42% stake in Zee Entertainment.
The debenture trust deed specifies the equity cover that promoters have to maintain but several market participants questioned the legal sanctity of such an arrangement.

The cover ranges from 1.5 to two times the debt and had fallen below the threshold after stock prices fell.

Fund houses have already sought legal opinion on whether the arrangement with the Essel Group is in line with mutual fund regulations.

“There is a provision that the majority of debenture holders can come together and change the debenture trust deed. We have informally approached Sebi proposing to change the terms and conditions on extending time when there is a drop in security cover. We will also be taking trustee approval for the same,” said a senior executive at a large fund house. “It is the prerogative of the fund manager to take the best call on investment. In the larger interest of investors, mutual funds feel this arrangement is appropriate for the current situation.”

Essel Group said it wasn’t aware of the move. “We are in constant touch with all the mutual fund lenders who have supported us and no such thing has been brought to our knowledge,” a spokesperson said.

Sebi didn’t respond to queries. Some fund houses may not have to alter their debenture trust deeds, they can choose not to call a default, said a lawyer advising a top fund house.

“All mutual funds retain a right to not call an event of default if it will jeopardise (investors)… That clause is there in the debenture trust deed, they are just exercising it,” said the lawyer.

Mutual funds had a total exposure of around Rs 8,000 crore to Essel Group nonconvertible debentures, against which shares have been pledged as collateral, at the end of December.

Aditya Birla Sun Life Mutual Fund has the largest exposure to Essel Group companies, followed by HDFC Mutual Fund, Franklin Templeton Mutual Fund and ICICI Prudential Mutual Fund.