Sebi sends notice to HDFC, Kotak MFs, questions pact with Essel

The Securities and Exchange Board of India (Sebi) has queried the legality of the agreement between two mutual funds and Essel Group that gave the conglomerate time till September to repay loans, said a person familiar with the development. This had meant investors in mutual fund schemes weren’t paid in full when they attained maturity.

In separate show-cause notices to HDFC Mutual Fund and Kotak Mutual Fund, the regulator has sought details of the terms of their investments in Essel Group’s debt securities. Essel owns Zee Entertainment and Dish TV.

This would be the first time Sebi has questioned the standstill pact between various fund houses & Essel soon after shares of Zee and Dish plunged in late January. Essel Group’s cash-strapped founders, who had borrowed from lenders including MFs and non-banking finance companies (NBFCs) by pledging shares with them, failed to replenish the collateral.


Mutual funds, which didn’t sell the pledged shares at the time as it could have led to a further collapse in their value, gave Essel time till September 30 to repay the money.

As a result, subscribers to the fixed maturity plans (FMPs) of Kotak Mutual and HDFC Mutual weren’t paid in full. That’s why Sebi sent show-cause notices to the two, said the person cited above, although at least nine fund houses could be holding Essel papers in various schemes.

“As per the NCD (nonconvertible debenture) agreement, money has to be paid at the time of maturity. It covers all the obligations,” said the person cited above. “If it’s not paid, then it’s not right. Why then should fund houses have a separate standstill agreement?”

The FMPs — close-ended debt schemes — of HDFC Mutual and Kotak Mutual had invested in Essel Group securities. While the tenure of some of these FMPs ended last month, Essel was unable to repay the funds. Kotak told the FMP investors it would pay the remaining money in September after Essel repaid its loans. HDFC Mutual Fund gave unit holders the option of rolling over investments for another 380 days instead of redeeming at maturity in mid-April.

HDFC Mutual, in a disclosure to stock exchanges, said it had received two show-cause notices in relation to the FMP investments in Essel Group companies.

Sebi has also asked what criteria the funds based their decision on.

“Investments have been made mainly on the strength of the collateral and not on the financials of the company to which the loan has been given,” said the person cited above. “What is the assurance that the part payment which has been held back will happen? What if the fund house fails to exercise the collateral?”

Debt mutual funds and NBFCs lent to privately held structures set up by promoters with shares as collateral. Promoters used the borrowed money to finance other business interests or buy assets abroad. In the case of Zee, the infrastructure businesses that the group entered into incurred losses.

The Essel Group has assured mutual funds and NBFCs that it will repay all the loans the moment it sells stakes in Zee Entertainment before the end of September.