Although, unwillingly, DHFL Mutual Fund is flouting the group exposure norms set by SEBI. Three of its debt schemes have a concentrated exposure to DHFL’s downgraded debt instruments, beyond a limit prescribed by the capital market regulator.
Unfortunately, they are still open for subscription.
According to media reports, the market regulator has taken a note of this and brought this to the notice of the fund house. But as of now, no disciplinary action has been taken against it. The regulator has asked for a remedial solution from the fund house.
What are the group exposure norms for mutual funds?
According to SEBI circular dated February 15, 2016, Mutual Funds/AMCs shall ensure that total exposure of debt schemes of mutual funds in a group (excluding investments in securities issued by Public Sector Units, Public Financial Institutions and Public Sector Banks) shall not exceed 20% of the net assets of the scheme. Such investment limit may be extended to 25% of the net assets of the scheme with the prior approval of the Board of Trustees.
For this purpose, a group means a group as defined under regulation 2 (mm) of SEBI (Mutual Funds) Regulations, 1996 (Regulations) and shall include an entity, its subsidiaries, fellow subsidiaries, its holding company and its associates.
What happened in the DHFL case?
DHFL came into the limelight in September 2018 when DSP Mutual Fund sold DHFL papers at a steep discount. Thereafter, independent credit rating agencies have slashed DHFL’s ratings twice which not only raised the cost of borrowing for the company, but made the bonds more illiquid.
According to AMFI data, average AUM of DHFL Pramerica in Q1, FY 2018-19 was Rs 23,137 crore which dropped to Rs 7,627 crore.
On March 31, 2019, DHFL Pramerica Ultra Short Term Fund held 29.5% of its assets in securities issued by DHFL. Similarly, the exposure of DHFL Pramerica Floating Rate Fund to DHFL papers was 29.2% and that of DHFL Pramerica Medium Term Fund was 36.7%. All these schemes lost more than 90% of their Assets Under Management (AUM) between March 2018 and March 2019.
In December 2018, the fund house announced its plans to exit the mutual fund business by selling 50% of its JV stake to Pramerica.
If you remember, this excerpt was DHFL’s reaction on its exit plans:
‘This is a strategic call by DHFL to focus more on our core business. We firmly believe this move is in the best interest of all parties and will have a positive outcome for all stakeholders.’
When Pramerica had sounded optimistic…
‘Our expanded investment demonstrates our deep commitment to this market and confidence in both our talented leadership team and robust investment process. We strongly believe that when combined with the deep expertise and broad capabilities of PGIM, we are well positioned to serve our clients and to strengthen our competitive position in India.’
Mutual fund houses might exit their business shrugging off their responsibilities, but distributors and mutual fund advisors can’t escape the wrath of investors when such unprecedented events take place.
What happened with debt schemes offered by DHFL Mutual Funds is a classic case of what lax players can do to investors’ money and to distributors’ reputation.
Thus, investors must select mutual funds cautiously. Similarly, advisors and distributors should be careful with their recommendations. Distributors, who may have recommended DHFL Ultra Short Term Fund, might not have imagined that a fund house could mess up a scheme coming from one of the steadiest categories.
If you think that was just one off case, please note, Reliance Nippon Mutual Fund has the highest exposure to debt securities issued by Anil Dhirubhai Ambani Group (ADAG) companies. Just a coincidence or are mutual fund houses deliberately utilizing investors’ money to get their group companies out of trouble?
In a nutshell:
Mutual funds are subject to market risks: A standard disclaimer for investors.
Mutual fund advice is subject to reputation risk: An implied disclaimer for distributors.
So, IFAs should take all the necessary due care before recommending mutual fund schemes to investors and follow high fiduciary standards.