Extending debt instrument maturity is like default: Sebi

Essel Group announces MFS have granted it more time to repay dues

Any extension given to a corporate entity by extending the debt instrument’s maturity needs to be considered a ‘default’ for the purpose of valuation, according to the Securities and Exchange Board of India (Sebi). The norm was laid out in a circular issued on Tuesday night, a day before Essel Group announced that lenders had granted it more time to repay its dues.

Earlier, Sebi Chairman Ajay Tyagi had stated that the regulator didn’t acknowledge ‘standstill’ agreements between mutual funds (MFS) and promoters. However, Sebi had not yet formally laid down norms to govern such arrangements.

Sources say the move could impact those fund houses that are giving extensions to the Essel Group promoters and have exposure to debt papers that are maturing in September.

“Valuation agencies will now be required to give pricing in line with these new norms when the maturities of debt instruments are extended,” said a debt fund manager, requesting anonymity.

The current norms require MFS to take a markdown of 75 per cent on secured exposures that are downgraded to default grade or ‘D’. “The regulator can decide to give an exception to MFS in Essel’s case as fund houses had entered into discussions on another extension with the promoters before the circular was issued by Sebi,”

said another executive, also asking to remain unidentified.

“MFS holding papers maturing beyond September 30 are unlikely to get impacted by this move,” the fund manager added.

MF exposures to Essel Group firms are secured against t he pledged shares of the promoters as part of the loan-against-share (LAS) structures.