Sebi’s role in the pro­moter fi­nanc­ing, MF jumble leaves much to be de­sired

Mint ST - - COR­PO­RATE -

out­stand­ing. For in­stance, for ₹100 crore worth of bonds out­stand­ing, ₹150-200 crore worth of shares are said to be back­ing the bonds. Armed with an in­vest­ment grade rat­ing, these bonds are then placed be­fore mu­tual funds.

In case the value of the share price falls, the pro­moter en­tity is ex­pected to add more shares, such that the value of the to­tal num­ber of un­der­ly­ing shares re­mains above the agreed upon thresh­old, or re­deem some bonds. When funds are raised in such fash­ion, the un­der­ly­ing shares are not tech­ni­cally pledged. This was first re­ported by Bloomberg colum­nist Andy Mukher­jee, who said that these debt covenants are as fluffy as cot­ton candy. “These are es­sen­tially un­se­cured loans to pri­vate in­vest­ment com­pa­nies, not suit­able for mu­tual funds,” he wrote.

While it’s bad enough that Sebi’s own mar­ket in­tel­li­gence didn’t pick up the in­creas­ing use of such in­stru­ments by the mu­tual fund in­dus­try, what’s even worse is that it did not see any need to act when re­ports of their use emerged over two months ago.

Apol­o­gists at mu­tual funds ar­gue that such trans­ac­tions are clearly per­mit­ted un­der ex­ist­ing reg­u­la­tions, and that they should be free to as­sess credit risk of a pro­moter en­tity and take such in­vest­ment calls. “If, as some are sug­gest­ing, there is a blan­ket ban on such struc­tures, we need to re­al­ize that there will be a cloud over fi­nanc­ing any pro­moter that uses a hold­ing struc­ture. Even groups such as Tata Sons raise fund­ing based on the value of their hold­ing in other group com­pa­nies,” says a fund man­ager, re­quest­ing anonymity.

“You may not curb the free­dom of mu­tual funds to in­vest, but you have to ask them to make more dis­clo­sures,” says SES’S Gupta. Whether Sebi de­mands more dis­clo­sures or a step-up in risk man­age­ment, it is high time it made its stand clear. To be sure, there is an­other view that Sebi doesn’t hold the keys to the prob­lem. “Sebi can­not stop all mis­deeds. It is for the mu­tual fund in­dus­try to do what is right for in­vestors, rather than side with pro­mot­ers” says Shri­ram Subra­ma­nian, founder and man­ag­ing di­rec­tor, In­govern Re­search Ser­vices Pvt. Ltd.

But there is a grow­ing cho­rus for bet­ter dis­clo­sures, which is some­thing that falls within Sebi’s realm. The lack of re­port­ing of pro­moter fi­nanc­ing us­ing the above­men­tioned struc­ture is a mat­ter of con­cern. “The cas­cad­ing im­pact on the stock prices trig­gered by un­wind­ing of pro­moter pledges of­ten tends to be quite se­vere. Hence a con- tin­u­ous mon­i­tor­ing of pledge hold­ings be­comes ex­tremely cru­cial,” an­a­lysts at Edel­weiss Se­cu­ri­ties Ltd said in a note to clients.

Af­ter the fraud at Satyam Com­puter Ser­vices Ltd, Sebi had man­dated dis­clo­sures on pledged shares to safe­guard in­vestors against the risk of over-lever­aged pro­mot­ers. Such risks were mostly un­known ear­lier. BSE data sug­gests the to­tal value of shares pledged by pro­mot­ers stands at ₹2.15 tril­lion cur­rently, spread across 2,947 com­pa­nies. This amount ex­cludes funds raised us­ing the modus operandi de­scribed above, which could be a sig­nif­i­cantly high amount as well.

“All pledges should be dis­closed. Pledges for rais­ing funds for third-party use are non-be­nign for mi­nor­ity share­hold­ers, as pro­mot­ers con­tinue with their vot­ing rights, but re­duce fi­nan­cial ex­po­sure. Once there is a sep­a­rate dis­clo­sure of non-be­nign pledges, the mar­ket will weigh in the risk fac­tors, and dis­count it in the price,” says Gupta. The ref­er­ence to a non­be­nign pledge is with re­gards to pledges made for out­side needs, or ven­tures un­re­lated to the com­pany.

San­jeev Prasad, man­ag­ing di­rec­tor and co-head of Ko­tak In­sti­tu­tional Equities, also joined the cho­rus for ad­di­tional dis­clo­sures on pro­moter hold­ing, pledges and the in­debt­ed­ness of pro­moter en­ti­ties, in a re­search note. It’s quite likely that Sebi will pay heed and is­sue new guide­lines on these mat­ters. If only, it had acted sooner.

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There is a grow­ing cho­rus for bet­ter dis­clo­sures, which is some­thing that falls within Sebi’s realm.

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