SEBI declines to ‘bless’ Zee moratorium being contemplated by Mutual Funds
Mumbai: A chastened collective of five leading mutual fund CEOs and ratings agency chiefs emerged from a meeting with SEBI member Madhabi Puri Buch on Monday morning, following a story broken by IANS on Sunday, after a shellacking over lapses in their judgment in taking huge debt exposure to the Zee group promoters against inadequate and illiquid collateral.
The Indian MF industry has lent a staggering Rs 7,000 crore to Zee Group promoters, and after the recent debacle in the stock price, the value of the security is less than even the principal amount due to them, leave aside any margin.
Sources in SEBI revealed that the regulator was categorical in its assessment over what had transpired and had firmly communicated the same to the delegation.
Firstly, MF industry players could not enter into any moratorium dialogue or agreement with an errant corporate group under existing MF rules and regulations. This tantamounted to restructuring which banks could do, but not MFs. The regulator clearly told the industry representatives that what they were contemplating was akin to shadow banking, something clearly beyond their permitted activities.
Secondly, the MF industry was told it should have done a well rounded risk assessment of its massive exposure to a corporate group where the debt levels were worrisome, before taking on such concentrated exposure. The regulator said if the only justification for not liquidating the shares now was the expected loss to investors, the industry should not have made such investments, otherwise what was the purpose of taking any security.
Thirdly, the MFs should have given adequate warning to investors who had subscribed to the mutual fund schemes that they were taking on the risk of illiquid security for debt investments, which might not be encashable on default and might lead to losses for investors.
On an impassioned request by the five CEOs that SEBI should “bless” the contemplated moratorium as a one-off case, the regulator categorically and firmly rejected this plea, stating that there was no provision in existing rules and regulations for any such moratorium, leave alone for a condonation of the same.
The regulator’s tone and tenor was clear as daylight that the MF industry heavy hitters had gravely erred in their judgment, and now it was for them and their respective Boards of Directors/Trustees to decide how to proceed in the matter.
The regulator also refused to countenance the MF industry stand that the moratorium was in the best interests of investors, stating this was something time alone would tell, and SEBI was holding out no assurance that in subsequent inspections/audits this was something which would be overlooked.