Resolution plan: Sebi may have reservations on Mutual Fund’s signing DHFL ICA

The resolution plan of Dewan Housing Finance Corporation is expected to remain stuck till mutual funds sign the inter-creditor agreement (ICA), as the Securities and Exchange Board of India (Sebi) is yet to green-light the same. Since July, banks, the Association Of Mutual Funds in India (AMFI) and the Indian Banks Association have separately written to the markets regulator seeking its inputs on whether mutual funds can sign the inter-creditor agreement. At this juncture, the matter is being pursued by RBI with the markets regulator.

RBI governor Shaktikanta Das had said on August 7 that the central bank was in touch with other regulators to so that insurers and mutual funds could become part of the ICA. However, FE has learned from sources that Sebi is yet to give a nod to MFs allowing them to sign the DHFL ICA, as it some reservations.

The regulator is concerned that the terms of the resolution process may end up violating the mandate of some of the schemes. In principle, the regulator may not have a problem with fund houses signing the ICA; i.e. a fund house may sign the ICA so long as the scheme mandate is not violated. So if a restructuring plan involves conversion of debt to equity then it may end up violating the scheme mandate. Market experts claim that they are not sure if the markets regulator would allow this even after side-pocketing has been done.

The clarity that would be needed is whether the restructuring happen before side-pocketing or after. One source who spoke to FE on the condition of anonymity said, “SEBI has conveyed its reservations on allowing MFs to sign the ICA in the DHFL matter, since some terms may violate mandate of the schemes. For example, in case of a debt scheme, they wouldn’t want the MF to be forced to take on an equity stake. At this juncture the matter is now being pursued through RBI.”

The understanding that some others who have also written to the markets regulator claim that it may be comfortable allowing funds to sign the ICA provided there are some pre-conditions attached to it and also that it may not be a blanket permission to MFs to sign similar such ICAs. Permission may be granted on a case-to-case basis. However, mutual funds claimed that they had not heard from the regulator on whether or not they could sign the ICA.

Mutual funds have an exposure of Rs 2,200 crore to the home loan financier via non-convertible debentures and Rs 180 crore of commercial papers. The cash-strapped company also owes banks Rs 38,000 crore and an additional Rs 34,000 crore to bondholders. While all banks with exposure to DHFL, including State Bank of India and Union Bank of India, have already signed an ICA as mandated by the RBI’s June 7 circular on norms for resolution of stressed assets, MFs are awaiting the green signal from Sebi.

Earlier this month, RBI governor Shaktikanta Das had stated the central bank has been in conversation with fellow regulators Sebi and Insurance Regulatory and Development Authority of India (IRDAI) on allowing other categories of lenders, apart from banks, to also become signatories to the ICA as it would allow the various sections of creditors to “look at the whole liability of an entity comprehensibly.” It is understood the IRDAI has already given its consent to insurance companies signing the ICA.