English is a versatile and beautiful language, and sometimes it’s fun to play with words.

Take this old adage for example, “A friend in need is a friend indeed”, which means—one who helps you in difficult times is your real friend.

But the entire connotation could change if you added a space or a question mark to the original phrase, and rewrote the adage as “A friend in need is a friend in deed” This now means a person in difficulty would extend the hand of friendship to seek favours, so is he/she indeed your friend?

More to this story
Recently, Securities and Exchange Board of India (SEBI) reprimanded mutual fund houses against rescuing financially troubled companies. Banks have become increasingly averse to lending money to businesses that have already borrowed heavily. Business prospects for many companies, especially those operating in export-driven enterprise and commodity businesses have deteriorated significantly. . Both these segments are down in doldrums and corporations are finding it difficult to even service the loans they currently have.

It appears that mutual funds have been playing with words and with investors’ money as well. Unfortunately, they refuse to analyze whether the companies whose debt they are piling on the portfolios of schemes under their management are worth any business relationship indeed.

Why did the SEBI send such a powerful message?
The SEBI suspects that there might be the scope for some “understanding” between the troubled companies and mutual funds. PersonalFN has been writing about the seriousness of this matter from time to time. In one of its recent articles dated February 22, 2016, PersonalFN wrote about the exposure of many fund houses to Jindal Steel and Power Ltd. In this case, out of a consolidated debt position of Rs 40,000 crore, the company had sourced a little over Rs 32,600 crore from bank facilities and the rest in the form of Commercial papers and non-convertible debentures. There may be many such instances suggesting that companies were turning to attractive yielding mutual funds only when they faced a dead-end. They either issue new commercial papers or debentures or just ask mutual funds to rollover the existing ones.

Amtek Auto is a classic case

The Amtek Auto Episode has been an eye-opener for many. Only JP Morgan, the fund house, can answer as to what value it had perceived in lending to Amtek Auto. Interestingly, the fund house has recently sold off its business to Edelweiss Mutual Fund. JP Morgan had taken over the debentures of Amtek Auto from Axis Bank in the secondary market. Then it shifted these debentures from one scheme to another, reason? Only the exiting fund house can answer.

Why shouldn’t investors raise doubts?
Mutual fund investors may wonder, if mutual fund houses are friends “in deed”? The yields offered by troubled companies may be 300bps to 400bps higher (3-4 percentage points) than the rate of interest provided by banks to depositors on deposits with comparable maturities, but is that worth it? Considering the concentrated exposure mutual funds bring to individual companies and the sectors, it’s always a risky business. That apart, intergroup lending (from mutual fund to a company from the same promoter’s group) is not uncommon. The capital market regulator has tried plugging all these loopholes by introducing new exposure norms for mutual funds, as well as warning them of strict actions if found guilty. Economic Times dated March 29, 2016, quoted Mr. U.K.Sinha, SEBI Chief, “If SEBI comes across instances of mutual fund houses buying papers to benefit the parent or any group entity, they will strictly deal with it,”

Investors may only wonder what stops SEBI from probing into the matters that look suspicious from inside out, from top to bottom.

Dear investors, PersonalFN is your real friend who won’t backstab you—by making you pay for the research report and calling up the fund manager of one of the worst performing funds, to assure him of the new business. In fact, PersonalFN doesn’t think about its profit or loss when it comes to speaking for the investors.

PersonalFN is in the business of selling research reports and offering paid advice, not selling souls.


 

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