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Delhi HC order on Indiabulls Housing NCD dues puts mutual funds in tight spot

MUMBAI: An order of the Delhi high court obtained by private sector lender Indiabulls Housing Finance against markets regulator Sebi has put mutual fund houses in a tight spot.

The HC has granted Indiabulls, a non-banking financial company (NBFC), the permission to not pay its debenture holders, including fund houses, interest and principal as long as the RBI allows banks and NBFCs to offer moratorium to their borrowers. Fund managers now fear that other NBFCs may take the same route and not pay MFs for the next few weeks.

This is the first time in India a situation has arisen where fund houses may not be in a position to meet their payment obligation to their investors if they don’t get money from the issuers of debentures, that is NBFCs. “A situation like this has never happened. Looks like more NBFCs will take this same route and not pay MFs on the NCDs they hold, and MFs will fail to pay to investors,” said a top fund manager said. “One of the way outs could be for the RBI to step in like in 2008 and 2013 and guarantees a line of credit to the fund houses.”

So far, the RBI has not spoken about providing a line of credit to the fund houses. Sebi is also working to find a solution to the imbroglio, sources said. While the RBI has allowed banks to provide a moratorium to their borrowers, the Indian Banks Association specifically excluded NBFCs. A meeting among lenders on Saturday was inconclusive with banks deciding to approach the RBI.

Sources in credit rating agencies said that with the court order, they might have to suspend their rating for Indiabulls or they might inform investors that given the current scenario ratings may no longer be relevant. According to reports, Edelweiss Financial Services has also approached the Bombay high court to restrain rating agencies from revising its double-A rating during the lockdown period. Sources said that the company wants more time to communicate its plans to the rating agency.

According to Indiabulls’s lawyers, the logic was if it did not receive money from its borrowers since it has to give loan moratorium to them, how will they be able to pay its debenture holders? Under section 11B of Sebi Act, Indiabulls prayed to the court to postpone its liability to pay its NCD investors. The court asked for a status quo on the position and asked Sebi to respond by May 19.

However, the silver lining is that on Monday also Indiabulls paid about Rs 30 crore that had fallen due to some of the mutual funds. According to a source, the company has taken this order as a precaution, more like a last line of defence, and it continues to honour all principal obligations including bonds which matured on April 20. “Since NBFCs have not been given moratorium on their own borrowings but have to give moratorium to their borrower companies, it is taking steps to preserve their own asset-liability management issues,” the source said.

According to some estimates, about Rs 20,000 crore worth of NCDs are set to mature by May 31 and this will have to be either paid back to the investors or rolled over. However, fund managers say there is absolutely no activity in the credit market and rollovers are not happening. “Every investor wants their money back,” said a debt fund manager.


April 21, 2020

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