Seems SEBI feedback has done its job. Now FMPs can be called fixed again. The key question is how much of questionable asset they are carrying. And we thought liquidity issues would only impact some weakly managed NBFCs and PSU banks.
Does it impact P&L ?
The acquisition means any gain or loss on this paper at the end of the standstill agreement will be borne by the AMC and not its investors
Looks like this only… and HDFC’s cost will be current prevailing market price. So FMP holders take a cut of say 60-70 percent if they were to liquidate. Now, tell me, how many holders would want to take this cut?? Knowing that their is a chance to recover full money if they wait for another 5-6 months.
This IMHO will fulfill law and give an option to FMP holders to liquidate in case they want, but i think most would not like to go this way.
Of course it does. However small the impact, it is the shareholders who have to pay; but the precedent is more worrying than the amount.
I think this will affect P&L temporarily for one or two quarters and ultimately it create more trust in clients mind
I feel provision is due to some SEBI guideline because they have not taken SEBI permission before delaying payment of FMP
As a long term investor positive for me is creating more trust in clients mind
Thanks
Ashit
Dear @ashit
So as an investor you are saying it’s positive because;
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First they messed up with the FMP customer by suddenly not respecting what an FMP is. Customer Fail.
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They did not respect SEBI guidelines. Regulatory Fail.
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Now shareholders of the company will pay, while executives will keep getting bonuses
. Shareholder Fail.
. Shareholder Fail.Sorry but I have just highlighted what I think but will not reply to any further comments to avoid a slugfest. Opinions of each are clear anyways so why haggle 
The process of handling this - Is this similar to a bank NPA where HDFC AMC has made a provision for 500 crores and will have a writeback if the Essel group pays back the NCDs to HDFC AMC?
Also, will this impact the P&L or the balance sheet?
Also, trusting on HDFC group management’s pedigree, this must be some well thought out move. Now they are satisfying the HDFC AMC customers with this buy out (still to see if customers undergo any loss even though they are able to liquidate). But if the Essel group companies are able to pay back OR if HDFC AMC sells the collateral, they may gain more than what they pay now and satisfy the shareholders. Hoping for that with the trust of management capability
I am surprised to see the criticism that HDFC AMC is receiving for bailing out its FMP. FMPs were sold like Fixed Deposit products, and even though ‘mutual fund investments are subject to market risk’, what the investors actually got was akin to a breach of trust. Investors certainly did not take that risk. Mutual Fund business is based on trust and the sole reason HDFC MF has grown to be the largest is due to investor’s trust in the HDFC brand.
Some have misunderstood this action as a “Rs.500 crore hit”. I am sure the AMC has at least some judgment on what the actual recoverability of the investment is. Rs.500 crore is the value of the assets and not the loss incurred.
Some have commented on setting a wrong precedent. I think HDFC AMC must have concluded that the incident is a one-off, and unlikely to recur for them at least. Further, a precedent if any gets set for the industry as a whole, not just for HDFC AMC alone. This means other AMCs in similar position now or in future will also be under pressure to replicate the action. Since HDFC AMC is largest and strongest of the lot, this only strengthens their relative position within the industry.
On the whole, what they have done seems to be the right thing for them to do for the long run.
When I googled, it seems such actions have been taken before. One of which is by Franklin Templeton buying Jindal Steel & Power NCDs from its own debt schemes. Not much details available on what happened later though.
Also, as this is shareholder money, does this action require approval from shareholders?
Please read this article by eminent mr. p v subramani
Hdfc amc, Essel dues
Posted by subra
Hdfc amc has decided to dip into its own shareholder’s funds to the extent of Rs. 500 crores to pay the FMP investors in full. Well if Hdfc amc were not a public listed company this information would never have come out. Even now if the “debentures” of Essel was nicely “placed” with some accomodating investor, and he was suitably compensated in some other way, it would not have come out. Let us say Hdfc Ltd (sponsor of Hdfc amc) had given a loan to “John Doe and Co.” to the extent of Rs. 500 crores, and John Doe had decided to “buy” the debentures, nobody would have known what happened. However, transparency has its risk.
Of course it is in the interest of the unit holder for this deal to be done. However, principally should this be allowed. If this is allowed, should we have a “capital adequacy” clause for mutual funds? Actually this beats the whole funda of an amc being a pass through vehicle.
However, this is not something new. We have heard about this for a very long time. Long ago Franklin Templeton did a similar bail out. In the 2008 crisis and recently in the Nbfc crisis we heard such murmurs for a long time. The great UTI fall in Nav was protected by creating SUTI – the government provided a way out for UTI. So in a country where we are willing to throw the equity investor to the mercies of he market we think that the “debt” investor should be protected. We do not see why we should let the unit holder “learn” by burning in the market fire. He should. That is what makes a coal turn to diamond.
However, this is a bad precedent for sure. However, it is not the first time that this is happening. Hdfc also runs the risk of telling its fund management team that profits will be distributed as bonus, but losses will be borne by the shareholders. The way of compensating the rich top employee team is wrong. However, whatever I write here or scream here will not matter. My take is simple – this is a wrong precedent. However, Hdfc amc is not the first amc doing this. There has to be a better solution like selling this to an ARC. Maybe Hdfc amc could get Rs. 400 crores for this debt and not the full Rs. 500 crores. Let market forces decide the value of these bonds, not the top management team of Hdfc Amc. Well Sebi we are eagerly waiting to see your move.
Not to contradict the above view point, just to highlight, promoter holding of HDFC AMC is over 80%.
One interesting thing I noted on this episode. I saw many investors and analyst have tendency to look for the positive side in whatever HDFC does. This is the stature and respect that HDFC has in investor and analyst community. Not sure if this is good or bad in long term.
Disc: I had small trading position and sold today, being extremely risk averse now in Finance shares. I will buy again if get opportunity. If not, I will buy some hair oil shares
I think this action is the right thing to do but the call should have been taken on the day the FMP matured and not today. I personally think In a conflict of interest scenario whilst deciding on priority between shareholder, client and regulator, the shareholder should come last by a country mile!
Better late than never! This is the precise reason why when ILFS failed and there was a run on liquid funds HDFC AUM instead of shrinking ended up growing 40 percent!
Disc: invested in HDFC AMC
Yes and also Essel group seems to have sold few assets in the last month or current already and more under discussion. So, it is not like the entire 500 crores goes as a loss, they may end up profiting as well.
Having said that, is it still the right thing to do - trying to take the debt on its own book and not functioning as a pure pass through vehicle… that is still an open discussion I guess