DHFL mutual funds exceed SEBI's limit on group exposure: Report

Due to crises at IL&FS and DHFL, the debt market's concerns about the companies increased, and mutual fund schemes exposed to these groups saw significant outflows. Liquid holdings were sold off due to which relatively illiquid DHFL papers soared, so much that it is in breach of the limits set by the Securities and Exchange Board of India (SEBI), Mint reported.

Moneycontrol could not independently verify the story.

The market regulator has prescribed a limit on the exposure that a mutual fund can have to a single group. Despite the excess, these schemes are open for subscription. DHFL papers have been downgraded by rating agencies like CRISIL, which is a point of concern even though there haven't been any defaults yet.

DHFL Pramerica Asset Managers Pvt Ltd witnessed a 68-percent or Rs 16,000-crore fall in its assets under management (AUM) in January-March 2019, as compared with the year-ago period. The average AUM fell from Rs 23,595 crore to just Rs 7,627 crore as investors exited the scheme due to the ongoing crisis.

Due to rigorous exits, the exposure of three schemes of DHFL Pramerica Asset Managers—DHFL Pramerica Ultra Short Term Fund, DHFL Pramerica Floating Rate Fund and DHFL Pramerica Medium Term Fund—to the DHFL Group securities hiked from 7.5-8.5 percent in June 2018 to 29-37 percent in March 2019, according to the report.

This is because the AMC had to meet the redemption pressure and sell its liquid securities. This, in turn, caused the breach of SEBI rules. The regulator limits exposure of an MF scheme to one group at 20 percent of assets. This can be taken up to 25 percent after the board’s approval.

The funds have not been warned of the breach yet. "This situation should not have been allowed to arise. Mutual Funds are diversified instruments and a scheme holding just three papers goes completely against this spirit. The AMC should have closed these schemes to fresh subscription," said Amol Joshi, founder, Plan Rupee Investment Services, told the paper.

At the end of March 2019, the sponsor DHFL Group had an exposure of 29.5 percent to DHFL Ultra Short Term Fund, 36.74 percent to DHFL Pramerica Medium Term Fund and 29.24 percent to DHFL Pramerica Floating Rate Fund.

Due to the crisis, DHFL Pramerica Ultra Short Fund and Medium Term Fund witnessed a 91 percent fall in AUM, and DHFL Floating Rate Fund saw a 94 percent plunge. The rest of the investors are exposed to very risky portfolios. And, since these are still open to subscription, it is dangerous for fresh buyers who may not be informed about the situation.

The prudent way of going forward is to prevent new investors from entering a high-risk situation. For instance, the Motilal Oswal Ultra Short Term Fund closed its subscription when the IL&FS default happened in September 2018.

"SEBI has observed that there are investment norm breaches in DHFL Pramerica's three debt funds," a source close to the regulator told Mint. "SEBI has issued a letter to DHFL seeking an explanation. For passive breach, DHFL Pramerica will be given time to remedy the situation. But if the situation continues, then the fund house will be penalised," the person added.

DHFL Pramerica AMC has responded saying it has taken necessary steps to reduce its exposure to the group. "In the last three months, the funds have reduced exposure to DHFL bonds by almost Rs 108 crore. Post this reduction, the aggregate exposure of the various funds of DHFL Pramerica Mutual Fund to the securities of DHFL as on date stands at about Rs 274 crore. A large part of this holding is short-term in nature, with almost 63 percent maturing in the next five months until September 2019," it said.