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MFs can’t enter into standstill pacts: Ajay Tyagi

Mumbai: India’s capital markets regulator Thursday said that mutual funds can’t enter into any kind of ‘standstill agreement’ with their borrowers, reiterating the primacy of existing rules for financial market entities a day after Subhash Chandra’s Essel Group said some funds agreed to further extend the repayment deadline for its outstanding debt.

“It is not there in any of the regulations. We have made our position clear,” Ajay Tyagi, chairman of the Securities and Exchange Board of India (Sebi), said on the sidelines of an industry event in Mumbai. “Entities have to follow the regulations that are there. There is no confusion on that.”

Essel and the lenders, led by mutual funds including Birla Sunlife, HDFC, Franklin Templeton, ICICI Prudential, SBI and Kotak, had first entered into standstill agreements late January. The deal gave the media group, which owns Zee Entertainment and Dish TV, time until September 30 to repay debt to the funds. The deals were made after the promoters failed to bring in additional collateral in the aftermath of pronounced declines in both Zee and Dish TV shares.

First Voiced Criticism in May

Essel Group has managed to repay about Rs 2,600 crore to mutual funds by selling 11 per cent in Zee to Invesco Oppenheimer for Rs 4,224 crore. It was expected to settle the remaining debt of about Rs 2,300 crore by September 30. But talks ended in a deadlock after the stock crashed.

Birla Sunlife Mutual Fund, Franklin Templeton, ICICI Prudential Mutual Fund and HDFC Asset Management are the funds to which Essel owes money. Earlier this week, SBI Funds Management and Kotak Mutual Fund sold Zee shares in the open market.


Mailed queries to Birla Sunlife, Franklin, ICICI Prudential and HDFC, seeking their reaction to Tyagi’s latest remarks, remained unanswered.

“If it (standstill agreement) is not prohibited, it is allowed in common law. It is a fundamental part of fund management to assess the situation and take a call,” said Sandeep Parekh, founder, Finsec Law Advisors. “It should be a fund manager’s discretion to decide whether it is in the best interest of investors.”

Sebi had first voiced its criticism against standstill agreements in May. The regulator had sent legal notices to HDFC Mutual and Kotak Mutual after their Fixed Maturity Plans (FMPs) holding Essel group papers came up for maturity.

Earlier this week, Sebi in a circular said any extension to the maturity of money market or debt securities ought to be treated as default.


Tyagi said the regulator is also reexamining the concept of ‘company promoters’ vis-a-vis ‘controlling shareholders’.

“The concept of ‘promoters’ has been prevalent in India for a long period of time. Globally, rather than promoters, the concept of ‘controlling shareholders’ is more prevalent,” he said on Thursday. “Keeping in mind the changing realities of the global and Indian markets, we are examining the relevance of the concept of a promoter in today’s times along with whether any changes to Sebi regulations are warranted in this regard."

The Sebi chief also said the regulator will consider a proposal to reduce the time taken for rights share issues to around a month. At present, the rights issue process takes 55-58 days from the time a company decides to launch the offer.

Tyagi said that Sebi is also in the process of taking steps to strengthen the framework for Alternative Investment Funds (AIFs) in areas such as standardisation of the private placement memorandum and benchmarking framework for performance disclosures.

On a cumulative basis, investments made by AIFs stood at Rs 1.1 lakh crore in March 2019, compared with Rs 7,300 crore in March 2015, Sebi data showed.
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