Sebi bans mutual funds from entering into standstill; tightens disclosure norms for pledged shares

MUMBAI: Capital markets regulator Sebi on Thursday approved a new framework for issuance of differential voting right (DVR) shares from July and banned mutual funds from entering into standstill agreements with any companies.

Sebi chairman Ajay Tyagi told reports after a board meeting that it has been decided to ban mutual funds from entering into standstill pacts with companies apart from making them hold at least 20 per cent assets of liquid funds in cash equivalents.

There is also a cap on the sectoral limit in liquid funds at 20 per cent. If royalty is more than 5 per cent than required, it would require shareholder nod.

Coming down heavily on MF players who in recent past chose to use shareholders fund to buy out debt of bleeding invested companies, he said mutual funds can't have standstill agreements with companies. We have taken action against mutual funds which had standstill pact with companies.

Besides DVR, the regulator also discussed in-principal approval for changes in the method of calculation of net asset value, with a view to tackle the problem of concentration of asset under management with just 10 asset management companies and increasing the scope of the definition of encumbrance.

Taking a serious note of some mutual fund houses' exposure to loan against share schemes, Sebi also tightened the norms for disclosing the details of pledged shares by promoters.

Loan against share schemes involve debt mutual funds investing in debt papers of little-known/lower-rated companies on the backing of promoter shares.

As per the new directions issued -- any direct, indirect lien on shares will qualify as encumbered shares.

"The promoters will have to furnish reasons if combined encumbrance crosses 20 per cent of the company's equity capital," Sebi said after the board meeting.

It can be noted that following the liquidity crisis among leading NBFCs, which began after the IL&FS group went belly up last September, shadow banks like DHFL, and media powerhouse Zee group among others had defaulted on their debt. Both these companies however entered into standstill agreements with their lenders.

The largest AMC, HDFC Asset Management Company had said it would buy back NCDs of DHFL worth Rs 500 crore which it could not redeem on time from its fixed income plan investors. This meant that the shareholders of HDFC AMC would take a hit of Rs 500 crore.

However, Kotak AMC, which also could not redeem its units on time, had asked its fixed income plan investors to wait for another year for payments.

Sebi further said if the amount of pledged shares of a company is over 20 per cent, then its audit panels will have to be kept informed of any undisclosed encumbrance.

It can be noted that these new tighter norms have come in as a result of the recent crisis faced by some mutual fund houses which had exposure to loan against share schemes. Under this, debt mutual funds invested in papers of little- known/lower-rated companies were backed by promoter shares.