Mumbai: Investors are demanding that any probe by markets regulator Sebi into this month's FMP fiasco should thoroughly examine the roles played by fund managers, promoters and rating agencies in creating toxic debt products that were sold to mutual funds as investment grade instruments.
Several high networth investors who are hit by the extended redemption period of Fixed Maturity Plans are raising questions about the way the rating agencies gave AAA rating to many of these debt papers that have promoter shares as underling, and also the failure of the fund managers in exercising their fiduciary duty.
A Mumbai-based corporate lawyer said Sebi should investigate, "how, under what prudential fiduciary norms, have they (fund managers) entered into unwritten understanding that is detrimental to investors' interest?"
Rating agencies have been too generous in granting investment grade rating to collateralised loan obligations (CLOs), which are effectively special purpose vehicles (SPVs) without productive or earning asset. These SPVs are backed by a financial, in other words fictitious, asset that depends on the value of it on the stock exchanges. "How can these instruments be given an investment grade? Obviously, rating analysts' palms must have been greased," an irate investor said.
Normally for loan against shares (LAS) there are limits along with Sebi and stock exchange disclosure requirements. The going interest rate for LAS is about 15-16 per cent. But by camouflaging these as CLOs, promoters were able to raise loans cheaper, at, say, about 11 per cent.
"Why they agreed on lower rates for an otherwise LAS transaction with lesser headache for the promoter? Obviously, dishonest and corrupt fund managers have privately gained and this should be probed by the regulators," said the Mumbai-based investor who has investment in FMPs.
"Just because there's no explicit prohibition on CLOs doesn't mean mutual funds and insurance companies should venture into those (transactions) that are not commensurate with the philosophy, scheme mandate and risk profile of (FMP) investors. This is rubbish on the part of MFs and absolutely intolerable. Did they disclose in the offer document that they would make such adventurous investments because Sebi doesn't prohibit them? asked a Mumbai-based HNI.
He said Sebi must take action against this misgovernance and cheating of investors. AMC should pay up to make good the promise of FMP. AMC should, in addition, be made liable for penal charge and contribute to the scheme corpus, instead of paying a paltry fine to Sebi, he said.
He said the episodes "will make funds liable for litigation in courts because of their own admission of commission of something that is against the scheme objective--concentration of funds and locking funds beyond the maturity date," experts said.
Sources said regulators, including RBI, Sebi and Irdai, are all set to examine 'the loan against share' issue in the financial market....