Debt MF-promoter nexus in securitisation under Sebi gaze
Yes Bank, Sun Pharma episodes shed light on fraudulent deals

Domestic mutual funds and rating agencies are likely to come under the Sebi lens for indulging in fraudulent transactions of securitisation of debt papers issued by promoter holding companies like Yes Bank and Sun Pharma.

According to sources, regulators are examining whether loan against shares rules of RBI and Sebi were circumvented by debt fund managers while investing in firms like Yes Bank promoter Rana Kapoor’s Morgan Credits and Sun Pharma promoter-linked firm Suraksha Realty.

Yes Bank and Sun Pharma episodes have brought out fraudulent practices by promoters in nexus with debt mutual funds.

Holding company of promoters--for example Morgan Credits, which is holding Yes Bank shares and nothing else--securitises its equity share holdings in a private company vehicle and goes to rating agency for a favourable credit rating on the back of excess shares given as margin to take care of any decline in the share price and places the bonds issued by the holding company with debt MFs.

According to regulatory sources, this practice, in effect, amounts to loan against shares and not securitised loan obligation as they may term it. “This appears to be done with a view to circumvent RBI/Sebi disclosure guidelines on pledge of promoter shares,” they said.

Regulators are examining whether MFs’ actions are in violation of Sebi guidelines in as much as they have provided accommodation to promoters by extending them loans against illiquid paper and transaction that amounts to loan against shares, which they are prohibited under guidelines.

Sebi is also probing if more such deals are done by promoters using the loophole and raised money for private purposes from mutual funds.

Rating agencies role is also being investigated as they appeared to be abetting fraudulent transactions in securitisation of debt papers issued by promoter holding companies.

“Even though rating agencies' life line, fee income, comes from issuer companies, they must own up and stand up to their fiduciary duty of safeguarding investors' interest--consumers of ratings in the first place--who actually collectively pay by way of subscription to company instruments. Rating agencies often wash their hands stating that they didn't have access to timely data as they assign default rating only after default occurs. Till then, everyone is happy in ignorance bliss. This must change at rating agencies,” partner with a leading Mumbai-based legal firm said.

Yes Bank chief Rana Kapoor’s investment firms borrowed money from mutual funds and invested it as equity in a finance company. Morgan Credits Pvt Ltd (MCPL) and Yes Capital (I) Pvt Ltd (YCPL) are holding companies owned 100 per cent by Radha K Khanna, Raakhe K Tandon and Roshini Kapoor (Rana Kapoor’s daughters). Radha, Raakhe and Roshini are qualified, independent woman entrepreneurs and have put in place a professional management team under the brand ‘The Three Sisters: Institutional Office (TTS:IO)’ through which greenfield, start-up ventures have been established, said the statement.

Two Yes Bank promoter entities, Morgan Credits (MCPL) and Yes Capital (YCPL), recorded losses of Rs 609.6 million in 2017-18.

Debt funds of several mutual funds like Reliance Mutual Fund and Franklin Templeton had invested in Morgan Credits and Yes Capital papers.

There were fears that the ratings assigned to these instruments could be hit as Yes Bank share prices have fallen sharply in the last few months. The stock plunged from a high of Rs 386 in August to a low of Rs 165 on Sep 28 and is ruling at Rs 197.

Mutual funds reportedly have an exposure of about Rs 1,400 crore to the lender. They have securities of Rs 4,000 crore against this exposure at current prices.

Sudhir Valia, brother-in-law of Sun Pharmaceutical Industries’ founder Dilip Shanghvi, has got a helping hand in running his own businesses due to the family’s stake in India’s largest drug maker by sales.

At least two of Valias' entities, Suraksha Realty and Suraksha Asset Reconstruction Company (ARC), have the backing of Lakshdeep Investments and Finance, which holds Valias' stake in Sun Pharma. Taking comfort from the investment entity’s stake in the latter, mutual funds (MFs) have exposure of nearly Rs 13 billion to Suraksha Realty.

“What effectively has happened in this structured transaction is nothing short of criminal conspiracy between promoter- rating agency and mutual fund managers,” said head of research with a leading brokerage firm.

“Promoter obtained rating for debt instrument (bond) of holding company which has underlying listed company shares that remain in promoter account. Promoter doesn't part with shares, nor creates pledge/lien but gets money (out of air) against issue of bond by just paying about 2 per cent rating fees and bribe to mutual fund managers. Shares remain with him, plus he gets money in violation of loan-against-shares guidelines. This is criminal conspiracy by the trio to defraud mutual fund investors,” he alleged.

Ashwin J Punnen