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Recent developments in Fixed Maturity Plans

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Fixed Maturity Plans (FMP) are close-ended mutual fund schemes with a fixed maturity period, usually more than 3 years, and which invests its corpus in debt instruments, such as, non-convertible debentures, certificate of deposits, commercial papers, etc. FMPs are popular for being less sensitive to interest rate fluctuations and credit risks, and for indexation benefits that they provide on returns.

FMPs are regulated by the SEBI (Mutual Funds) Regulations, 1996 and various circulars issued therein. As per the Regulations, FMPs have to be compulsorily listed (except equity linked savings scheme), and not more than 10% of the total net asset value of a scheme can be invested in a single issuer and it can have a maximum 20% of exposure in debt instruments of a group.

Recently, due to default in repayment of its debt instruments by the Essel group, the industry was struck hard. As per the disclosures made by Essel group companies, upon an agreement with the holders of debt instruments, their maturity period was extended to September 2019. Certain FMP schemes floated by HDFC and Kotak mutual funds which had invested in such instruments were in news recently. While Kotak made part payments to its investors and deferred the rest; HDFC gave its investors an option to either exit at the maturity date with some amount towards full settlement of their claims, or to defer the whole payment to the extended maturity date.

Besides raising concerns with regards to the very reasons for which FMPs were popular mutual fund schemes, i.e. low credit risk / promising returns, this incident has also raised certain other issues. Firstly, whether funds should continue such heavy reliance on assessment of credit rating agencies for taking their investment decisions. Secondly, whether mutual funds can be used as a vehicle for shadow banking. In the instant matter, the debt instruments were secured by way of pledge against promoters’ shares; a fall in price of shares led to inadequacy in security cover and hence, the maturity period was extended. Such practice is commonly referred as ‘loan against shares’, a facility which is provided by banks.

Lastly, whether extension of maturity period amounts to change in fundamental attributes of a scheme as referred under Regulation 18(15A) of the Regulations wherein the fund is obligated to given an exit opportunity to its investors. It is now important that the existing legal regime is revisited and a standard operating procedure for dealing with such situations be devised by SEBI.