HDFC AMC: Throwing Prudent Credit Appraisal to the Winds

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SOURCEHKH Research


EXECUTIVE SUMMARY. HDFC Asset Management Co. (HDFC AMC), promoted by HDFC is in the news for all the wrong reasons, a rare situation for a blue-blooded group which is the darling of institutional investors. The only saving grace is that it is not the only AMC which has been impacted by its mutual fund schemes’ exposure to the troubled Essel founder group of investment companies (flagship: Zee Entertainment Enterprises). What should be of concern to HDFC AMC’s shareholders is not only the relatively high concentration of Essel group exposure in its Fixed Maturity Plan (FMP) schemes, but its investment policy, which permitted it to invest in these companies. This development thoroughly exposes the mutual fund’s credit appraisal and risk management systems and should be a wake-up call to its shareholders and investors in its debt schemes.

1 COMMENT

  1. I entirely agree. It is shocking that HDFC Mutual Fund, headed by a financial wizard Mr Deepak Parekh as non-Executive Chairman is ditching the mutual fund investors who invested their hard earned savings in their fund. The irony is Mr Deepak Parekh was closely associated with ILFS until recently and he ought to have known that ILFS was heading for a disaster. The pity is most of the fund managers of mutual funds – HDFC AMC is no exception – have no credit expertise. They have the audacity to say the instrument was credit rated. Is there no obligation on the risk heads of these funds to do an independent check without being carried away by the external ratings. There is poor oversight by the AMC members or the Trustees. These are all big names and board /trustee membership is taken as a past time rubbing shoulders with pals and pocketing hefty sitting fees. As a senior citizen, I invested in Banking & PSU Debt funds and received a shocker mail this morning from HDFC mutual fund

    “As of 12th April 2019, the following scheme(s) of HDFC Mutual Fund have exposures to NCDs issued by HREL:
    (Amount in INR crore)
    Scheme Name Total exposure to security in the scheme (Face Value)
    HDFC Banking and PSU Debt Fund 8.5
    HDFC Credit Risk Debt Fund 42.0
    HDFC Dynamic Debt Fund 81.0
    HDFC FMP 1146D April 2018 (1) 10.5
    HDFC Hybrid Debt Fund 41.0
    HDFC Short Term Debt Fund 49.5

    Considering the default by HREL on its debt obligations, we have taken an additional markdown of 12% effective 15th April 2019 (over and above 25% markdown taken on January 22, 2019), taking the total markdown to 37% on prices provided by valuation agencies for January 24, 2019, the date on which HREL was downgraded to non-investment grade. Additionally, we have also taken a markdown of 37% on the interest accrued till date. Going forward, we shall not be accruing interest on our exposures in HREL..,”

    1. Is it not time SEBI immediately directs those funds which have made such bad investments to stop declaring any dividend to shareholders and set up a loan loss reserve out of such dividends to meet the losses.

    2. Should not SEBI direct the fund managers and the top management should take 20% hair cut in their salaries and bonuses.

    3. Should not AMC Directors and Trustees undergo sacrifice ?

    If you do not immediately intervene, many investors in mutual fund would lose their faith in this instrument.
    You must make SEBi wake up from their slumber.
    Regards
    Moorthy

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