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finance | IST

Pledging is a concern only when MFs sell large portion of holding firm, says ICRA

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CNBC-TV18 spoke with Anil Gupta, VP & sector head - financial sector ratings at ICRA on the issue of mutual funds exposure to promoter entities.

CNBC-TV18 spoke with Anil Gupta, VP & sector head - financial sector ratings at ICRA on the issue of mutual funds exposure to promoter entities.
The subject has garnered a lot of interest following reports that Capital and Morgan Credits, the holding companies of Yes Bank, paid about Rs 700 crore in cash collateral to Franklin Templeton Mutual Fund and Reliance Mutual Fund to avoid breach of covenants in non-convertible debentures.
With regards to how rating agencies view investments by mutual funds in promoter entities, Gupta said, "These transactions are legitimate. The only concern is when large portion of the holdings is pledged. For example,  as a promoter I have 50 percent stake and I have pledged almost 40 percent and there is stock prices correction and I don’t have adequate cushion to top-up my margin calls then that becomes risky.”
"However, if one is pledging a small portion of their holding for temporary liquidity needs then that would not be a big risk," he said on Friday.
The other risk in that typically, these transactions are for a period of 2-3 years, so the question is how will these transactions be liquidated when the maturity date comes.
"How these transactions will be liquidated and will there be a stake sale by promoters in the company – these are the risks apart from stock price correction that trigger margin calls," said Gupta.
Icra on Wednesday downgraded Yes Bank's long-term ratings.
 
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