"Insurance firm picks up illiquid realty bonds worth Rs1,755 crore
from mutual fund arm amid a credit crunch"
State-owned Life Insurance Corp. of India Ltd (LIC) may have bought
illiquid debt paper, largely of real estate firms, worth at least
Rs1,755 crore from its unit LIC Mutual Fund Asset Management Ltd (LIC MF) in October, according to people familiar with the matter.
The off-market deal was effected to provide liquidity to LIC MF to
meet redemption pressure without resorting to distress sale of assets, an option not readily available to other mutual funds.
LIC, India's largest insurer, had assets under management of Rs5.59
trillion at the end of fiscal 2007, the latest period for which
figures were available from the Insurance Regulatory and Development
Authority, more than the sum of assets managed by the entire mutual
fund industry in India.
The acquired debt included bonds worth Rs650 crore sold by BPTP Ltd, Rs543 crore by Housing Development and Infrastructure Ltd, Rs195 crore by Unitech Ltd and Rs117 crore by Sobha Developers Ltd, among others, said at least three people with knowledge of the matter who didn't want to be named.
At the end of September, LIC MF held bonds of realty firms worth about Rs2,180 crore in its so-called liquid and liquid-plus funds, which are popular debt schemes among corporate investors and bank treasuries for parking surplus funds.
By October-end, when a liquidity crunch had taken a firm hold on the
markets, the liquid and liquid-plus funds only had about Rs425 crore
of real estate paper, suggesting that LIC MF had disposed of assets
worth Rs1,755 crore in an illiquid market. A transaction between LIC
and LIC MF would have been off the market and not reflected on the
corporate bond market.
Neither Thomas Mathew, managing director of LIC, nor Sushobhan Sarker, chief executive of LIC MF, responded to emails and phone calls.
Large-scale early withdrawals since mid-September, after the collapse of investment bank Lehman Brothers Holdings Inc., plunged the global financial system into an unprecedented liquidity crisis which also hit Indian fund houses hard. Mutual fund investors redeemed at least Rs96,000 crore from debt schemes in September and October.
The turnover in the corporate bond market dipped to Rs7,803 crore in
October compared to an average of at least Rs11,000 crore in the first
nine months of 2008, according to data on the website of the capital
market regulator Securities and Exchange Board of India.
"Lack of liquidity and risk aversion killed the (corporate bond)
market then," said J. Moses Harding, vice-president, wholesale
banking, IndusInd Bank Ltd. "It has not improved since."
A flight to safety among investors further sucked liquidity out of the
system. Despite the central bank extending a Rs60,000 crore credit
line for banks to lend to mutual funds, debt managers working in an
illiquid corporate bond market had a tough time selling bonds to meet
redemption demands.
LIC is not the only firm to bail out its mutual fund unit. Housing
Development Finance Corp. Ltd, India's largest home loan company, and its partner Standard Life Plc. have taken a similar route. Standard
Life holds a 40% stake in HDFC Asset Management Co. Ltd.
"The fund has certain property assets owned by Indian property
companies and those assets have now turned out to be not as good
quality as we thought they would be," said Gerry Grimstone, chairman of Standard Life, in a recent interview with Mint.
"The promoters have found a way of removing those assets from the fund to the benefit of the investors in the fund," Grimstone said,
explaining that the firm has "substituted some of the assets of the
fund which have a longer duration with high-quality short-term assets
to make sure that the fund's liquidity is preserved".
Sources
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