 "Redemption from JP Morgan's two India schemes becomes difficult for large institutional clients")
It's difficult time for large investors, mainly institutional clients, of JP Morgan (India) AMC who invested in two of its schemes - India Treasury Fund and India Short Term Income Fund.
Any investor who had wanted to redeem units of these schemes on Friday could not have done so as per their wishes as redeemable units have been "gated" with effect from 28 August - one of the rarest developments in recent years in the fund industry.
Both these schemes, put together, have an exposure of Rs 200 crore or about 6.75% of total assets under management (AUM) in debt issuances by financially stressed Amtek Auto. The shares of the company lost 70% on the stock exchanges this month - hitting a six years low.
In an announcement on its website, Nandkumar Surti, managing director and CEO of the fund house, said, "In the general interest of the unit holders of the JP Morgan India Treasury Fund and JP Morgan India Short Term Income Fund, JPMorgan Mutual Fund India Private Limited, the Trustee Company, has decided to limit the redemptions in the above referred two schemes effective August 28, 2015."
Accordingly, the redemptions in these two schemes will be limited ("gated") to a percentage limit not exceeding 1% of the total number of units outstanding on any Business Day.
It further added that any units which consequently are not redeemed on a particular Business Day will, subject to the further application of the Trustee Company's right to limit Redemption, be carried forward for Redemption to the next Business Day.
Both the schemes are managed by the fund manager Ravi Ratanpal. The India Short Term Income Fund (launched in March, 2010), in particular, has 15.37% (or Rs 134 crore) exposures to debt papers issued by Amtek Auto with coupon of 10.25%.
For a scheme of a size of mere Rs 430 crore, such a large exposure to a single security is more than enough to dramatically impact the performance of the scheme if the underlying asset class faces troubles.
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JP Morgan's India Treasury Fund (which completes its seven years next month), on the other hand, a relatively bigger scheme with AUM of Rs 2,534 crore as on 31 July, 2015 has 5.29% (or Rs 66 crore) exposure to 10.25% Amtek Auto 2015 debentures.
Last Thursday, the credit rating of a bond holding in these two schemes was downgraded from A+ to C, as a result of Brickwork Ratings down grading similar bonds by the same issuer. This resulted in the valuation agencies CRISIL and ICRA reducing the valuation of the bond held by these two funds by about 25%.
Performance wise, both the schemes are witnessing their worst phase since their launch. For instance, the one month returns of Treasury Fund and Short Term Income Fund are in the negative territory of - 1.14% and - 2.83%, respectively. The category average return during the same period stood at 0.64% and 0.73%, respectively. In the one year time frame too, both the schemes have heavily under performed vis-a-vis the category returns.
In a correspondence to the stock exchanges, Amtek Auto earlier said this month, "There is decline in the operational performance of the company due to current market scenario which caused decline in the sales and profit margins. There is temporary cash flow mismatch in the company and to mitigate the present situation, the promoters have already infused Rs 75 crore and if required in future will also infuse more funds."
The shares of Amtek Auto have been excluded from the Futures and Option (F&O) segment.
The stock price declined from Rs 170 to Rs 53. Reports suggest that the company could be on the verge of a default on its huge debt payment. The top management of the company, in a TV interview, did not deny the possibility of such a situation. All indicators point towards severe financial stress in the company.