Indostar Capital Finance, a non-banking financial firm (NBFC) that reported losses for the quarter ended March 31, has been creating negative buzz for the past few weeks, especially regarding its inability to continue as an ongoing concern. In. Barely two months after joining the company, the resignation of its Chief Financial Officer Kapish Jain has added to this negative outlook.
The mutual fund exposure to the debt instruments of the company is estimated at approx. 482 crore (as of July 2022), according to Ace MF data. In the worst case of default by Indostar Capital, the fund house may be forced to write off debt to an extent or side pocket – after segregating qualitative and risky instruments – for instruments issued by the firm risk. This can affect the return you get from your investment.
There are five debt mutual funds whose portfolio exposure in these instruments is more than 2%. These are Baroda BNP Paribas Low Duration Fund, PGIM India Low Duration, Baroda BNP Paribas Ultra Short Duration, SBI Magnum Income and Franklin India Floating Rate Fund. The schemes of Baroda BNP Paribas have investments in commercial papers issued by NBFCs, while others have investments in corporate debt papers—even if they mature in 2022 or 2023.
In terms of investment in absolute terms, schemes with maximum 50 crore exposure in debt papers (floating rate or corporate debt papers) of Indostar includes Axis Ultra Short-Term Fund, SBI Magnum Medium Duration and ABSL Low Duration Fund.
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Commercial papers are rated A1+, the highest rating for short-term papers, and corporate debt papers are rated AA-, well below the highest AAA rating by CareEdge Ratings. Note that these instruments have not been de-rated in the last three financial years. Vehicle loan financier, Indostar Capital reported a net loss of Rs. Net loss of Rs 754 crore in March quarter 317 crores were logged in the same period last year. Its results for the March quarter were delayed due to audit review. The auditor of the company reported that its total liabilities exceed the total assets maturing within 12 months 2,206 crore as of March 31, 2022, and said there is a material uncertainty that could cast significant doubts on its ability to continue as a significant concern.
To this observation, the company responded that it had raised incremental funding. 1,170 crore based on the support of the promoters. It also said that the management plans to raise additional financing through monetization of a portion of its stake in its 100% subsidiary lndoStar Home Finance.
Referring to this and referring to IndoStar’s high capital adequacy and good debt to equity ratio, a spokesperson of one of the MF houses said that for now they are confident that the loan default by the company is unlikely and they Will wait for results. To decide on investment risk in the quarter ending June 2022. Results are expected next week.
Most of the fund houses mentioned above are understood to have participated in the buyback offer announced by the Company for its debentures. Details of the price and time period of the instrument, cash flow on offer are not available.
An industry source said the company will refund the entire money to the fund houses. Financial experts have taken a similar stance. Dilshad Billimoria of Diljar Consultants, SEBI-registered investment advisory said, “Investors can wait till the Q1 results are out as the financial performance of the company will be very clear. Investors can also look at the cash position held by these schemes so that there is no negative impact – as we experienced in the case of Franklin Templeton – in case of any redemption amounts from these funds.”
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