April 10, 2016

JSPL paid up. So what?

Till about a week ago, the exposure of some debt funds to JSPL was a widely discussed topic among industry insiders.  Not anymore.  According to some people that I spoke to, after JSPL honored its repayment commitment to holders of its NCDs last week, this was being regarded as a closed chapter.  As one person put it, “Now that they’ve paid up, it’s business as usual.”

Well, for the sake of investors, and even the industry as a whole, I hope that SEBI is not treating this as such.  The events of the past couple of months or so, offer a useful window to understand the implications of how valuations, if not well thought through, can create price distortions. In this post, I propose to spotlight some of that.  But rather than state anything, I’d like to present a single piece of visual evidence.  Hopefully, it will also strengthen the case I sought to make in my last post, for SEBI to bring about greater uniformity in the valuation of junk bonds. 

The visual evidence is in the form of the relative NAV movements (from Feb 1 to Apr 5) of two schemes that had significant exposure to the JSPL NCD that matured last week.  The schemes are:

  • ICICI Prudential Fixed Maturity Plan - Series 72 - 823 Days Plan H
  • Reliance Fixed Horizon Fund - XXIII - Series 11

I have chosen these because of the comparative similarity in their returns and their exposure to JSPL, as shown in the table below.


Exposure to JSPL as on Jan 31

Absolute Return from Feb 1 to Apr 5

ICICI Prudential Fixed Maturity Plan - Series 72 - 823 Days Plan H



Reliance Fixed Horizon Fund - XXIII - Series 11




This, then, is the chart showing their relative NAV movements from Feb 1 to Apr 5.


NAV Distortions

For anyone concerned with the fairness of scheme valuations, I believe this chart should set alarm bells ringing.  In fact, were it not for the prefatory remarks, I doubt if anyone would believe that the NAV swings of these two schemes were triggered by the valuation of near-identical holdings of the same security.

I’d like to close this post with one other observation: if the March-end portfolio disclosures are anything to go by, ICICI Prudential MF continues to hold JSPL NCDs (presently valued at over 157 crore) that have been downgraded by CRISIL to default status.  While the bulk of these are held in the portfolio of ICICI Prudential Regular Savings Fund, the exposure as a percent of this fund’s portfolio is just over 2%.  As far as I can make out, the scheme with the highest exposure (as a percent of its holdings) is ICICI Prudential Multiple Yield Fund - Series 10 - 1825 Days - Plan B, where these NCDs constitute over 6% of the portfolio.

All the holdings are due to mature in 2019, and as at the end of March, have been marked down to 67.5% of their face value. Despite CRISIL’s rating, as per SEBI regulations, these investments are not being treated as a NPA.  If my information is correct, the interest on these bonds is to be paid annually on 11 Aug.  If so, then that would mean that the treatment of this investment as a performing asset is based on interest received 8 months ago.  All may turn out well for those who are exposed to these NCDs but I wouldn’t consider the JSPL episode to be a closed chapter just as yet.

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