What went wrong with FMPs

How can a 'fixed' maturity plan (FMP) ask me to be flexible about the maturity date? Can mutual funds lend to promoters? Was I wrong to invest in FMPs instead of good, old bank deposits? Many such questions are swirling around in the minds of mutual fund investors after it has come to light that several fund houses are seeking to defer part of the returns or looking to roll over some of their FMPs after delays in repayments from their borrowers. Before we get to how you can deal with this issue, let's understand how the FMP crisis came about. I saw the note from Kotak AMC to their investors saying that they will pay back only 99.6 per cent of the original capital on one of their FMPs (Series 183) on maturity date. On another FMP (Series 127), they've paid back just 109.1 per cent. They've indicated that more returns may be shared later. How come the maturity amount be so low? The two FMPs had bonds from two Essel group companies - Konti Infrapower and Edisons Utility - in their portfolios. These bonds were due to mature on April 8, 2019. If the Essel companies had repaid on time, the FMPs would have received their principal, along with 11.1 per cent interest for the entire period of investment. But because the Essel group couldn't make the repayment, the fund has given them more time until September 30 to come good. As these FMPs matured earlier, they've repaid capital and promised to share some of the returns later, assuming the Essel group repays its dues by September 30. Kotak has said that four other FMPs (Series 187, 189, 193 and 194) also hold Essel group bonds and are likely to face similar issues at redemption. I read that HDFC Mutual Fund also held Essel bonds in its FMP 1168D Feb 2016 series that was maturing. It has asked for its investors okay to roll over the scheme by another 380 days. What about investors who put money in the FMP thinking they'll get it back this year? They could have chosen to redeem on April 15 by not giving their written consent to the roll-over. HDFC Mutual Fund gave its investors the option of either opting for the roll-over or redeeming their investment on the due date. But if they redeemed on the due date, the fund would not have received its repayments from the Essel companies and therefore may have repaid less than their original capital. The two Essel companies - Sprit Infrapower and Edisons Infrapower - accounted for 9.6 and 9.9 per cent, respectively, of this scheme's portfolio. HDFC Mutual Fund has also listed out over 20 other FMPs with maturity dates falling between April 2019 and July 2021 that have some holdings in the Essel group. But when these AMCs knew fully well that their FMPs were going to mature earlier, why did they give the Essel group promoters extra time to repay?