Nilesh Shah of Kotak AMC on the FMP crisis

Kotak AMC has been one of the first AMCs to redeem Fixed Maturity Plans (FMPs) with exposure to the Essel group and has also been quite communicative to investors on this issue. Nilesh Shah, Managing Director, Kotak Asset Management, spoke to Value Research about equity markets and the FMP issue. Until recently, the Indian mutual fund industry navigated credit risks well, with relatively few defaults, while banks piled up large NPAs. Why are we seeing more defaults in mutual funds cropping up now? There is a difference between a delay and a default. About 90 to 95 per cent of the mutual fund industry's assets are invested in a high-credit-quality portfolio, which has received payment on time every time. There have been issues only in 5 to 10 per cent of the assets mandated to take credit risks. In the last two years, the shocks have come from IL&FS and the Essel group. In the IL&FS case, the market took a call based on the promoters' pedigree. It was not that the market could not see deterioration in the group's balance sheet. A rights issue to recapitalise IL&FS was expected and that never came through. There's a world of difference between a company with a Rs 6,000 crore net worth and Rs 90,000 crore debt and one with Rs 12,000 net worth and Rs 84,000 crore debt. The rights issue didn't happen for a variety of reasons despite announcement by the company and assurance to rating agencies as well as to the bank which provided bridge finance of Rs 2,000 crore. We will learn our lesson because that was a call on promoter's pedigree, which didn't work out. In Essel's case, the choice was between sub-optimal recovery or giving the promoter more time to recover full money. There's no point in converting a notional loss in