Delhi HC orders Indiabulls Housing for the outstandings to NCD investors.

A Delhi High Court order received by private-sector lender Indiabulls Housing Finance toward market regulator Sebi has placed mutual fund houses in a tight position.

The HC has permitted Indiabulls, a Non-Banking Financial Company (NBFC) not to pay its debenture holders, including fund houses, interest and principal, as far as the RBI requires banks and NBFCs to give their borrowers a moratorium. Fund managers now worry that over the next few weeks; many NBFCs can follow the same path and not pay MF’s.

It is the first time a situation has emerged in India where fund houses will not be in a position to meet their payment obligation to their investors unless they get capital from debenture issuers, that is, NBFCs. “A scenario like this has never existed. Looks like more NBFCs are going to follow the same path and not pay MFs on the NCDs they carry, and MFs will not be able to pay investors,” a top fund manager said. “One way out could be for the RBI to move in as in 2008 and 2013 and guarantee a credit line to the fund houses.”

According to Indiabulls’s lawyers, the reasoning was how would they be able to pay their debenture holders if they didn’t receive money from their borrowers because they have to give them a loan moratorium? Under Sebi Act section 11B, Indiabulls appealed to the court to defer its obligation to pay its NCD investors. The court demanded a status quo on the situation and asked Sebi to respond by 19 May.