The ripples from the Subhash Chandra-promoted Zee Group ’s debt crisis has hit debt investors in some of the country’s leading mutual fund houses with Kotak Mutual Fund delaying full redemption in six of its fixed maturity plans (FMPs). HDFC Mutual Fund, the country’s largest, also announced plans to roll over one of its FMPs that is coming up for redemption on April 15.Investors in six FMPs of Kotak Mutual Fund maturing between April 8 and May end will not be able to redeem all their units due to delay in recovering money lent by the schemes to two Essel Group companies, Edisons Utility Works Pvt Ltd and Konti Infrapower & Multiventures Pvt Ltd. Essel Group is owned by Subhash Chandra and comprises private unlisted companies such as Edisons and listed firms such as Zee Entertainment and Dish TV.More fund houses holding Zee Group debt and facing redemption deadline in the next three months could delay payment, experts said. This is the first time investors in fixed maturity plans are not getting paid the full amount on maturity and reflects the crisis facing some of the country’s leading companies saddled with debt and unable to refinance on easier terms due to liquidity pressures.Kotak said on Wednesday that investors will get maturity amount minus the value of holding in Essel Group. The balance will come to them as and when the fund house recovers the money from the companies, Kotak AMC said.“Essel promoters are working for a resolution through a strategic sale of Zee in a time-bound manner,” Kotak Mutual Fund said in a statement. “The above resolution is likely to be achieved by September 30, 2019 as per communication from Essel promoters. Any realisation from said investments will be shared proportionately with the unit holders subsequently.”The three firms are facing headwinds due to company and sectoral-specific issues, the statement added. “We are working closely with the Essel Group for optimal recovery from Konti and Edisons for the benefit of our unitholders and believe that such recovery will take place, albeit with some delay.”HDFC has filed for a rollover, according to a notice from the fund house. “Given the current interest rate scenario and portfolio positioning, the yields prevailing in the short maturity bucket present an option for investors to lock in their investments at the current prevailing yields,” the notice said. A spokesperson for HDFC Mutual Fund refused to elaborate.Kotak and HDFC Mutual Fund will not have to create a side pocket since this is a fixed maturity plan (FMP) and no fresh money will flow into this scheme. “FMP investors have to wait and hope the problem resolves. The probability of the problem resolving is high and you may get your total money and also interest for this period,” says Manoj Nagpal, CEO, Outlook Asia Capital.A ‘side pocket’ option allows a fund house to separate bad or risky assets from other liquid investments in a debt portfolio which could get impacted by the credit profile of underlying instruments. This creates two schemes — one containing the illiquid paper and the other holding the good ones.“As per the previously issued official communication, Essel Group has reached at an arrangement with the lenders with a resolution time frame of September 2019. The lenders have unanimously extended support to the group and the same has positively resulted in saving the loss of public money. The arrangement with the lenders has also given the group the required time to realise the right value from the stake sale of ZEE Entertainment Enterprises Ltd…,” an Essel group spokesperson said.The mutual fund industry has a debt exposure of Rs 7,500 crore to the Zee/Essel Group. Of this, around Rs 1,500 crore is in fixed maturity plans with the rest in open-ended debt mutual fund schemes. Kotak and HDFC Mutual Fund hold most of the debt in fixed maturity plans.The fund houses hold collateral in the form of shares of Zee Entertainment. Its shares suffered a severe fall in January leading to breach of top-up covenants. But most fund houses, including Kotak and HDFC, decided against selling shares to recover money and agreed to a standstill agreement with Zee/Essel promoters till September 2019. The investors were promised that the promoters would sell stakes in key companies including Zee Entertainment and repay debt for which they had sought six months.This private deal was severely criticised by industry watchers and corporate governance experts who said that breach of covenant should have immediately led to sale of pledged shares in the market. But the mutual funds had argued that such panic sale would have further collapsed value without giving anything tangible in return.Last October’s non-banking financial sector crisis sparked by the collapse of Infrastructure Lending and Financial Services (IL&FS) led to serious liquidity crisis with many firms unable to roll over and refinance short-term debt. Shares of firms with high debt and finance companies with high proportion of shortterm debt were hammered on the bourses. The Essel Group’s private unlisted infrastructure companies were among those unable to raise debt and this affected Zee Entertainment shares which collapsed.