As Yes Bank exits Nifty Indices on 19th March and S&P BSE Indices on 20th March, mutual funds have decided to de facto seggregate their exposure to Yes Bank held through Index Funds and Exchange Traded Funds (ETFs). The government reconstruction plan for Yes Bank locks in existing investors with more than 100 shares of Yes Bank for a period of 3 years. Such investors can only sell up to 25% of their shares. However this has placed index funds and ETFs in a quandary because they are mandated to track indices and change their composition when indices change. As Yes Bank exits all indices, they can no longer hold the stock as per their mandate.
Fund houses have marked their holdings of Yes Bank to zero on 16th March said a senior executive at a mutual fund who declined to be named. They have decided to address the issue of lock-in by separating out their exposure to Yes Bank. Existing investors will be given the amount realised after selling Yes Bank shares after the 3 year lock-in period. However 25% of the shares held by Yes Bank were sold by passive funds on 18th March. "MFs have sold 25% of their Yes Bank shares today since it will not be in the Nifty indices tomorrow. These shares have risen 135% from their Friday closing price and hence some gains have already been locked in," said Anil Ghelani CFA, Head of Passive Investments, DSP Mutual Fund
New Investors in index funds and ETFs will not be exposed to Yes Bank. Yes Bank occupies a mere 0.2% weight in the Nifty but holding this stock without it being part of the index can compound the tracking error of Index Funds and ETFs. Yes Bank occupies a 0.73% weight in the Nifty Bank Index. It is also present in some S&P BSE Indices from which it will be removed on 20th March. "There is still debate on the cut off date for investors to be allotted these marked down units," said the aforementioned executive. "One proposal is for all active and index fund holders as on 13th March to be taken for this purpose. In case of ETFs, investors on record as of 18th March will be considered," he added. According to the executive, even actively managed funds holding Yes Bank have marked down their exposure to zero and will apply the same side pocketing procedure.
Mutual Funds had 14 crore shares in Yes Bank at the end of February 2019. At the closing price of the share on 18th March, this amounts to a stake of around ₹846 crore which is roughly 5% of Yes Bank’s market capitalization. “We are maintaining a record of investors in our Index Funds and ETFs as of the last day in which Yes Bank remains in the Index. As and when we have the marketable value of the locked in 75% units, these investors will get the holding value of such units.Fresh investors will not get these units. Since there is no formal side pocketing in equity funds, we are not initiating this procedure in a formal sense," said DP Singh, Executive Director and Chief Marketing Officer, SBI Mutual Fund. A CEO at one of India’s largest mutual funds confirmed on condition of anonymity that the same procedure was also being followed by other AMCs.