INSUBCONTINENT EXCLUSIVE:
Even as the fate of India's shadow banks swings precariously between unexpected defaults and sudden downgrades, there's trouble brewing
in another unlit corner of finance.Exotic funds, designed for wealthy investors, have grown to $40 billion from nothing in just seven years,
expanding by 71% in the 12 months through March
Since September, when the surprise bankruptcy of infrastructure financier IL-FS Group triggered a refinancing squeeze for property
finance without storing up trouble for the future
In this case, accidents may occur because of a weak property market, leveraged developers and their troubled financiers, the shadow banks
Since nonbank finance companies are facing a liquidity shortage of their own, they're passing on their illiquid, poor-quality builder loans
to bespoke funds by indicating 20%-plus returns to investors
Distributors aren't complaining
While the market regulator has put a leash on the expense ratio of publicly distributed mutual funds, there isn't even a strict disclosure
requirement on the 6%-10% fees that can be earned upfront for selling pipe dreams privately to 1,000 people, each of whom has to be able to
commit at least $143,000 to qualify.That's a ridiculously low threshold for a buyer-beware product free to invest in unlisted securities
Whether potential IPO candidates, young startups, distressed assets, commodities or builder debt, alternative investment funds take complex,
risky bets.An economy growing at its slowest pace in five years isn't exactly a cornucopia of easy money
Truly wealthy individuals, who have the stomach for venture capital, private equity or hedge fund-type opportunities outside of public
markets, have trained investment staff who can evaluate exotic funds for their family offices
Instead, these private pools are being hawked to the middle class as get-rich-quick schemes
Relationship managers at banks are pushing them even to unwitting octogenarians who just need vanilla tax-free bonds to generate a regular
trouble ahead.After inflicting embarrassing losses on mom-and-pop investors, India's mutual funds are cutting back their exposure to debt
securities of shadow financiers
However, for the borrowers it means finding other options for as much as $19 billion in funding that must be repaid in the current quarter
No wonder the fees for distributors are so juicy.It's time the market regulator woke up because there's every risk that middle-class
investors will end up being hurt
They're picking up nickels in front of a steamroller
With unsold housing inventory at an all-time high of almost 1.3 million homes across 30 cities, and developers needing twice as much
operating profit as they're currently making just to service their debt, shifting the problem to unsuspecting retirees is really no solution
to India's funding crunch.(Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services
He previously was a columnist for Reuters Breakingviews
He has also worked for the Straits Times, ET NOW and Bloomberg News.)Disclaimer: The opinions expressed within this article are the personal
The facts and opinions appearing in the article do not reflect the views of TheIndianSubcontinent and TheIndianSubcontinent does not assume
any responsibility or liability for the same.
