The total mutual fund and insurance exposure in such CBLOs amount to as much as a fourth of the banking industry bad loans, or non-performing assets.

Mumbai: After mutual funds, domestic insurance companies are also caught in the securitised debt paper tangle. Several private sector insurers are said to have significant exposure to the securitised debt papers given by promoter companies.

Investments in these debt papers are classified as CBLO, Collateral Backed Loan Obligations. It is estimated that the exposure could be in the range of Rs 25,000 crore-Rs 30,000 crore in the debt portfolio of insurance companies.

Poor quality and lapses in financial credit derivative instruments CBLO had shook the Wall Street in 2008 and triggered the global financial crisis. These instruments have made deep inroads into the Indian lending space and become a threat to the retail financial savings market.

According to industry sources, the insurance debt funds have exposure to the extent of about 8-10 per cent of their bonds portfolio in these credit derivative instruments which are backed by promoter shareholdings. These are effectively loan against shares that have dropped in market value and are therefore threatening to wipe out a significant amount of investors’ funds.

SEBI is already collating data from mutual funds of their exposure in such tricky deals that is estimated in the region of Rs 1.5 lakh crore-Rs 1.75 lakh crore and do not reflect in the pledged shares data of the exchanges.

Insurance funds’ exposure in such roundabout deals is estimated to be far more than what is conservatively pegged in the Rs 25,000 crore- Rs 30,000 crore range. The recent drop in share values is giving sleepless nights to regulatory authorities.

The total mutual fund and insurance exposure in such CBLOs amount to as much as a fourth of the banking industry bad loans, or non-performing assets.

“These fraudulent transactions have been ingeniously structured to circumvent extant Sebi and RBI guidelines on loan against shares. They have knowingly invested in illiquid securitised debt CBLOs and failed in their fiduciary duty of protecting and enhancing investors' funds,” partner with a leading consultancy firm said.

Recently Franklin Templeton Mutual Fund, which has the highest exposure among asset managers, has agreed to a standstill arrangement with Anil Ambani group companies if the value of pledged shares falls below the required level.