Asking a Friend for Investment Advice? Mutual Funds Sahi Hai - 1
The recent series of advertisements by AMFI (Association of Mutual Funds in India) under the banner ‘mutual funds sahi hai’ (MFSI) have been well received. One of them is humorous which makes it memorable. The timing was perfect too—it coincided with the booming stock market, combined with lack of investment alternatives (a low interest rate regime and malpractices in the real estate market...
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  • Mutual Fund Saahi Hai? SEBI’s Recent Action against ICICI Pru AMC Raises Huge Questions about This Claim
    If you are a football fan, ‘mutual fund saahi hai’ the tagline of the mutual fund (MF) industry’s excellent advertising campaign has probably been drilled into your consciousness. But, if your football watching is not followed up by reading the pink papers in the morning, you would have missed the fact that the market regulator has pulled up two biggest fund houses in India for not very ‘saahi’ actions. And this has a bearing on your future investment decisions. 
     
    A few days ago, the Securities & Exchange Board of India (SEBI) asked HDFC Asset Management Company Ltd, (HDFC AMC) to cancel the Rs150-crore private placement made to 140 of their privileged distributors, in April 2018, ahead of its initial public offering (IPO). The shares were offered to these distributors at Rs1,050 each, while the price band for the forthcoming IPO is Rs1,400-1,500, giving them a huge profit on subscription. The issue here was creating a conflict of interest. The distributors were seen to be influenced into give a preference to HDFC Mutual Fund’s schemes over those of others which is detrimental to investor interest—a far from ‘saahi’ action. SEBI has asked HDFC AMC to return the money to distributors at 12% interest, leading to a terrible loss of face and yet another delay in its IPO. 
     
    The other case is more serious and complicated. On 3 July 2018, SEBI ‘advised’ ICICI Prudential Asset Management Company (ICICI Pru AMC) to pay Rs240 crore to its five MF schemes that had subscribed to the IPO of ICICI Securities on the last day of the issue. The money has to be returned with 15% interest (calculated from the date of allotment to the actual payment). Further, SEBI wants the AMC to find out which investors, in each of these schemes, have redeemed their investment and compensate them too. 
     
    We know all this from media reports. We learn that SEBI leaked its ‘advice’ to select media houses in Delhi within minutes of being sent to the fund house. There is no public information about the decision on SEBI’s website; so there is no way of knowing what facts were taken into consideration, or the scope of the investigation. It is not clear if SEBI has thought through the further consequences of its order. The ‘advice’ is serious and it adversely affects a large segment of retail investors who have put their faith in the ‘mutual fund saahi hai’ proposition and others who invested directly in the ICICI Securities’ IPO. Until one can force the regulator to follow basic transparency and disclosure that it mandates for regulated entities, we cannot get all the answers; but here are some important facts and issues: 
    ICICI Pru Mutual AMC has been asked to refund Rs240 crore, to five schemes. But, according to The Mint, it had invested another Rs400 crore on the day the issue opened. So, has SEBI concluded that losses on the earlier investment are okay because it was a ‘reasoned and researched’ decision and only the additional investment on the last day is a bailout? 
     
    The big problem is this. If the bailout investment is to be refunded why should ICICI Mutual Fund investors be the only beneficiaries? An investor has written to us saying that if the Rs240-crore investment is pulled out, ICICI Securities fails to meet the eligibility criteria under Section 26(2) of the SEBI Issue of Capital and Disclosure Requirements (ICDR) Regulations. Its IPO document states the following: “Eligibility for the Offer Our Company is eligible for the Offer in accordance with the Regulation 26(2) of the SEBI ICDR Regulations which states the following: “An issuer not satisfying the condition stipulated in sub-regulation (1) may make an initial public offer if the issue is made through the book-building process and the issuer undertakes to allot, We are an unlisted company, not satisfying the conditions specified in Regulation 26(1) of the SEBI ICDR Regulations and are therefore required to allot at least 75% of the Net Offer to QIBs. Further, not more than 15% of the Net Offer shall be available for allocation on a proportionate basis to Non-Institutional Bidders and not more than 10% of the Net Offer shall be available for allocation on a proportionate basis to Retail Individual Bidders in accordance with the SEBI ICDR Regulations, subject to valid Bids being received at or above the Offer Price. In the event we fail to do so, the full application money shall be refunded to the Bidders. (emphasis added). Hence, we are eligible for the Offer under Regulation 26(2) of the SEBI ICDR Regulations. Further, in accordance with Regulation 26(4) of the SEBI ICDR Regulations” This means that the entire issue ought to be cancelled and the money returned to investors.  
     
    But can the matter end there? If ICICI Securities has to return the money to all investors and cancel the issue, it will bear a loss of 41% which the scrip has suffered since it got listed and a 15% interest that SEBI has already ordered to be paid for the five schemes. If cannot bear the loss, their promoters, mainly ICICI Bank, will have to pump in capital. This could blow into a bigger problem than is indicated by a seemingly pro-investor ‘advice’ from the regulator. SEBI has not bothered to give us a response to this either; but it is probably a fit case for class action by those who invested in ICICI Securities’ IPO and are sitting on a huge loss.  
     
    If ICICI Pru AMC accepts SEBI’s advice without a challenge, can’t the trustees of the AMC be held responsible for allowing a ‘bailout’ of a sister entity and jeopardising investor interest? SEBI’s rules cast a serious responsibility on them. 
     
    ICICI Pru AMC’s net profit for FY17-18 was Rs625.55 crore. If it has to buy back Rs240 crore + interest, it would nearly half its profit for the year. Will this impact the performance and bonuses of top management and fund managers? Will the trustees ask questions?
     
    We learn that ICICI Pru AMC has regularly dealt in the shares of ICICI Bank and also made big investments in both, ICICI Pru Life Insurance and ICICI Pru General Insurance, when they went public. This is the only case where there is a loss and SEBI has issued a secret advice to ‘refund’ money. So is it SEBI’s case that investment in sister entities should always be profitable for mutual funds? Or does it have other facts and details to conclude that it was a bailout of an over-priced issue that can be proved before a court or tribunal? SEBI needs to be forthcoming to the public. 
     
    Industry sources also say that SEBI’s letter of ‘advice’ is a tactic to pressure regulated entities to accept its ‘pro-investor’ orders without demur to avoid a larger investigation. In this case, it may lead to loss of confidence about the regulator and fund industry itself which ought to be SEBI’s primary concern. After all, bailout by related entities is a serious issue and at the centre of the bad loan saga that the government is struggling to resolve. 
     
    ICICI Pru AMC is the largest mutual fund house in the country with assets under management of Rs3.10 lakh crore. HDFC AMC, with Rs3 lakh crore under management, is the second largest fund house in India. So how ‘saahi’ are their actions? Does it worry you more than a little about the entire industry giving itself an excellence certificate with a ‘mutual fund saahi hai’ tagline? In fact, this is not a case that can be buried with a mere secretive ‘advice’. SEBI has to order a full-blown investigation, hear both sides, consider facts and follow up with a judicial order. This is not merely an issue that affects India’s largest mutual fund companies, but one that involves the trust of the investing public. It is a pity that SEBI Chief Ajay Tyagi, who has taken several interesting decisions lately, has failed to understand the fundamentals of disclosure and transparency that is the basis of the regulatory system that India has adopted.

     

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    COMMENTS

    tapan sur

    2 years ago

    Financial misselling by distributors, banks, agents, lead managers & so on should pay heavy for their misdeeds, rather than only asking them to pay back money at 12% interest to the investors or whoever. Only then such misselling will stop.

    Swaminathan Ramachandran

    2 years ago

    I missed out NOT in the case of BSE and NSE. They do not advertise as aggressively as our friends AMFI

    Swaminathan Ramachandran

    2 years ago

    In my view the ad itself is unwanted and cost the MF holders as it can not come from other sources of the AMFI . Not only that they have too many varieties of Ads. Not only that some versions are , in my view , plain right , objectionable. Eg talking through a classical concert, talking in a Yoga class etc. Even Colgate and HUL have one or just 2 types of ads repeated. The MF fund houses are sloshing with surplus money. Some even hold cash not being able to deploy ! Under such circumstances Sah Hi hai is not right! I suspect some unholy nexus between Ad agencies and AMFI ; May be some staff have vested interest. BSE or NSE does advertise aggressively as is done by AMFI.

    Bikash Kumar

    2 years ago

    It’s very difficult to update while wanting to subscribe I went 5 th time to subscribe the space on phone number do not allow.

    Amit Manchanda

    2 years ago

    Hats off for providing this perspective in detail and in a very structured manner. Many takeaways for me as an investor as well as a small advisor. Brokers,fund houses, media - 90%-95% of all the talk is why mutual fund sahi hai. No one tells k har mutual fund sahi nahi hai. True asset aggregators and manipulators these big fund houses are. Takes courage to write plain truth with such conviction. A big of 'backward research' from your article helped me pull out more skeletons such as HDFC mutual fund did private placement at a huge discount EVEN AFTER it was barred from allotting such shares under a separate quota to the distributors earlier.

    Atish Kumar

    2 years ago

    The rating agencies should take note... In case a company is likely to get into bailing out because they've parents getting into loss making misadventures, there funds must be rated low.

    jaideep shirali

    2 years ago

    It is shocking that ICICI Bank and all its associate/ subsidiary companies seem to show as much professionalism as a "lala" run concern, as they say. It is at times like these that regulators should be allowed (and I mean that) to take a tough stand, to prove to investors that they mean business. Disallowing a last minute investment, but permitting the earlier one, does not make sense, the ICICI Sec issue should have been allowed to fail. In a way, ICICI is following the lead of the Central Govt which uses LIC as a lender or investor of last resort, its policyholders be damned.

    Venkatraman Narayanan

    2 years ago

    1. Your statement -" ICICI Pru AMC’s net profit for FY17-18 was Rs625.55 crore. If it has to buy back Rs240 crore + interest, it would nearly half its profit for the year. Will this impact the performance and bonuses of top management and fund managers? Will the trustees ask questions?" --- Is not factually correct. Please work out the math. The loss is 40% of invested value only which will be in the range of 80 to 100 crores, based on how they can resell the stocks at.

    2. I am a retail investor in the shares of ICICI Sec. I have been trying to raise a complaint with SEBI on SCORES on ICICI Bank mispricing the issue and colluding with IPru AMC for the same. The SCORES system just does not work. Have tried to submit the complaint for the last 7 days;

    3. All that be so, from a fundamental standpoint, find ISec a very good buy at 300

    RAMANATHAN MUTHIAH

    2 years ago

    I think....MF's are fake. Only the AMC's and distributors gain from investors. And, not investors gain any amount apart from this there is GST too, so better redeem all funds and deposit in banks are invest in gold ...better you take high risk go for shares instead of MF's. Am working in that concern, so I know how R&T's get and gained for several years, AMC's huge salary and distributors commission...think not once or twice...think many and redeem the hard earned money otherwise, invested principal will goona...out..

    Saurabh Shrivastava

    2 years ago

    People trust their advisor and believe in this advise for investment in various schemes.
    As after paying a expense and getting good fund management and better governance will yield them better tax efficient returns than FD ( a investor believe) .
    However incidence like this will deter investors old and new alike.
    All the scheme has performed far lower than this benchmark and peer since January till now.
    Peoples hard earned money has been taken for toss.

    Abhishek Singh

    2 years ago

    I think no MF or AMC can give high return without creating new debt in circulation that's the rule of Finance.

    Natural resources are limited or unlimited decide first! Because printing money is unlimited

    chandrashekhar mahadik

    2 years ago

    guide whether to continue with sip or stop temporarely

    Sachin Purohit

    2 years ago

    This also brings in a bailout giant called LIC. It is holding a huge corpus of premiums by ordinary policy holders. A government insurance company is a perfect case of a bailout tool. Just recently it has decided to buy IDBI Bank's stocks. This seems to be a clear case of bailout using public money.

    Ramesh Poapt

    2 years ago

    The issue is now largely public. ICICI AMC must compensate investors as advised by
    SEBI. There will be further contamination otherwise. There are many serious issues
    with MF working. SEBI has warned MFs for taking huge overdraft temporarily, in debt
    schemes. In the past, DWS and JPM did wrong in debt schemes,caught by SEBI.
    MFs to be barred to invest in co.s where they have vested interest. HDFC MF was also
    pulled up for trades. This was reason for delay in its clearance. But this are known
    cases. There are many known/unknown practices detrimental to investors' interest.
    Though it may not be proved in all the cases. SEBI overlooks so many things so that
    trust of investors not shaken. With huge AUM, anything cane be managed in small
    scale.

    REPLY

    Abhishek Singh

    In Reply to Ramesh Poapt 2 years ago

    Nice text by Ramesh !

    PRAMOD SONI

    2 years ago

    I'm new to your web site, but I'm highly impressed the way you have put in such a simple way for small time investors like me. I would surely strongky recommend your page to all investors .

    REPLY

    Sachin Purohit

    In Reply to PRAMOD SONI 2 years ago

    MoneyLife sahi hai!

    What Can We Learn from the Recent Returns of Debt Mutual Fund Schemes?
    Managers of debt mutual fund (MF) schemes have been very active in the past several months, as fears of a rise in interest rates had a major impact on the returns of their schemes. Long-term debt schemes delivered negative growth in the past one year, the worst in the entire debt scheme category. Among the short-term debt schemes, those which had invested predominantly in government...
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