Two complaints of high net worth individuals have shown that the bank has possibly flouted rules and taken signatures on blank forms to execute transactions to churn the mutual fund portfolio and earn huge commissions

Over a year back we wrote about how HSBC Bank took Ms Suchitra Krishnamoorthi, a well-known singer and actor, for a ride over a five-year period by promising an extravagant assured return of 24% from mutual funds as well as insurance. (Read: HSBC loots Suchitra Krishnamoorthi after big promises of 24% returns) However, far from delivering such returns HSBC Bank continuously churned her portfolio. In a similar case, another high net worth individual (HNI) based in London, found out abnormal churning of mutual funds in his portfolio that was managed by HSBC bank. Both are HNIs who were made to sign a power of attorney (POA) in favour of HSBC to handle their investments smartly. They believed in the brand name of HSBC. Most importantly they trusted their banker, like they would trust their doctor.

Moneylife has reviewed  Ms Krishnamoorthi’s mutual fund transactions and found massive malpractices by HSBC

• • Her mutual fund portfolio was continuously churned resulting in high transaction costs in the form of entry load and exit loads. While several transactions led to huge losses for her, HSBC was the gainer of commissions.
   
• • Out of the 75 transactions made, nearly 60% of the transactions were in equity schemes kept for a period less than one year. Here investments were made in schemes like HSBC India Opportunity Fund and HSBC Mid-cap Equity Fund, both of which have been underperformers. Apart from these, majority of the investments were made in balanced schemes of HDFC Mutual Fund, ICICI Mutual Fund and Sundaram Mutual Fund.
   
• • The worst part of the transactions came around the market peak in November 2007 where nearly Rs3 crore was invested across five schemes on a single day which included over Rs1.67 crore invested in three sector schemes—ICICI Prudential Infrastructure Fund, Sundaram CAPEX Opportunities and Reliance Diversified Power Sector. Nearly Rs50 lakh was invested in Sundaram CAPEX Opportunities which has a current corpus Rs200 crore.
   
• • The investments from all sector schemes were withdrawn between June and August 2010 at a loss of nearly Rs40 lakh, almost half her initial investment. The schemes from ICICI Mutual Fund and Sundaram Mutual Fund went down by nearly 50%. The other schemes were also withdrawn at a value 15%-30% lower resulting in a total loss of Rs86 lakh. These schemes included JP Morgan India Equity Fund (a poorly-performing scheme) and IDFC Premier Equity Fund.
   
• • Surprisingly, in the whole portfolio there was not a single debt scheme and just one liquid scheme— HSBC Cash Fund. Ironically, commissions paid on debt schemes and liquid schemes are much lower.
   
• • Ms Krishnamoorthi says an entry load amounting to over Rs29 lakh was deducted from her investments. If the bank had opted to only invest her amount of Rs3.60 crore in performing equity schemes for the long term, without any further buying or selling, the entry load of 2% at that time would have worked out to just Rs7.20 lakh.
  
  Similarly, when the NRI investor examined his portfolio managed by HSBC, it was found that there was continuous buying and selling without any cogent reason. The value of the portfolio was unnecessarily eroded because of payment of exit load.

According to data from mutual fund industry association AMFI, for FY11 and FY12 HSBC earned the highest mutual fund commissions amongst all distributors. In FY11 it earned a commission of Rs118.97 crore and in FY12 it earned a commission of Rs153.98 crore even when the industry was down in the dumps. Another bank just below HSBC in terms of commissions earned is, not surprisingly, HDFC Bank.

The modus operandi for HSBC in both the cases has been a continuous churning by the “portfolio management service” by taking a power of attorney (POA) and used pre-signed blank letter of intents (LOIs) to execute the transactions on behalf of the clients. The London-based NRI mentions that he was asked to sign blank LOIs. On asking the bank to provide copies of the LOIs, he found that certain forms were not signed by him due to a mis-match in signature. He has even provided forensic evidence to prove that he has not signed on certain documents.

In Ms Krishnamoorthi’s case, she says “LOI’s provided by the bank to me clearly show that investments were made without my corresponding signature or mandate to every debit made by them in my account as is the lawful requirement. In fact inspite of my repeated requests they have refused to provide me copies of LOI’s between 2008 and 2010 – the period in which I incurred maximum loses and my portfolio repeatedly reshuffled without my knowledge or consent”.

Ms Krishnamoorthi in her letter to the banking ombudsman mentions that on seeing around Rs3.60 crore being deposited to her account (as a part of a divorce settlement), “HSBC bank approached me with a proposal that they could handle my investments. Since I hold such large balances, for the same they should be appointed as portfolio managers to handle my investments. They even showed me a very rosy picture of investments which they had made for others and assured me that they would get better returns for me.” The officers of HSBC Bank also informed her that “portfolio management is one of the prime businesses of HSBC Bank other than banking” and assured her “a minimum of 24% p.a. return” on her investments. However, following her complaint to the to officials of the bank she said that “HSBC Bank now claims that they have not acted as portfolio managers but merely advised me on the management of my wealth.”

Ms Krishnmoorthi refutes this saying, “This is a false claim as they have clearly performed the duties of portfolio managers as stated by law and as per the power of attorney obtained from me in 2004.” Apart from mis-handling of her investment portfolio, the bank mis-sold her insurance products promising 24% returns, insisting her on taking a loan instead of withdrawing funds without even disclosing that she was entitled for a smart loan.

As we have mentioned several times in the past, scamming bankers (now being called banksters) look to earn for themselves the highest commission no matter that the investment would terrible for the clients. Recently, we reported on the how senior citizen Maganlal Sharma was duped by his bank into purchasing a mutual fund scheme.  (Read: Mangelal Sharma gets his Rs7 lakh back—another Moneylife victory) Thanks to Moneylife’s efforts, he got back his money; however, others are not so fortunate. Moneylife Foundation recently wrote to the Reserve Bank of India (RBI) on the mis-selling by banks. (Read: Moneylife Foundation memorandum to RBI on mis-selling by banks) If you have been a victim of mis-selling by banks do mail your complaints to us at [email protected]

But another striking irregularity has emerged as per the findings as brought to our notice by the other investor is that HSBC Bank was merely acting as portfolio managers and in fact may not have any regulatory authorisation. Not surprisingly, the illegal transactions have earned the bank huge commissions. When the London-based HNI sought legal advice into to this matter with two separate law firms, they mentioned that HSBC Bank has not complied with the portfolio management service (PMS) regulations as laid down by the Securities and Exchange Board of India (SEBI). In order to manage funds or even advice clients the bank was required to obtain a portfolio manager’s license from SEBI.

Even though HSBC has taken a POA to indemnify itself, one of the law firms mention that the bank is still not authorised to provide such portfolio management or advisory service. Along with this, HSBC Bank has not complied with other regulations according to the law firm.