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.