Fidelity asked to clarify on trades by Sebi

Fidelity asked to clarify on trades by Sebi

Mumbai: Global investment management group Fidelity International has come under the lens of India’s capital market regulator over trades that it has undertaken in the shares of local companies in the past year.

The Securities and Exchange Board of India (Sebi) has written to the group’s Indian mutual fund (MF) arm, FIL Fund Management Pvt. Ltd, and some of its foreign funds registered in India, seeking clarifications, said two persons familiar with the matter and who did not want to be named.

Fidelity has been asked why investors in domestic MF and foreign funds paid different prices for the same stocks even though the transactions were done around the same time.

“Sebi has sent letters to Fidelity mutual fund and some of the group’s foreign funds, asking them to explain why certain Indian stocks were bought at widely different prices for different sets of investors even though they were bought at around the same time. The matter is in the second stage of investigation," said one of the persons cited above.

“As a group, they are not supposed to prefer one set of investors over the other. In most cases, under Sebi’s probe, it has been found that clients under Fidelity’s FIIs (foreign institutional investors) in India have been preferred over the group’s investors under Fidelity’s mutual fund in India. It is a violation of the existing rules," he said.

A Sebi spokesperson declined to comment for this story.

Fidelity International said in response to queries that it maintains strict hygiene measures to ensure that there is no exchange of information among the various entities that engage in trading in compliance with regulations.

“Regulators across the globe seek information on trade data from various market participants and as a regulated entity we respond to such requests on a regular basis. Fidelity mutual fund has provided some trade-related information requested for by Sebi and no concerns have been raised," Fidelity International said in response to an email query.

According to Sebi rules, portfolio managers and MF managers are to ensure unbiased treatment of all investors. Also, FIIs are required to maintain an arm’s length from all activities or businesses of the group firms that are registered as different legal entities with the regulator.

“We would like to clarify that Fidelity does not buy or sell stocks as a group, but has individual portfolio managers appointed for managing each of the different funds. These funds or schemes are registered and regulated in different countries and invest in India as registered FIIs, while the schemes of Fidelity mutual fund invest directly," the company said.

Fidelity said it has in place stringent checks to prohibit access to information and ensure that trading orders of different funds are not shared internally and avoid conflict of interest. The checks, it said, also ensure “best execution" and protect interests of investors “at all times".

Fund managers have a fiduciary responsibility while dealing with clients’ money, said a lawyer at a Mumbai-based consulting firm who handles many FII clients in India.

“When Sebi finds a pattern in dealings where securities have been bought or sold during the same time by the mutual fund entity and the FII entity under the same group, it is investigated," he said. “Sebi may ask why mutual fund managers bought the same stocks at a higher price around the same time when an affiliate of the same group bought them at a lower price. If there are several such dealings, it may raise a case of conflict of interest and regulators take such things seriously."

As a part of its market surveillance, Sebi, on a regular basis, collects information from various exchanges and marketplaces. If it comes across any discrepancy in the securities dealings by any entity, it sends letters seeking clarifications, marking the so-called second stage of the investigation.

In the second stage of such an inquiry, an entity is supposed to justify its dealings to Sebi.

If the regulator is not convinced by the justification, it proceeds to the third stage by issuing a show-cause notice to the entity. Once the violation is established, Sebi initiates the adjudication process and penalizes the entity.

The Fidelity inquiry is currently in the second stage.

India’s MF industry manages funds worth a total 7.43 trillion. Fidelity MF, the Indian arm of Fidelity International, manages assets worth 9,346.56 crore belonging to at least 1.7 million investors.

Fidelity International manages client assets worth at least $300 billion (Rs 13.3 trillion) for investors across the UK, continental Europe, the Middle East and Asia-Pacific. It has at least seven million customer holdings and manages more than 750 equity, fixed-income, property and asset allocation funds.

There are 1,729 FIIs and their 5,912 sub-accounts registered with Sebi. Fidelity is one of the largest FIIs.

According to Sebi, Fidelity has at least 10 registered FII funds. As per bulk and block deals reported on the stock exchanges, some of these funds have dealt in Indian stocks worth 41.28 crore through these transactions since April 2010. These may not cover all trades.

Bulk deals cover only those transactions where the quantity of shares bought or sold is at least 0.5% of the company’s equity. Block deals apply to trades of a minimum 500,000 shares, or 5 crore in value. Such trades may take place at levels that vary from the market price.

In the past year, Fidelity MF has bought Indian stocks through eight schemes.

“There are several instances where a particular stock was bought at different prices by Fidelity’s FII funds and Fidelity mutual fund almost during the same period," said the second person cited above.

Mint could not ascertain the stocks in which the concerned trades have taken place.

The company said that under the Fidelity model, individual portfolio managers are given the flexibility to manage their portfolios at their own discretion as long as they act in accordance with the applicable investment guidelines and within the risk-management framework.

“The buy and sell decisions of different funds are made by their respective portfolio managers after consideration of relevant factors in each case, such as research reports including sector, competitor and macro-research, investment strategies, cash position, and investments limits," Fidelity said.

“Further, buy and sell decisions are also affected by market events, inflows and/or redemption pressures faced in the scheme/fund. Therefore, each manager’s reason to buy and sell even the same scrip may be different. There will be times when one portfolio manager may buy a particular stock while another portfolio manager may sell the same stock," the firm added.

It further said that no stocks were bought by different FII entities and/or domestic schemes at different prices at the same time. “The price would vary, depending on the date and time of trade, market movements and liquidity," it added.