Apparently, Securities and Exchange Board of India (Sebi) has found that ICICI Prudential Asset Management Co. (AMC) Ltd bailed out the ICICI Securities Ltd initial public offering (IPO), and short-changed its unitholders in the process.
The IPO would have devolved if the institutional portion of the IPO book wasn’t fully subscribed. And so, according to a leaked communiqué from Sebi, ICICI’s mutual fund arm put in a last-minute bid of ₹ 240 crore. It had already bid ₹ 400 crore on the first day of the book building process, which means its total bids amounted to over 55% of the size of the institutional book. Including the anchor book, the size of ICICI Prudential Mutual Fund’s bid was about 22% of the total allotment to institutional investors.
Based on all this, some have concluded that Sebi has an open and shut case. But here is the big problem.
There is no way to confirm any of this because Sebi hasn’t communicated this through an order. It has merely written a letter to ICICI Mutual Fund directing it to return the amount it bid on the last day to the schemes from which the funds came, along with an interest of 15% from the date of allotment of shares.
The letter, a so-called ‘advice to comply’, was leaked to a few journalists, and the above sequence of events is from news reports that rely on it.
Has ICICI Mutual Fund been given an opportunity to present its version or explain? Has it been told which regulations or rules it has violated? What lessons does the episode hold for other fund houses?
We don’t have answers to a plethora of questions that arise, because Sebi, in its wisdom, has chosen to give ICICI Mutual Fund merely some ‘advice’.
Mario Puzo’s Godfather famously said, “I’m going to make him an offer he can’t refuse". Sebi’s ‘advice to comply’ letter almost sounds like “I’m going to give you advice you can’t refuse".
Mint reported in 2011 that two mutual fund companies were forced to compensate investors, through similar directives.
Thankfully, securities lawyers say ICICI Prudential AMC can make an appeal against the directive with the Securities Appellate Tribunal. Technically, then, it is advice it can refuse.
In fact, this would be the most logical thing to do. To not protest would amount to a tacit admission that it misused funds deposited by its unitholders to bail out a sister company’s IPO, and ultimately its parent company, which raised ₹ 3,500 crore by selling shares in the IPO.
The day ICICI Prudential AMC received Sebi’s advice, news reports said another fund house, HDFC Mutual Fund, received directions from the regulator asking it to cancel the shares it allotted to certain distributors ahead of its proposed IPO. It wants the fund house to return the money raised from them and pay 12% interest for the period it has access to the funds.
A report by the Press Trust of India states, “According to industry participants, the distributors, who subscribed to the shares of the fund house, may give biased advice because of their equity stake in HDFC Asset Management Company. This has prompted Sebi to ask the fund house to scrap this pre-IPO placement."
Should we even discuss the merits of this argument without knowing if this is what led to Sebi’s action? That would be naive, to say the least.
It is pitiful that the markets regulator can’t bring itself to provide formal guidance on matters that have implications for a number of market participants. It sends all sorts of worrying signals.
If it indeed found ICICI Mutual Fund to have violated any of its norms, does it not have the resources to go through with a formal investigation before issuing an order? Or does it believe an order would have been challenged, while ‘advice’ will be complied with?
Whatever the reason, it’s safe to say that this behaviour does not behove the premier regulatory body in the country. Also, note that it’s been over 30 years since Sebi came into being, and this column has repeatedly said that Sebi’s main role now is to ensure good enforcement of its various rules and regulations. In this backdrop, this new-found interest in giving advice, as opposed to issuing orders, is troubling.
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