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MUMBAI : The markets regulator has found prima facie evidence that Invesco Asset Management India Pvt. Ltd has executed trades on behalf of offshore funds, violating norms governing mutual funds in India, two people with direct knowledge of the matter said.

Securities and Exchange Board of India (Sebi) norms bar mutual funds from doing business with offshore funds other than offering advisory services. Further, the domestic and offshore businesses need to maintain separate accounts, personnel and operations, the rules state.

“In the case of Invesco, the domestic mutual fund team executed trades on behalf of offshore funds (focusing on Indian debt). This violates Sebi mutual fund regulations 24 (B)," one of the two people cited above said seeking anonymity.

“This is where the Chinese wall was breached in terms of execution of trades. At all times, the operations of a portfolio management service (PMS) and the domestic mutual fund have to be kept separate. The violation has been corroborated by an independent investigation commissioned by the fund house, too," the second person said, also requesting anonymity.

Email queries sent to a spokesperson for Invesco in India on Monday and subsequent reminders on Tuesday did not elicit a response. Email queries sent to a Sebi spokesperson also remained unanswered.

Asset managers run their offshore funds under the PMS.

The lapses first surfaced when a whistleblower alleged mismanagement of fixed income schemes by Invesco Asset Management India between 2018 and 2019. The complainant alleged the fixed income team of Invesco MF identified certain debt papers, such as Dewan Housing Finance Ltd, that were to come under stress after the default by infrastructure financier IL&FS. The team then went on to transfer the exposure to their offshore funds.

“The total value of such transactions is upwards of 200 crore," said the first person.

Transferring securities from one scheme to another is called inter-scheme transfer, a fairly routine practice till 2020. However, the regulator barred such transactions starting January 2021 because such transactions merely shifted the risk from one fund to another without investors’ knowledge.

“The whistleblower filed the complaint with Invesco management, its US-parent, Sebi, US Securities Exchange Commission (SEC) and Securities and Futures Commission (SFC, Hong Kong’s markets regulator) in July 2021. Following this, Sebi initiated an examination of the minutes of investment committee meetings of data related to its debt schemes from 2017 to 2020. Separately, Invesco initiated an independent probe to look into the allegations," said the second person.

“Even SFC has sent queries to Invesco," this person added.

Both Invesco’s independent probe and Sebi concluded that mutual fund norms were breached in failing to keep the operations of domestic and PMS separate, the first person said.

“Sebi is likely to send notice to the fund for failing in its fiduciary role and breaching norms," this person added.

In its defence, Invesco has argued that there hasn’t been any loss to investors and violations of the separation of PMS and domestic operations are fairly widespread in the industry.

“Invesco’s PMS operations manage more than 9,000 crore. So a 200 crore exposure is not much. Further, no harm has come to domestic investors," said a person aware of Invesco’s thinking. In an earlier statement, Invesco said it seeks to maintain excellent relations with regulators and cooperate with regulatory inquiries, including examinations or investigations.

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