HDFC Mutual Fund's perks to distributors make industry see red

Fund house has made equity share placement to key distributors ahead of its IPO; rivals see it as conflict of interest

The Rs 23-trillion mutual fund (MF) industry is seeing red over equity share allotment made by the country’s most profitable fund house HDFC MF to the distributor community, which continues to remain a vital link between investors and asset management companies (AMCs).
 
Ahead of its much-awaited initial public offering (IPO) — only second by an AMC so far — HDFC MF, which manages assets worth over Rs 3 trillion, has made a private placement of shares worth Rs 1.5 billion to 140 distributors. While in its offer document filed with the Securities and Exchange Board of India, the asset manager has clearly made provisions for such an allotment, industry players see this as a distortive trade practice.
 
According to the share application form, an allotment of 1.44 million shares to distributors has been made at Rs 1,050 per share of a face value of Rs 5 each. This, many feel, is at a deep discount to the IPO price. To be sure, the price band for the maiden offering will only be finalised days before the issue opens.  However, according to reports and investment banking sources, the IPO price range is expected to be between Rs 1,400 and Rs 1,500, which will value the fund house at as much as Rs 307 billion. At the allotment price for distributors of Rs 1,050, HDFC MF is valued at Rs 215 billion.
 
“This is a case of conflict of interest. Clearly, the distributor will be biased towards the fund house due to the equity holding. Ideally, the distributor should be loyal to the customer. Such a practice could lead to mis-selling. Still a large portion of
 
MF assets come via distributors,” said a top official with a rival fund house.
 
Some other industry players also raised concerns over the move.
 
An email sent to HDFC MF seeking comment on the issue went unanswered.
 
Sources say some players have already approached Sebi over the issue to seek clarity on whether such a practice would be acceptable. The issue gains significance as more players in the industry could soon go public.
 
In October 2017, Reliance MF became the first AMC to come out with an IPO. Other large players such as ICICI Prudential MF and UTI MF, too, intend to list in the near future.
 
HDFC MF’s private placement offering to ‘empanelled distribution partners’ was open for subscription between April 21 and April 26. Sources say the offering saw huge demand and the fund house subsequently allotted shares to 140 distributors. The shares allotted to distributors are subject to one-year lock-in.
 
Distributors are a key cog in the wheel for the MF industry, which has managed to reach only a tiny fraction of the country’s population.
 
In the case of HDFC MF, nearly 70 per cent of HDFC MF’s total assets under management (AUM) come from distributors, while the rest comes from direct plans, where an investor deals directly with the fund house. In the equity segment, the distributors’ share is even more at 85 per cent of the AUM. In its offer document, HDFC MF has underscored the importance of distributors to its business.
 

Nearly a fourth of the AMC’s AUM came from top 200 distributors (excluding banks) in 2017-18. Some feel the perks to distributors are necessary.
 
“Distributors are also partners in an AMC’s growth and therefore, some incentive given to distributors is justified,” said Manoj Nagpal, chief executive officer (CEO), Outlook Asia Capital.
 
HDFC MF also wanted to have a special quota for distributors in its IPO. The proposal, however, is said to have been turned down by Sebi.
 
“HDFC MF owes its success to its distributors. Therefore, to reserve shares for them in the IPO is a good way to acknowledge their contribution. This is not a stock option,” Dhirendra Kumar, CEO, Value Research, had earlier told Business Standard.
 
In May, Sebi’s website stated that HDFC MF’s IPO had been “kept in abeyance for examination of past violations”. The fund house was aiming to launch the IPO in the last quarter. Investment bankers say the issue will be ready to hit the market as soon as it gets Sebi’s approval.
 
Parent Housing Development Finance Corporation (HDFC) and the UK’s Standard Life Investments currently hold 57 per cent stake and 38 per cent, respectively. HDFC will offload 4 per cent, while Standard Life will sell 8 per cent stake in the IPO.