Sebi launches proceedings against ICICI Prudential MF, to probe officials

The country’s largest mutual fund (MF) house ICICI Prudential Asset Management Company (AMC) may not escape simply by compensating its investors in the ICICI Securities fiasco. Sources say market regulator Securities and Exchange Board of India (Sebi) has launched adjudication proceedings against the fund house to further probe misuse of investors’ money.

ICICI Prudential AMC had placed a bid of Rs 6.4 billion in the initial public offering (IPO) of group firm ICICI Securities, in which parent ICICI Bank was looking to divest around 24 per cent stake.

As the IPO was falling short of the minimum subscription, ICICI Prudential AMC is said to have placed a last minute bid of Rs 2.4 billion to facilitate its sponsor ICICI Bank.

While Sebi has already directed the fund house to repay the investors Rs 2.4 billion, it is now probing the role of top officials, fund managers, and also the parent ICICI Bank.

Investment or bailout?

• ICICI Bank looks to divest 24% in ICICI Securities’ Rs 40-billion initial public offering (IPO) 
   
• Compulsory 75% subscription was needed for IPO to succeed
   
• ICICI Securities reduces IPO size due to sluggish demand 
   
• ICICI Prudential Asset Management Company places Rs 4-billion bid on Day One of IPO
   
• Fund houses place another Rs 2.4-billion bid on last day of IPO
   
• Without the last day bid, the issue would have failed

“The directive to repay investors was to restore the loss incurred by the respective schemes due to the investment decisions. The adjudication process is to examine the violation of MF regulation committed by the parties involved,” said an official privy to the development.

Sources say Sebi’s analysis of investment pattern of ICICI Prudential AMC in the IPO points towards several lapses. For one, it is not consistent with the past pattern of the fund house in various other IPOs, including that of group companies ICICI Prudential Life and ICICI Lombard. Also, the additional bid made by the fund house was just to salvage the IPO.

Shares of ICICI Securities are currently down around 40 per cent from its IPO price of Rs 520.

Typically, Sebi’s adjudication process takes several months to complete. After an initial probe, the regulator issues show cause notices to entities that are found to be in violation of regulations. These entities are then given sufficient time to respond or present their case. Alternatively, the noticees have the option of settling the case through the consent mechanism, which is akin to an out-of-court settlement.

ICICI Prudential said it is engaging with Sebi to address the matter to the satisfaction and remains fully committed to investors’ interests.

In an email response, the fund house further said, “All investments by ICICI Prudential AMC are carried out in line with the regulatory guidelines and established processes. The investment in ICICI Securities IPO is consistent with the investments made by us in the past and there has been no deviation from the investment pattern which we have typically followed.”

Meanwhile, ICICI Prudential AMC may have to divest shares in ICICI Securities to make good the losses cause to investors. For this, the fund house may to sell 4.6 million shares (worth Rs 2.4 billion) of the broking firm. According to sources, ICICI Prudential AMC is in talks with other fund houses to sell these shares through negotiated deals so that secondary market price is not impacted.

Alternatively, the sponsor ICICI Bank could take the shares on its book. However, as ICICI Bank’s holding in ICICI Securities is already above the 75 per cent threshold meant for promoters, it may require a special exemption from the market regulator.

ICICI Prudential AMC had applied in the IPO through five of its schemes, which included ICICI Prudential Balanced Advantage Fund and ICICI Prudential Balanced Fund.

In a directive, Sebi has asked the fund house to pay the amount equivalent to the last day bid to all the five schemes. The fund house has also been asked to pay the investors who have redeemed their units from the date of allotment of shares of ICICI Securities. Further, it has to pay an interest of 15 per cent from the date of allotment to the date of repayment.