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Credibility crisis for JP Morgan AMC

The fund house faces an uphill task to restore investors' faith; remaining on mute mode can't be the option for the fund house

Chandan Kishore Kant  |  Mumbai 

Image via Shutterstock
Image via Shutterstock

A little over a month has passed since the Amtek Auto episode broke out late August involving JP Morgan (India) AMC's two schemes - JP Morgan India Treasury Fund and JP Morgan India Short Term Income Fund.

The two schemes, put together, had an exposure of about Rs 200 crore or about 7 per cent of their total asset under management (AUM) to Amtek Auto's debt papers as on 31 July. This investment had a coupon rate of 10.25 per cent - quite higher than other such papers, with a maturity date of 20th September, 2015.

ALSO READ: Amtek episode causes dent in JP Morgan AMC's assets

However downgrades by some rating agencies in August stoked fear among investors as the net asset value (NAV) of these schemes nose-dived 1.7 per cent and 3.4 per cent in a single day, which was quite unusual for such schemes.

Also, JP Morgan's response to the crisis have not been above board. Allowing select corporates to redeem units before JP Morgan AMC 'gated' the redemptions to not more than 1 per cent of the total underlying units, going on silent mode (which still continues) have not just resulted in heavy redemptions from these two schemes but have also affected the credibility of liquid money market schemes offered by mutual fund houses. Investors have now turned wary of investing in schemes which are running credit risk.

ALSO READ: Lenders turn the heat on Amtek Auto

As Amtek Auto failed to pay the schemes on debt papers' maturity day, JP Morgan AMC was forced to segregate the assets of its schemes, under its plan 'B', after getting approval from its unit holders - thereby declaring two different NAVs for its two troubled schemes.

But more than the exposure of Rs 200 cr to Amtek Auto, the handling of the crisis by JP Morgan AMC has also come under severe criticism. Almost all media queries to the fund house met with a standard response : "We do not want to comment."

Investors are justifiably worried. The ripple effect are now being felt by other fund houses. Investors are asking a lot of questions as they are worried about their investments in debt funds. Clearly a case of one bad apple spoiling the entire bunch.

And sensing the crising brewing in the industry, market regulator SEBI has also reportedly told fund houses to be watchful about the instruments they invest in. It will not be surprising if SEBI initiates a probe very soon. After all, protecting the rights of the investors is the top priority for the regulator.

This brings us to a more important question.What signal has JP Morgan AMC sent to investors in the manner in which they handled this issue?

Lack of transparency has not just put their credibility at stake but has also impacted the overall mutual fund industry. The industry is on the back foot and confidence of investors in some categories of mutual funds is certainly shaken.

JP Morgan AMC's peers believe that the fund house could have handled the Amtek Auto issue better to infuse confidence among investors. The decision to cap the redemption limit was the beginning of the mishandling of the crisis. The Rs 200 crore default may not have been called a crisis at all if the fund house had not behaved in a suspicious manner. Transparency went for a toss, communications completely halted and speculations re-surfaced that Amtek will trigger JP Morgan AMC's exit from India - another foreign entity to wrap up its India business.

The course JP Morgan AMC took did not match with the core philosophy of a mutual fund as a investment product . Mutual fund products, by all means, are one of the most transparent financial products currently in India. The fund house did not entertain requests to meet its chief executive officer (CEO) Nandkumar Surti. It did not let us talk to the fund manager Ravi Ratanpal, who was managing the two troubled schemes.

By denying access to the media, the fund house blocked flow of accurate information to several investors and stake holders who would have to liked to know their gameplan to face the crisis. Its quite ironic that the media is much sought after when the fund houses want to build awareness about its products. For new product launches, fund houses conduct press conferences, meet media personnel for sharing views on markets and their outlook on the economy.So, why was the same approach not followed this time too?

And it appears, this is not the end of JP Morgan's troubles. Already, large distributors have stopped selling its products. It has lost respect among its peers. The AUM has fallen from Rs 15,000 cr to Rs 12,500 cr. The fund house is faced with a huge task to re-build its brand equity among investors and distributors while restoring the lost credibility in a business which involves people's money.

Only time will tell where JP Morgan AMC will stand as they continue to struggle to overcome this crisis.

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First Published: Mon, October 05 2015. 10:49 IST