ICICI Prudential MF seeks clarity from Sebi on compensation to investors

ICICI Securities shares hit new low; Outgo could be nearly a third of the MF's net worth

The country’s largest asset manager, ICICI Prudential Mutual Fund, has approached the Securities and Exchange Board of India (Sebi) on the issue of compensation to unit holders due to losses incurred from the share sale of sister concern ICICI Securities.

Earlier this week, the market regulator directed the found house to return Rs 2.4 billion, along with an interest of 15 per cent per annum, to the five schemes that applied in the initial public offering (IPO) of the broking and investment banking firm.

“The fund house wants to discuss various scenarios, including whether it should sell the shares of ICICI Securities in the open market and make good the losses, or whether it should transfer the shares on to its books and pay for the losses,” according to a source.

“We are engaging with Sebi to address the matter to the satisfaction of the regulator. ICICI Prudential MF remains fully committed to investor interest,” an official spokesperson for the asset management company (AMC) said.

Shares of ICICI Securities on Wednesday hit a new low of Rs 305 on the BSE. The stock is down 42 per cent from its IPO price of Rs 520 per share. 
 

ICICI Prudential MF had made Rs 6.4 billion worth of application in the IPO, which had hit the market in March. At the current rate, the fund house is staring at a mark-to-market loss of Rs 2.7 billion on its investment. 

ICICI Prudential MF had bid twice during the IPO, Rs 4 billion on the first day and Rs 2.4 billion on the last. According to Sebi, the last-day bid was to ensure that the IPO did not fail, which was not in the best interest of investors and also violated the code of conduct.

 

According to Sebi's code of conduct, trustees should ensure that the asset management company does not give any undue advantage to any associate or deal with any of the associates of the AMC in any manner detrimental to the interest of unit holders.

An analysis of the financials of ICICI Prudential MF shows the move to bailout ICICI Securities' IPO could prove to be a costly affair for the fund house.
 

In 2017-18, the fund house reported a net profit of Rs 6.25 billion. Its net worth stood at Rs 8.23 billion as on March 2018.

Assuming the fund house has to repay around Rs 2.5 billion to investors, it amounts to 40 per cent of the last financial year’s profit. The potential outgo towards investor compensation could be nearly a third of its net worth.

Besides the financial loss, the fund house is also staring at a loss of good will, according to experts.

“This episode could hurt the trust factor of the fund house. Although, on an overall basis, the exposure to the stock was miniscule, to restore the trust among investors, it should soon come up with a formal clarification on the matter,” said Vidya Bala, head of mutual fund research, FundsIndia.

According to sources, the fund house has reached out to select distributors, saying the investment in ICICI Securities was well within the regulatory framework.

Responding to a detailed mail sent by Business Standard, a spokesperson for Prudential Plc -- the MF's UK-based JV partner -- said that all queries should be directed to the Mumbai-based AMC. Query sent to ICICI Bank to know if it had any role to play in these transactions, remain unanswered. 

Clarification

The strap in this article has undergone a change and a paragraph has been added at the end.