Why SEBI imposed Rs 5 lakh penalty on ICICI Mutual Fund

Why SEBI imposed a fine of Rs. five lakh on ICIC Mutual Fund and its trust. Were there two violations or three? An explanation of what went wrong

Published: December 27, 2019 at 10:45 am

On Dec 23rd 2019, SEBI issued an Adjudication Order citing three violations by ICICI Prudential AMC and ICICI Prudential Trust with a penalty of Rs. 5 lakh. A look at what these violations are.

1st Allegation deemed a violation: SEBI appointed auditors found three non-FMCG companies, namely, La Opala Rg Limited, Tara Jewels Limited and V-Guard Industries Limited in the portfolio of ICICI Pru FMCG Fund.

The combined portfolio exposure to these stocks at any given point in time was less than 3%! The auditors pointed out that although these were consumer goods, they are not “fast-moving” consumer goods.

The adjudicating officer (AO) noted that these stocks were not part of the S&P BSE
Fast Moving Consumer Goods Index and NSE Nifty FMCG Index and therefore cannot be called as part of the FMCG sector disregarding with the AMC’s contention that the definition of “fast-moving” is arbitrary. Therefore a penalty was imposed as the action was in violation of SEBI regulation 43(2).


Opinion: This situation is the result of a rather restricted scheme information document and could have easily been avoided with a simple clause allowing the fund manager freedom to deviate from the FMCG sector up to a certain limit.

As the scheme document is the only legally binding material, AMCs tend to provide as much latitude as possible to the fund manager and leave specific investment strategies. These are included in the promotional material for distributors and investors. Instead of going after trivial offences such as this, SEBI should first stop this practice of promoting funds with claims that are not legally binding.

2nd Allegation not deemed a violation: SEBI appointed auditors pointed out that the AMC had failed to rebalance the portfolios of open-ended and closed-ended debt funds holding bonds of Jindal Steel and Power Limited that defaulted. This was cited as a violation of the terms stated in the scheme documents.

However, the AO noted that there was no provision in the scheme document of the open-ended fund that warranted a portfolio rebalance (sell the defaulted bond or clear it off the books).

Although such a provision is present for the closed-ended funds, the AO accepted the AMCs reasoning that it was not deliberate, was done with adequate risk-reward analysis and keeping investor interest in mind. Therefore, this was not deemed a violation.

Opinion: This is a debatable topic. Junk bonds cannot be sold easily and it is hard to pinpoint reasons for not rebalancing and impossible to determine if the AMC has or has not acted in the best interest of unitholders.

3rd allegation deemed a violation:  Readers may recall from an earlier article – Can Mutual Funds Fail (go bust) Like Banks? – that mutual funds are operated like trusts with this framework.

Structure of a mutual fund in India

The owner (sponsor) of the mutual fund creates a board of trustees that is responsible for overseeing the operations of the fund. They will have to ensure compliance with SEBI regulations.

The trust (among other things) will have to decide the quantum of dividends declared in a fund and the record date. In the present case, ICIC Pru Trust delegated this responsibility to ICICI AMC which is a breach of Regulation 52(A) and SEBI Circular No. SEBI/IMD/CIR No.1/64057/06 dated April 04, 2006

From 1st Nov 2015, the trust authorised the AMC to declare and fix the record date as well as decide the quantum of dividend under various schemes of the fund. This violates the fiduciary responsibility of the trustees noted the SEBI order and is a compromise of the regulatory framework.

In its defence, the AMC gave a rather flimsy excuse: ” a very limited time window to
consider the various factors and approve the (dividend) proposal” was offered as a “constraint” for not following SEBI regulations! The AMC admitted that “Board of ICICI-Trust would approve the recommendation, as received from ICICI-AMC” and that this was done to “smoothen the process of dividend declaration and in investors’ interest”.

Opinion: The primary reason for the existence of the trust is to ensure SEBI regulations are followed, not to allow the AMC to declare dividends as they please! This is the most serious of three allegations as it pertains to the actions of the trustees.

Summary: In its rebuttal of the 3rd allegation, ICICI pointed out that SEBI had earlier “let off” Indiabulls AMC for declaring dividends without trustee approval. However, this did not wash with the AO.

The 3rd allegation is probably the most alarming for investors. A body whose sole existence is to protect unitholder interest should not be allowed to act like this. Rs. five lakh is not even pocket change for the AMC. The penalty should be much, much higher and heads should roll to serve as a deterrent.

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