Last Updated on December 29, 2021 at 5:12 pm
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.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
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.
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.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1000 investors and advisors use this!
New Tool! => Track your mutual funds and stocks investments with this Google Sheet!
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter with the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
About freefincal & it's content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)