Axis Mutual Fund has suspended two fund managers, one of whom is a dealer, as it investigates possible irregularities at the fund house. While the exact nature of the wrongdoing is not known, there have been allegations of frontrunning.
The fund house said it started a suo moto investigation in February, using external advisors.
In this week’s edition of Money Matters, we spoke with Sandeep Parekh, founder of Finsec Law Advisors and a former executive director of the Securities and Exchange Board of India (SEBI), Feroze Azeez, deputy CEO at Anand Rathi Wealth, Kirtan Shah, founder of Credence Wealth Advisors, and Amit Bivalkar, founder of Sapient Wealth Advisors & Brokers.
Could Axis MF have handled the situation differently? What can it do to keep its credibility intact? Our panel of experts shed light on these and other questions. Edited excerpts:
Is it odd that while the investigation was launched in February, unit holders were kept in the dark?
Sandeep Parekh: This is somewhat of a tricky question. When do you disclose something as serious as what allegedly is frontrunning? In mutual funds, that is one of the biggest offences you can do because you are really shaking people’s trust in the entire fund house, not just those particular schemes where this might be happening. So, it is like one of the most negative events in a mutual fund’s life journey.
If I were to advise them, I would have also probably told them that till the time you have some prima-facie evidence, don’t disclose it because it may be premature. What if you find that nothing wrong happened and it is some kind of prima facie view you had built? At least a lawyer would advise them to have something in hand before they go to the public.
This is exactly what SEBI also does, right? Until there is some kind of order, nothing really is in the public domain. So, show-cause notices are not put in the public domain. So, I think I really can’t fault the fact that they disclosed something now, whereas the probe started in February. So, that bit sounds okay to me.
Should a simultaneous probe be conducted by SEBI?
Parekh: So, what I know about SEBI, I am almost 99 percent sure they would have started that already. When you look at the various industries and markets that are regulated by SEBI, mutual funds are at the extreme end of the supervision that they go through. It is a very crucial segment for SEBI because it has a lot of retail participation and a lot of small investors participating. Someone with Rs 20 would also have invested in a mutual fund. Therefore, SEBI is very sensitive about any kind of malpractice, even if it is a small valuation error. In this case, we are possibly talking about one of the cardinal sins as far as mutual funds are concerned. So, I will be highly surprised if SEBI has not already initiated a probe into this. And I am almost certain that they would have started it already.
What would Axis MF need to do to win back credibility? Could it have done anything differently in handling the matter?
Amit Bivalkar: I think we are jumping the gun in thinking that whatever has happened or whatever is going to come out, we already know. So, I will wait for the findings of the investigation. Axis MF’s future course of action would depend on these findings.
If we remember in Berkshire Hathaway’s takeover of Salomon Brothers, Warren Buffet famously told the employees of Salomon Brothers, “Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.” Every mutual fund in the country, the CEO, the board and everybody, is well aware of the importance of reputation in this business and they are generally ruthless when they find any irregularities. I don’t think Axis MF is any exception. If they find people are guilty, they should take legal action against them.
In terms of communication, Axis MF has sent a letter to investors, but I didn’t find any apology in that letter. So, firstly, one should apologise if they say that there is an irregularity found. So, an apology has to go to the investors because of the fiduciary responsibility a mutual fund has towards the investors. This is very much needed.
Is it surprising that the two fund managers in question were suspended only months after the investigation was initiated and not earlier?
Feroze Azeez: I don’t think it is surprising. Here an investigation has taken place and people have concluded that further investigation is required. If any organisation starts to report to investors each of its investigations, then there would have been 10 they could have done in the last two years and one of them is of serious nature, which required any action. So, I don’t think when you initiate a probe, you need to disclose to everyone… So, it doesn’t surprise me that the two individuals in question continued till they got evidence and once they got evidence, they surgically replaced them in seven funds in one day, which I think is a courageous decision.
I would respect that decision because you are surgically on one fine day changing them and they are also clarifying that SEBI has not started the probe and that this is a suo motu probe. If they are able to put that in the public domain, I am kind of okay and am not surprised. I think organisations would not disclose every internal investigation. Probably, in several AMCs, as we speak, there might be investigations going on, which may result in no wrongdoings. If you alert everyone every time about your investigation, it keeps investors unnecessarily on their toes.
I hope if there is some conclusive evidence that there is wrongdoing, there has to be a severe punishment and a precedent has to be created. Debarring somebody from the capital markets and asking them to pay Rs 50 lakh-Rs 1 crore fine is the least punishment.
How should investors of Axis MF schemes read this whole situation?
Kirtan Shah: Right now, these are just allegations and we don’t know how deep they are, which schemes got directly or indirectly affected by this. So right now, to judge what schemes and to what extent they would have been affected would be anyone’s guess.
Of the seven schemes that got affected, four were ETFs, one was arbitrage. I don’t think those schemes would have largely got affected in any material way. If you look at quant and value schemes, the AUMs of these funds are pretty less and hopefully the number of investors are small in these two schemes. These are new funds, without even much of a track record.
So for investors, it is advisable to wait for some time, see what comes out and then take a step.
Beyond these seven schemes, Axis MF’s other schemes have been extremely popular among investors. These schemes are also sitting on large amounts of cash holdings. So, if any redemptions were to happen in Axis MF’s other schemes, these are well-placed to deal with it.
So, other investors who want to stay invested in other schemes of Axis MF are not likely to get impacted, even if there is a set of investors that decide to withdraw their allocation from Axis MF.
Till the time we exactly know what the issue is and how big it is and going by the kind of stock picking Axis MF has done over the years, there is no reason for panic.