The financial market has this uncanny ability to spring negative surprises. No amount of bitter experiences of the past could stop players in the market from slipping into the dirty pit again. The recent episode of investments made by mutual funds into dubious instruments structured by promoter group companies of Yes Bank and Sun Pharmaceutical Industries shows that the industry has not learned the lessons from past mistakes.
Fund managers who have the fiduciary responsibility of managing investors’ money with prudence have invested in instruments that were structured with the intent to circumvent regulatory guidelines. This practice, in effect, amounts to loan against shares and not securitised loan obligation as they may term it and the intent is to circumvent RBI/Sebi disclosure guidelines on pledging of promoter shares. Regulators are examining whether MFs actions are in violation of Sebi guidelines in as much as they have provided accommodation to promoters by extending them loans against illiquid paper and transaction that amounts to loan against shares which they are prohibited under guidelines. Sebi should probe if more such deals are done by promoters using the loophole and raised money for private purposes from mutual funds.
It appears that these structured transactions are carried out by criminal conspiracy between promoter-rating agency and mutual fund managers. The game is not above board for sure. Promoter obtains rating for debt instrument (bond) of holding company, which has underlying listed company shares that remain in promoter’s account. Promoter doesn't part with shares, nor creates pledge/lien but gets money (out of air) against issue of bond by just paying about 2 per cent rating fees and bribe to mutual fund managers. Shares remain with him, plus he gets money in violation of loan-against-shares guidelines. This is criminal conspiracy to defraud mutual fund investors.
Rating agencies role should also be investigated, as they appeared to be abetting fraudulent transactions in securitisation of debt papers issued by promoter holding companies. Domestic small investors have slowly warmed up to mutual funds in the recent past putting behind the past follies of the asset managers. The AUM of the Indian MF Industry has grown from Rs 4.13 trillion as on 31st December 2008 to Rs 22.86 trillion as on 31st December, 2018, a near five-fold increase in a span of 10 years. Mutual fund managers have huge responsibility towards investors. They should not be enticed by short-term gains putting investors money at stake.
Sebi has adequate powers and the wherewithal to go deeply into the issue bring corporate scoundrels to shame and try them to cleanse the image of India Inc. Though crime can't be eliminated permanently doesn't mean known and found criminals should be let loose. Wrongs committed by them are both illegal and immoral. Letting them lose would send a wrong message to investors of all types and class from across geographies who are committing long-term funds for the country's development.