ICICI Prudential Mutual Fund has found itself lumbered with criticism following its investment in the Initial Public Offering (IPO) of ICICI Securities, a while ago.
Before we proceed, we would like to lay the foundation with a very significant statement: There has been NO official public order from the regulator, the Securities and Exchange Board of India (SEBI). All the information available has been published extensively in the media.
Hence, the most logical course of action is to apply the Mosaic Theory.
The Facts
ICICI Securities came up with an IPO with a share price band of Rs 519-520.
As per the Offer Document, regulations required 75% of the IPO to be offered to Qualified Institutional Buyers (QIBs); failing which the public issue would be called off.
ICICI Prudential Mutual Fund’s investment in the IPO totaled Rs 640 crore. Additionally, 13 other domestic asset managers subscribed to the issue during the IPO for an additional amount of Rs 840 crore. The QIB portion was fully subscribed while all the other segments were marginally undersubscribed.
On the day of listing, the price of ICICI Securities corrected by 14% closing at Rs 445. As on August 9, the stock is trading at Rs 350, 32% below its issue price.
The Bone of Contention
ICICI Prudential Mutual Fund’s investment of Rs 640 crore was in two tranches. The first was Rs 400 crores and the balance Rs 240 crores came in the second late subscription bid. (Rs 640 crores = 400 + 240).
SEBI frowned upon the second bid of Rs 240 crores since it appeared to be extremely convenient as the IPO was not widely subscribed to. If one ignores the second bid, the QIB portion would have potentially remained undersubscribed, which would have led to devolvement of the public issue. The potential conflict of interest seemed apparent, as the bid may have been placed not purely on investment merit rather done so to prop up the public issuance of a sister concern to go through.
SEBI asked ICICI Prudential Mutual Fund to compensate investors for the drop in the market value of the second tranche of ICICI Securities shares as well as provide them with interest.
The Perspective
There are 2 questions that need to be answered.
- Was ICICI Prudential AMC wrong in subscribing to an IPO from its sister concern?
There has been a slew of IPOs thanks to the buoyant equity market. ICICI Prudential, being amongst the largest asset managers in the country, has participated in several of them, including two sister concerns – ICICI Prudential Life Insurance and ICICI Lombard General Insurance. This is not unique to the AMC; HDFC Mutual Fund invested in HDFC Standard Life Insurance and SBI Mutual Fund in SBI Life Insurance. Having said that, these IPOs were sought after and oversubscribed.
- Was ICICI Prudential AMC wrong in placing multiple bids.
On analyzing the AMC’s bids during past IPOs, we found that they did make multiple bids in several IPOs such as HDFC Standard Life, SBI Life Insurance and Avenue Supermarts; investing in both the Anchor as well as QIB portion. However, ICICI Prudential AMC was not a part of the anchor investors during the ICICI Securities IPO.
Morningstar’s Take
Mutual Funds have a fiduciary responsibility towards investors and all investments made should be done so purely with the investor’s best interests in mind. While the regulations are silent on investing in group companies, asset managers should use their discretion in drawing up a framework for such investments so as to distance these decisions from any potential conflict of interest.
There are several instances of global asset managers who have a framework in place which prohibits investing in related parties or need special board approvals for such investments.
We have always regarded ICICI Prudential Mutual Fund as an asset manager with above-average investment processes, but at the same time an average ‘parent’ as we have found some of their business practices not in line with industry best practices.
We understand where SEBI is coming from; if there is even the slightest element of doubt, they rule in the favour of investor interests.
By investing in the ICICI Securities IPO, ICICI Prudential Mutual Fund has technically not violated any regulations. However, by placing a second bid, the potential for a conflict of interest on the AMC’s behalf does come into play. We are quick to admit that this cannot be conclusively proven. Nonetheless, it cannot be conclusively dismissed either.
Presented with these circumstances, we think it prudent to follow the guidance from the Regulator. Consequently, we have downgraded ICICI Prudential AMCs Parent Pillar and have gone ahead with specific fund downgrades.
The following funds shall be downgraded:
As far as the regulator is concerned, we do believe it would be wise for SEBI to consider formulating rules that govern investing in related entities by mutual funds; for instance, such specific transactions requiring the approval by the Board of Trustees prior to investing.
