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The capital markets regulator, Securities Exchange Board of India (SEBI) is probing investments between country’s largest foreign-owned fund house Nippon India Mutual Fund and YES Bank between 2016 and 2019 for ‘suspected misuse of investors' money’.
Nippon India, a unit of Nippon Life Insurance Co, acquired 75% stake in Reliance Asset Management Company in October 2019 to become the owner of the mutual fund house. Prior to this, Nippon India Mutual Fund was known as Reliance Mutual Fund and was owned by the Anil Dhirubhai Ambani Group. On the other hand, YES Bank was taken over by the RBI in 2020 and sold to a consortium of banks after a dramatic rise in non-performing assets.
However, the transactions under scrutiny by the regulator date back to earlier the transfer of ownership. The investigation by the market watchdog delves whether investments by the fund house, known at the time as Reliance Mutual Fund, in perpetual bonds of YES Bank were made as part of a deal whereby in return the lender invested in securities of Anil Ambani group of companies.
As per SEBI regulations the parent company of any mutual fund house cannot access investors’ money either directly or indirectly.
According to court documents, Nippon India Mutual Fund was the biggest holder of additional tier-1 bonds issued by YES Bank between 2016 and 2019 and held Rs 250 crore out of the Rs 841 crore of such securities issued by YES Bank. Further, these bonds were cancelled in 2020 by YES Bank as part of its restructuring, which has been challenged in court by bondholders.
Now if the regulator’s enquiry results in charges against the fund house, it could land its officials or the bank and its former officials into paying monetary penalties along with restrictions on accessing capital markets, the sources stated. The current owner of the fund, Nippon India, as well as the previous owner Anil Ambani group could be liable.
Under the guidelines of 'Prevention of Fraud and Unfair Trade Practices Relating to Securities Market', the fund group, senior and former officials could face charges for violating regulatory norms.
As a result, considering the consequence of this case, SEBI plans to tighten its mutual fund regulations asking mutual fund owners to reduce their stake gradually as a measure to check their influence on investment decisions. It did not specify a level to which they must reduce their holdings. As per present rules, mutual fund owners can hold a minimum 40% stake.
If this regulation is imposed, it will address issues of conflict of interest and undue influence which have led to bad investment decisions by fund managers. However any final decision on enforcement of such regulations will only come after the investigation is completed.