Mumbai : The market regulator has found prima facie evidence that Invesco Asset Management India Pvt. Ltd. has executed trades on behalf of offshore funds, in violation of norms governing mutual funds in India, said two people with direct knowledge of the matter.
Securities and Exchange Board of India (SEBI) norms bar mutual funds from doing business with offshore funds other than offering advisory services. In addition, domestic and offshore businesses are required to maintain separate accounts, personnel and operations, the rules state.
“In the case of Invesco, the domestic mutual fund team executed the trades on behalf of the offshore fund (focus on Indian debt). This is in violation of SEBI Mutual Fund Rule 24(b),” said one of the two people above. Requested anonymity.
“This is where the Chinese wall was broken in terms of the execution of trades. Portfolio Management Services (PMS) and domestic mutual fund operations have to be kept separate at all times. The violation has also been confirmed by an independent investigation initiated by the fund house,” said the second person, requesting anonymity.
Email queries sent to an Invesco spokesperson in India on Monday and subsequent reminders on Tuesday did not elicit any response. Email queries sent to the SEBI spokesperson also did not elicit any response.
Asset managers run their offshore funds under PMS.
The loopholes first came to light when a whistleblower alleged mismanagement of fixed income schemes by Invesco Asset Management India between 2018 and 2019. The complainant alleged that the fixed income team of Invesco MF had identified certain debentures, such as those of Dewan Housing Finance Ltd., which were due to come up. Tension after default by infrastructure financier IL&FS. The team then transferred the exposure to its offshore funds.
“The total value of such transactions is upwards of 200 crores,” said the first person.
Transfer of securities from one scheme to another is called inter-scheme transfer, which is a fairly regular practice till 2020. However, the regulator prohibited such transactions with effect from January 2021 as such transactions merely transfer risk from one fund to another without the knowledge of investors.
“The whistleblower filed a complaint with Invesco Management, its US-parent, SEBI, the US Securities Exchange Commission (SEC) and the Securities and Futures Commission (SFC, Hong Kong’s market regulator) in July 2021. Subsequently, SEBI started its investigation. Minutes of investment committee meetings of data relating to its loan schemes from 2017 to 2020. Separately, Invesco launched an independent investigation to look into the allegations,” the second person said.
“Even SFC has sent queries to Invesco,” this person said.
The first person said that both Invesco’s independent investigation and SEBI concluded that the mutual fund norms were violated by its failure to keep domestic and PMS operations separate.
“Sebi may serve notice to the fund for its fiduciary role and violation of rules,” the person said.
In its defence, Invesco has argued that investors are not harmed and that violations of PMS and segregation of domestic operations are widespread in the industry.
Invesco’s PMS manages more than operations 9,000 crores. so one 200 crore exposure is not much. In addition, there is no harm to domestic investors,” said a person familiar with Invesco’s thinking. In an earlier statement, Invesco said it seeks to maintain excellent relations with regulators and cooperate with regulatory inquiries. which includes examination or investigation.