High-profile scandal at Axis Mutual Fund set to tip MF industry by $465 billion

A sprawling regulatory probe that has ensnared the Indian partner of Schroders Plc is rocking one of the country’s biggest asset managers and is poised to shake India’s mutual fund industry by $465 billion.

Axis Asset Management Co., which is India’s seventh-largest mutual fund manager and part-owned by Schroders, in May laid off two employees, including its main dealer, amid an ongoing internal investigation.

In early July, the fund submitted its findings to regulators and said it had evidence to believe the fired executives violated securities law. Meanwhile, the Securities & Exchange Board of India has conducted its own investigation into the potential front-running of the two men, a person familiar with the agency’s investigation said, asking not to be identified discussing private information.

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Front running is the trading of stocks by someone aware of information about an impending large transaction that will move prices. It is illegal in India, and massive search and seizure operations have been carried out by the market regulator at the offices and residences of Axis Mutual Fund executives, and other securities brokers and traders, a said the person. In total, the regulator’s investigation covered 30 locations in different cities after receiving surveillance alerts and information from the stock exchange regarding suspected front running in Axis Mutual Fund transactions by certain parties, the person said. .

Interviews with nine people familiar with the surveys showed how a pandemic-fueled boom in India’s investment industry may have made it harder for executives and regulators to manage the fallout from this outsized growth. British investment giant Schroders owns a 25% stake in Axis Asset Management, Axis Bank Ltd. holding the rest.

Some companies withdrew money from Indian company funds following the allegations, another person familiar with the matter said, asking not to be named as they were not authorized to speak publicly. Axis Mutual Fund did not respond to questions about the company withdrawals, but in a public statement said the company has always followed regulatory guidelines and believes that the conduct of those affected has no impact on its liquidity or operations. Schroders and Axis Bank did not respond to emails seeking comment.

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Viresh Joshi, the former chief dealer, filed a lawsuit alleging unfair dismissal and sought 542.6 million rupees, his law firm, Mansukhlal Hiralal & Co. said in an email. The company’s other named employee, Deepak Agrawal, could not be reached for comment. Calls and a message to a cellphone number believed to belong to him went unanswered, and Bloomberg was unable to obtain further contact information for him or any representative he may have. engage.

Growing scrutiny

Meanwhile, legal experts are predicting increased scrutiny of India’s entire mutual fund industry.

“The extent to which the regulator is investigating the matter makes us believe that SEBI is a serious matter,” said Sumit Agrawal, founder of Regstreet Law Advisors and former legal adviser to the market regulator. “We expect faster investigation and action which could lead to tougher regulation for fund managers.”

Going forward, there is likely to be increased scrutiny of the bank accounts and tax returns of fund managers and brokers and their relatives, he said.

Mutual funds, which fall somewhere between high-risk stock trading and low-yielding bank deposits, have offered an attractive proposition to young and older risk-averse investors in India. The industry has grown nearly fivefold over the past decade, with more than 37 trillion rupees ($465 billion) in assets at the end of June, according to the Association of Mutual Funds In India.

Axis Mutual Fund joined the industry with its first investment plan in 2009 and had Rs 2.5 trillion in assets under management at the end of June this year. Among the first members of his team was Viresh Joshi.

Over the next few years, Joshi progressed through the business and became the Chief Dealer, overseeing its business operations in 2019. He was involved in executing trades in the glass fronted trading room on the first floor of the office business, until the pandemic in 2020. forced most people to work from home.

Mutual fund trading rooms are strictly controlled spaces equipped to record every activity inside. Axis Mutual Fund’s trading room is equipped with cameras that monitor all activity, office phone lines are recorded while the use of cell phones is prohibited.

Compliance breaches

It is not publicly known whether Joshi worked from home during the pandemic or on trading floors. But in January this year, company management was unofficially informed by other market participants that there appeared to be something wrong with the trades executed by Joshi, according to two people familiar with the matter. developments in the case, who asked not to be identified while discussing confidential matters. details. Joshi also had unexplained absences during trading hours, the people said.

The company decided to investigate and called on Alvarez & Marsal Inc. to help. In early May, Axis Mutual Fund said it suspended Joshi and another fund manager, Deepak Agrawal, pending an internal investigation into possible wrongdoing. Shortly after, people familiar with the matter told Bloomberg that SEBI was investigating whether the two men were involved in the running.

“We believe our client is a scapegoat and that his dismissal is wrongful and unlawful and that the principles of natural justice have been denied to him,” Chirag Shah, attorney at the law firm representing Joshi, said via email. “When we wrote to Axis Mutual Fund to let us know what the charge was or if there had been a show cause notice, they did not provide us with the same.”

The law firm also said the asset manager failed to respond to several complaints Joshi made when he witnessed price spikes before he could execute orders given to him.

Axis Mutual Fund, in an email response, said the fund house would respond to claims made by Joshi in his court case.

“We have more than sufficient findings regarding violations of our policies, including non-cooperation with our internal investigation (during its suspended period). We also have good reason to believe that he has committed serious and persistent violations of securities laws,” the company said in its response.

Stricter rules

The investigation has raised questions about potential compliance lapses and practices followed during the Covid-19 restrictions of the past two years, which have seen major stock gauges hit multiple highs. Meanwhile, India’s new SEBI chief Madhabi Puri Buch has tried to crack down on market irregularities as mutual funds attracted billions of dollars in inflows.

At the end of May, the market regulator issued a circular to brokerage houses and fund companies, withdrawing the possibility of working from home for employees in charge of critical functions related to investments, compliance and risk management, the brokers who have seen the circular but are not authorized to be quoted, said. SEBI did not respond to an email seeking comment.

Some analysts, meanwhile, have raised concerns about the potential fallout on Axis Asset Management.

Primeinvestor.in, a financial research platform for retail investors, recommended quitting the company’s small-cap fund and suspended its mid-cap and flexicap funds, in part due to concerns over redemptions due to the survey as well as other challenges such as low entries. due to market turbulence. Axis media representatives did not respond to a request for comment on the research firm’s views.

“We remain concerned whether this allegation will turn into a corporate governance issue in its own right,” said Vidya Bala, head of research and co-founder of Primeinvestor.in. “At this time, the depth of the problem and the fault lines have yet to be explained, but where allegations as serious as this are afloat, many events can damage investors’ holdings even before the problem is not solved.”

Dolores W. Simon