The national markets watchdog Securities and Exchange Board of India (Sebi) has found PGIM Asset Management Co Ltd, ranked 23rd among Indian fund houses with assets of nearly Rs 17,000 crore, guilty of unfair inter-scheme transfers that put investors of some of its closed-end funds at a disadvantage.
Sebi fined the AMC a sum of Rs 25 lakh. Additionally, it has fined its chief executive officer, Ajit Menon, a sum of Rs 5 lakh, and three fund managers, Kumaresh Ramakrishnan, Puneet Pal and Rakesh Suri, a sum of Rs 2 lakh each. Ramakrishnan was the fund house’s former head of fixed income; he left the fund house in November 2021. Pal is the fund house’s present head – fixed income. Suri was a debt fund manager at the fund house as well, but he, too, left the firm, in June 2019.
The Sebi order found PGIM AMC guilty of transferring good quality securities from its closed-end funds to open-ended funds, while transferring stressed securities from open-ended schemes to closed-end schemes. It also questioned the fund house’s rationale in investments in certain securities such as Sunny View and SD Corporation in 2018.
Sebi's latest penalties on PGIM AMC and its officials come on the heels of its recent order on Kotak Mahindra Asset Management Co Ltd where it fined the fund houses, its CEO, its trustee company and its debt fund managers a cumulative sum of Rs 1.6 crore.
The penalties were imposed for flouting Sebi rules while investing in Essel Group companies.
Just like PGIM AMC, Kotak AMC’s episode was also part of the larger credit crisis that had plagued the MF industry and the debt markets between 2018 (the year of the IL&FS crisis) and 2020 (when Franklin Templeton India shut down six of its debt funds).
In PGIM AMC’s case, the regulator found 315 cases of inter-scheme transfers and 25 of these took place with securities that were downgraded before or after the shifts. As part of the inter-scheme transfer incidents, Sebi observed that the fund house had transferred stressed securities from open-ended schemes to closed-end schemes and good securities from closed-end schemes to open-ended schemes.
The Sebi order notes that in October 2018, the stressed security of Jorabat Shillong was transferred from PGIM Medium Term Fund to PGIM Fixed Duration Fund. On the same day, it adds, security of Power Finance Corporation - which “did not have any adverse developments pertaining to it” - was transferred from the same fixed-duration fund to the medium term fund. Similarly, the security of DHFL was transferred from Medium Term Fund to Fixed Duration Fund on October 17, 2018 and on the same date, good quality security of L&T Housing Finance was transferred from Fixed Duration Fund to Medium Term Fund.
Inter-scheme transfers have been undertaken by fund houses for years, provided the securities confer to the scheme objectives in which they are transferred. But fund houses have been found transferring stressed securities from one scheme to another, particularly from open-ended funds to closed-end funds, to provide liquidity to open-ended schemes. Open-ended funds get inflows and outflows on a daily basis, so liquidity in such schemes is very important.
If the scheme is saddled with illiquid securities, it might provoke a redemption crisis. To avoid this, fund managers usually transfer bad securities to closed-end schemes, where there is no redemption pressure as they mature in the distant future; say after three or five years. The problem was that investors of closed-end funds were at a disadvantage if the stressed security continues to be stressed till redemption time of the closed-end fund. In which case, investors of closed-end have to bear the loss.
In 2020, Sebi tightened inter-scheme transfer rules, as part of its on-going strengthening mutual fund regulations after the Franklin Templeton debt fund crisis. It made inter-scheme transfers more stringent. For instance, schemes could only take inter-scheme transfers after exhausting all other measures to generate liquidity, like use of cash, market borrowing and selling of underlying securities in the market.
If, after all this, a scheme still needs cash to meet its redemptions, it should transfer the securities that come with a combination of low duration and high credit rating.
With regards to two securities, Sunny View and SD Corporation, Sebi found that PGIM had transferred these securities from its open-ended funds to closed-end funds, when bad news about these companies had started to come out.
According to the Sebi order, PGIM AMC defended its actions by saying that even after it transferred securities from open-ended schemes to closed-end schemes, the former still continued to hold sizeable chunks of the same securities. The underlying securities, the fund houses added, continued to pay interest. Any downgraded as observed by Sebi, it added, was “only by one notch” and happened “much later” or “prior” to the inter-scheme transfer.
And the fund house also said that as opposed to Sebi's charges of not recording adequately the rationale behind the inter-scheme transfers (a requirement as per Sebi's circulated dated in the year of 2000), “there is no specific template as to how detailed the reason must be”.
The Sebi order says that the fund house had defended that it had recorded its investment decisions and the fund house was monitoring all its underlying securities adequately.
In a response to Moneycontrol query after the publication of the regulator's order, a PGIM India Mutual Fund spokesperson said: “We strongly believe there has been no wrong doing. We are studying the order and will consider all options open to us.”
This is a developing story. Please keep checking for more updates.