India regulator probes investments between Nippon Mutual Fund, Yes Bank - sources

Reliance Infrastructure

19/01/2023 09:37

By Jayshree  Pyasi
       MUMBAI, Jan 19 (Reuters) - An Indian regulator is
investigating investments between Nippon India Mutual Fund, the
largest foreign-owned fund in the country, and Yes Bank between
2016 and 2019 for suspected misuse of investors' money, sources
said.
    At the time, the parent company of the mutual fund was owned
by the Anil Dhirubhai Ambani Group. Yes Bank was taken over by
the central bank in 2020 and sold to a consortium of banks after
a dramatic rise in toxic assets.
    The Securities and Exchange Board of India (SEBI) is probing
whether investments by the fund, 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 companies, said two sources with direct
knowledge of the matter. The sources declined to be named as the
investigation is confidential.
    SEBI's regulations say that the parent of a mutual fund
cannot access investors' money either directly or indirectly.
    If the regulator's probe results in charges against the
fund, its officials or the bank, it could lead to penalties
ranging from restrictions on accessing capital markets to
monetary penalties. The current owner of the fund, Nippon India,
as well as the previous owner could be liable, the sources said.
    The market regulator's probe has not been previously
reported.
    The fund house itself, senior officials and its former
sponsor could face charges for violating regulatory norms under
India's 'Prevention of Fraud and Unfair Trade Practices Relating
to Securities Market' rules, one source said. Yes Bank and its
former officials could also face charges, the source added.
    Nippon India, the Anil Ambani Group, Yes Bank and SEBI did
not respond to requests for comment. Sundeep Sikka, who has been
chief executive office of the mutual fund since 2009, did not
respond to requests for comment. 
    Nippon India, a unit of Nippon Life Insurance Co  NPNLI.UL ,
acquired 75% in Reliance Asset Management Company in October
2019 to become the owner of the mutual fund. The transactions
under scrutiny date back to before the transfer of ownership,
the sources said. Nippon Life did not respond to telephone calls
from Reuters seeking comment.
    As of September 2022, Nippon India was the fourth largest
mutual fund in India with assets under management of 2.9
trillion rupees ($35.46 billion) as well as the biggest
foreign-owned mutual fund.
    The Nippon India mutual fund was the biggest holder of
additional tier-1 bonds issued by Yes Bank between 2016 and 2019
and held 250 billion rupees out of the 841 billion rupees of
such securities issued by Yes Bank, according to court
documents.
    These bonds were cancelled in 2020 by Yes Bank as part of
its restructuring, which has been challenged in court by
bondholders.
    As a consequence of this case, the market regulator plans to
tighten its rules, said the first source, although any final
decision will only come after the investigation is completed.
    On Friday, SEBI proposed further tightening of 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. Present rules require that mutual fund owners
hold a minimum 40% stake.
    "If this becomes a rule, this would address issues of
conflict of interest and undue influence which have led to bad
investment decisions by fund managers," said the first source.
 (Reporting by Jayshree P Upadhyay; Editing by Ira Dugal and
Raju Gopalakrishnan)
 ((jayshree.pyasi@thomsonreuters.com; +91-9920092491))