Subprime Bonds Case: Sebi Issues Show Cause Notice To Invesco
Stock market regulator Sebi has issued a voluminous, nearly 600 to 1000 page, show cause notice (SCN) to Invesco India Asset Management Company (AMC) for violations in moving subprime bonds to retail-oriented schemes and also several transfers to off-shore funds, sources told BW Businessworld.
Invesco, one of America’s leading fund management companies that manage more than Rs 50,000 crore in India, had come under the investigation of financial market regulators spanning multiple jurisdictions for alleged misappropriation of fixed income schemes. This is after a whistleblower, a former employee of Invesco had spilled the beans on Invesco's alleged manipulation. Apart from Sebi, the SEC in the US and SFC in Hong Kong have conducted an intense probe looking into emails and other data of the senior employees of Invesco, mainly from India, the sources said. The Hong Kong regulator had also imposed a penalty on Invesco.
In India, the Sebi probe had revealed that Invesco India had undertaken several inter-scheme transfers (ISTs) between 2016 and 2021, specifically aimed at moving papers with ‘poor fundamentals’ into retail-oriented schemes at the time of heightened credit risk. SEBI had also probed Invesco for illegally moving ‘bad papers’ in a few fixed-income schemes to various jurisdictions to avert potential damages. Fund managers who were buying a security in one of their schemes were selling the same in another scheme they managed, say sources.
Hurting retail investors: Probe revealed a pattern
Sebi rules say IST should be the last resort of AMCs to manage liquidity after they have exhausted all other options for raising cash. But, Invesco AMC moved low-rated subprime securities of issuers like Sintex Industries, Business Broadcast Networks (BBNL), a subsidiary of Reliance Capital, and IL&FS Transport (ITNL), among others from Invesco India Short Term Fund (IISTF) and other funds to Invesco India Credit Risk Fund (IICRF).
SEBI's probe showed a pattern that whenever securities held by IISTF faced a rating downgrade or risk of adverse credit view, they were simply moved to IICRF through IST. Invesco's IISTF had 97 per cent institutional investor participation compared to IICRF with 43 per cent retail investors. The retail participation of IICRF rose from 33 per cent in 2016 to 43 per cent in 2018.
Unlike retail investors, large institutions, due to their expertise, are more likely to pull out business from a fund house if the schemes hold bad papers. Data with regard to the date of ISTs, lowering of credit ratings of the securities, buy sell spreads show that the transfers were undertaken with the knowledge of degrading and deteriorating fundamentals of the bonds, said sources.
The Sebi probe also revealed that the AMC did not follow best price execution practices while undertaking the ISTs and had no commercial justification or rationale for the same. Also, the fund managers who were buying a security in one of their schemes were selling the same in another scheme they managed, sources said.
Hiding poor investments
It is alleged that an attempt was made to hide bad investments made in some Indian schemes by transferring them into other global funds. Meanwhile, the Indian schemes continued to buy bad papers. Invesco’s funds registered in tax haven Luxembourg, too, are under the scanner.
Data also show when BBNL was rated AAA (SO) by CARE, the AMC bought 45 crore worth of securities in its scheme of IISTF in November 2015. However, after BBNL’s ratings were downgraded and the security was put on credit watch in January 2018, IISTF first transferred Rs 10 crore worth of BBNL bonds to IICRF in March and later the remaining Rs 35 crore in October. Due to this, IICRF’s exposure in BBNL increased from 2.62 per cent to 5.23 per cent.
Similarly, IISTF’s Rs 15 crore exposure in ITNL was transferred to IICRF in August 2018 after the bonds were downgraded in July that year. As a result, its exposure in ITNL jumped to 7.73 per cent from 2.96 per cent earlier.
In the case of Sintex, an exposure of Rs 47 crore was first transferred from IIST to Invesco India Treasury Advantage Fund (IITAF) in December 2015 and January 2016. IITAF moved the majority of the exposure to IICRF between December 2015 and September 2017 when the issuer was put on credit watch. Sintex was downgraded on July 25, 2017, from AA+ to A. Three months after Invesco undertook the last IST of Sintex to IICRF, the credit ratings of the issuer were withdrawn by the rating agency, making it a junk bond in the hands of Invesco’s retail investors.
Some of the senior management of Invesco, too, held investments in the schemes in which ISTs were undertaken and that angle, too, was looked into by the investigators.
Securities like Indiabulls Housing Finance and DHFL, where the Invesco India scheme had exposures worth nearly Rs 700 crore and Rs 625 crore, respectively, were transferred to Invesco India Bond Fund (IIBF), an offshore scheme. IIBF is a sub-fund registered in Luxembourg and falls under the jurisdiction of regulator SICAV UCITS. Invesco Management SA, which manages the fund, has delegated the responsibilities to Invesco Hong Kong. As per the IIBF prospectus, Invesco Mutual Fund acts as a non-binding advisory to it.
A slew of resignations after whistleblower complaints
Nearly 50 per cent of the team managing fixed-income schemes at Invesco India Mutual Fund resigned between 2021 and 2022 after an Indian fund manager-turned-whistleblower levelled allegations of misappropriation of debt schemes.
Invesco insiders say that resignations were mostly tendered by officials who were linked to the debt schemes — both onshore and offshore — which are under investigation. The resignations include that of the Head of Fixed Income, Senior Fund Manager, key personnel managing investments for Invesco India Bond Fund (IIBF), Head of Credit, along a Credit Analyst.
Since Sebi started its probe, Invesco’s Head of offshore global investment leads– strategy was moved to greener pastures with a new designation. Also, the Senior Vice President of offshore portfolio management strategy and Director for internal audit are serving their notice period. Many of those who have resigned recently did so suddenly after spending more than a decade at Invesco India.
The whistleblower has dragged Invesco, its top management and parent company to the court on alleged unlawful termination of his employment following his allegations of malpractices.
