The ongoing probe by SEBI into the alleged violations by Invesco India Asset Management Company (AMC) has revealed that the fund house undertook 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.

Invesco India AMC, part of America’s top fund management companies, is being investigated by regulators in multiple jurisdictions for alleged misappropriation of fixed income schemes after a whistleblower filed complaints with regulators in the US, India, Hong Kong and few other jurisdictions. In India, Invesco manages assets worth more than ₹53,000 crore.

Risk ‘aversion’

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). The probe shows a pattern that whenever securities held by IISTF faced ratings downgrade or risk of adverse credit view, they were simply moved to IICRF through IST.

Data accessed by BusinessLine show 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.

Downgrades, transfers

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 ₹10-crore worth BBNL bonds to IICRF in March and later the remaining ₹35 crore of it in October. Due to this, IICRF’s exposure in BBNL increased from 2.62 per cent to 5.23 per cent.

Similarly, IISTF’s ₹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 ₹47 crore was first transferred from IIST to Invesco India Treasury Advantage Fund (IITAF) in December 2015 and January 2016. IITAF moved 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.

Offshore scheme transfer

Some of the senior management of Invesco, too, held investments in the schemes in which ISTs were undertaken and that angle, too, is being looked into by the investigators.

Securities like Indiabulls Housing Finance and DHFL, where Invesco India scheme had exposures worth nearly ₹700 crore and ₹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 IIBF prospectus, Invesco Mutual Fund acts as a non-binding advisory to it.

SEBI is likely to order a forensic audit of Invesco AMC as it did for Frank Templeton Mutual Fund in 2020. E-mail queries sent to Invesco India CEO Saurabh Nanavati and the US office on May 27 remain unanswered.

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