Sebi inspecting JPMorgan MF's books

MUMBAI: Market regulator Sebi has started inspecting the books of the troubled JPMorgan Mutual Fund and is also looking into its processes to see what went wrong with two of the fund house's schemes - JPMorgan India Treasury Fund and JPMorgan India Short Term Income Fund. Late on August 28, the fund house restricted redemption in these two schemes to just 1% of its total outstanding units, but had given selective exits to three large corporate investors.

"We are looking at if the fund house had followed all the rules before restricting redemptions from the scheme," said a Sebi official. "Sebi officers are already on the job for the last few days," the official said.

Sebi received a mail from JPMorgan MF late on August 28, a Friday, about its decision to restrict redemptions from the two schemes. Sebi has a 5-day work week and is closed on Saturday and Sunday. The rule is that for any fund house to take any such decision, the boards of directors of the asset management company (AMC) and trustee should agree. And after the two crucial approvals are in place, the fund house has to inform Sebi well in advance before imposing redemption restrictions.

"Sebi officials are also looking into if the fund house had the approval from the AMC board and also from the board of trustees, before imposing the redemption restriction," the official said. Sebi officials do not feel good about the manner JPMorgan MF informed it, over an email late in the night before the weekend started, and went ahead with its decision. "The doubt is the fund house has taken a decision at the executive level," the Sebi official said, while the rule is that the decision should be made at the board level.

Top officials in the MF industry are asking why Sebi is not forcing the sponsors of JPMorgan MF to make good the losses in these two funds. A few years ago, Deutsche Bank's Indian mutual fund suffered losses in its investments in Vishal Retail. Sebi had acted behind the scenes and Deutsche Bank took over the papers and investors in the mutual fund were completely insulated from the losses. In 2008, the regulator had also acted behind the scenes in the sale of Lotus MF, a joint venture between Fullerton of Singapore and Sabre Capital of Rana Talwar, to Religare Mutual Fund. Top fund industry players expect Sebi to facilitate a similar bailout for the JPMorgan MF and insulate investors in the two schemes. Queries sent to Sebi over the weekend remained unanswered. As a policy, the regulator does not comment on individual cases.

Just days before the restrictions were imposed, JPMorgan MF gave selective exits to three large corporate investors from these two schemes, while others did not enjoy the same benefits. Due to the restriction on redemptions, several investors are stuck in these two funds. However, some investors and MF distributors said that the fund house has indicated that the daily limit on the amount of redemptions may be relaxed next week. Last week, JPMorgan MF had declined to comment to TOI's emails.

In April this year, JPMorgan MF had invested about Rs 200 crore in Amtek Auto's short-term debt papers, then rated AA and due for maturity on September 20. However, in early August ratings for the paper were suspended by the ratings agency CARE. As a result, the two schemes had to write down the value of their investments in Amtek Auto's papers, which led to a 3.4% slide in the NAV of India Short Term Income Fund and a 1.7% fall in the NAV of India Treasury Fund on August 27.

The fund house is yet to publish its August 31 portfolio and assets under management of its schemes, including the two troubled ones. According to disclosed data, as of July 31, JPMorgan MF's India Treasury Fund had Rs 2,534 crore funds while its Short Term Income Fund had a portfolio size of Rs 430 crore.