Balani’s attitude reflects the attitude of much of India’s investor and advisory community, who await the outcome of a SEBI probe into allegations by some former Axis MF employees.
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Moving forward in terms of funds is similar to insider trading in listed companies. Here, the fund manager, trader or dealer becomes aware of large buy or sell orders by an entity and uses that information for personal gain. The fund is affected because the price may move up before the buy order is executed, which in turn affects investors by affecting the net asset value.
While a SEBI probe is underway on the alleged front in Axis MF, on May 9, the AMC issued a note stating that it had appointed external investigators to look into the allegations of wrongdoing. It said that two senior executives – the fund house’s chief trader and fund manager Viresh Joshi and equity research analyst and Deepak Agarwal, a fund manager – have been suspended.
On May 18, Joshi was fired by Axis MF. Two days later, Agarwal was also thrown out like Joshi for violating the ethics and code of conduct. While the fund house’s note said that its investigation began in February, the suspension and termination took place only in May, soon after the matter was brought to the public notice by some Chinese whispers.
Apart from the ongoing scams, another major concern facing the fund house today is the shift in investor focus from growth to value stocks, which has led to a decline in the fund house’s performance over the past few months. Axis MF has followed a growth style of investing over the years, buying into fast-growing companies even though they are sometimes priced dearly. That approach paid off well for a few years. Now, however, with market sentiment shifting towards cheaper stocks, in the hope that they will rise, Axis MF funds have suffered a fall in value. The timing of this innings could not have been worse amidst the ongoing investigation.
‘No Lamborghini is’
There is indeed a mystery behind the ongoing allegations against Axis MF due to AMC’s limited disclosures. Mint has pieced together this narrative of what happened at Axis MF based on court filings 54 crore wrongful termination suit filed by Joshi, and based on interactions with regulatory authorities and fund houses.
On January 19, a broker wrote an email to Joshi accusing him of pushing some stocks. If Joshi were to buy these shares 100 per share he ended up buying them 105, the email alleged. “This email was marked to a dozen other individuals. Interestingly, the email IDs of all other persons were wrong; Only Joshi had the correct email address,” said a person with direct knowledge of the matter.
The email was detected when Axis audited all its fund managers during a routine examination – in February 2022, all employees of Axis MF were asked to provide their personal and work email IDs, office computer data, office mobile phones, work-from- Home laptops, desktop data, personal landline data and phones to independent external investigators, AZB, and Alvarez and Marsal.
When this email was investigated, it raised doubts over the details of the transaction, and prompted AMC to launch an investigation into possible breaches of securities law.
Meanwhile, a Chinese whisper surfaced that an AMC was investigating its fund manager, who was painting the streets of Mumbai red in a Lamborghini. The market was quick to connect the dots, and speculated that it was Joshi who was driving around in a Lamborghini.
“There is no Lamborghini. A limited number of this luxury car is sold in India and it is quite easy to track who owns them,” said Chirag Shah, lawyer, Mansukhlal Hiralal & Company, the law firm representing Joshi. . Italian super-luxury car maker Automobili Lamborghini, part of the Volkswagen Group, has so far sold all 400 Lamborghinis in India.
According to court filings and Joshi’s termination notice, Axis MF does not believe that Joshi owns the luxury car, but suspects that he has disproportionate assets, mostly in real estate, which were reviewed by Mint. . However, as per documents reviewed by Mint, he owns only two cars (Innova and Verna) and one scooter (Honda Activa).
The person cited above said, “His hesitation to explain the immovable property assets was one of the major grounds for his suspension and subsequent dismissal.” Joshi said in a written reply to the AMC that since he has been barred from trading in shares and options. , he had built up a real estate investment portfolio over the years.
Regulator Sebi has sought details of assets and income tax returns of both Joshi and Agarwal for the last 10 years. A person with direct knowledge of the matter said, “Agarwal is alleged to have shared some stock-specific information with some third party as a consultancy.”
blame game
There are more twists in the story. Joshi insisted that further investigation in the fund house was initiated on the basis of his own alert. From June 2021, according to court filings, Joshi noticed irregular spikes in trades in certain stocks which he was supposed to execute on behalf of Axis. He claims that he had flagged CEO Chandresh Nigam and Jinesh Gopani, head of equity at Axis Mutual Fund, specifically for the period between November 2021 and January 2022. Joshi said these spikes influenced the analysis and decisions made by him.
Joshi had filed a wrongful termination case in the Bombay High Court, in which he said, “These abnormal spikes will push the price up and down when large institutional buyers like the respondent company (Axis) place their orders to impact their portfolios.” lamps.”
However, Axis MF in response to an email to Mint categorically denied any such alerts sent by Joshi to others in the organization, calling such claims false. “Any portrayal of Mr Joshi, including in his suit filed before the Bombay High Court and in your questions, as a whistleblower, is completely baseless. With regard to Mr. Joshi, we have more than enough findings regarding violations of our policies, including non-cooperation with our internal investigation (during his suspension). We also have strong reasons to believe that they have committed serious and persistent violations of securities laws,” the response said.
systemic investigation
There are systemic checks in place to prevent frontrunning. Fund managers are not allowed to invest in stocks or futures and options. As an industry practice, the dealer executes trades only through listed brokers as instructed by the fund manager. Brokers are third parties and fund houses have limited control over their operations. A fund manager, who did not wish to be named, said that if the fund managers find that the price of a stock is outside the margin of error, they ask the dealer to cancel the trade.
Then, there are layers of compliance checks from the regulator—phone calls and activity recorded during market hours—and a strict code of conduct.
If the move were to go ahead, the fund house would have limited data to find out in which stocks or how it happened. Axis is using the services of Deloitte Haskins & Sales to mitigate this. This is where the improved monitoring powers of the regulator come in handy. It asks the exchanges to analyze the raw trading data of securities for a particular period. In the case of Axis, it is from 2019 to May 2022.
SEBI has algorithms to detect unusual trading patterns. However, the algos used by SEBI have had to come to grips with the evolving methods of fraud. At one time frontrunners used his or her family’s name. This was later changed to use accounts of devars, as they are excluded from the definition of persons concerned. Fraudsters are now using ‘Accounts for Hire’ to trick the system.
“As a test, I once reached out to a sort of fixer and asked him if he could arrange for multiple accounts to do business on my behalf. The person assured me that he would within two days. Can easily arrange 300 KYC-compliant clean accounts where I can trade without any fear.” Take place using shell companies. “The algo has been adapted to capture it,” the official said.
performance pressure
Investors in Axis Mutual Fund have enjoyed almost a decade of benchmark returns and have rewarded the fund house with huge inflows. almost . with 30,000 crore assets, Axis Long Term Equity Fund is India’s largest tax saver mutual fund. In 10 years from 2010 to 2020, the fund outperformed its category average in eight years—an incredible success ratio. Anyone who invested money in the scheme at the beginning of the last decade would have a CAGR of 17.31%, which is much higher than the 10.16% given by the BSE 500.
But something changed in this story in 2021. The fund delivered a return of 24.54%, which is nearly eight percent below its category average of 31.92%. Many investors dismissed the failure as a fluke. However, in 2022, as of June 17, the performance gap of about eight percentage points has been repeated. The fund is down 21.84% this year against its category’s 13.42%. The poor performance is particularly worrisome at a time when AMC is dealing with allegations of overstepping by its employees. Nor is Axis Long Term Equity a standout. Other flagship schemes like Axis Bluechip and Axis Focused 25 have also witnessed a drop in performance.
Axis MF’s growth investment approach paid off well in 2018-20 when the market rewarded this strategy. Axis Bluechip, another top equity scheme, stood at 20.16% from January 1, 2017 to January 1, 2021, as against 15.39 per cent for the BSE 100. However, inflation and rising commodity prices in 2021 reversed fortunes for funds in India and across the world, as value investing came back with a bang.
The team at Axis MF sticks to its growth vision. “It has been a tough period for us in 2013 and again in 2016. It is a part and parcel of investing. Our beta is actually lower than the market and we underperform whenever there is a rapid change in market direction (a J curve). However, you have to look at the intrinsic value of the companies we hold, rather than mechanical measures like price-to-earnings and price-to-book. They can perform for a long time. Our average holding period for such stocks is 7-8 years.”
demand for transparency
The community of mutual fund distributors and financial advisors in India is more inclined to wait rather than issue a cell call on the fund house. “More information from SEBI investigation is awaited on the issue going forward. For now, we will give them the benefit of the doubt. “We generally wait for at least three years of poor performance before exiting a scheme,” said Ravi Saraogi, co-founder, Samasti Advisors, a SEBI registered investment advisor (RIA).
However, some investors are starting to worry about the communication gap. “Other AMCs also have periods of poor performance, but they take the trouble to explain it. The related notes going forward were also worthless and this is not reassuring,” said Shiladitya Banerjee, a Kolkata-based professional at an audit firm. This is a bad Apple’s case. On the sidelines investors want answers to three key questions: One: Are there other examples of so-called fronts that haven’t been uncovered yet? Second: Will senior management be on the lookout for this? Was lax in tracking Three: Is the fund house seriously investigating these discrepancies?
The ball is in the court of Axis MF.