Too early to assess impact of alleged frontrunning at Axis Mutual Fund: Experts

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Feroze Azeez, deputy CEO of Anand Rathi Wealth, and Manoj Nagpal, founder of Outlook Asia Capital, in an interview to Moneycontrol, said it’s premature at this stage to assess the impact of alleged frontrunning by two fund managers at Axis Mutual Fund and one should wait for the outcome of the investigation into the matter.

Nagpal said there isn’t enough data as yet to figure out the extent of the damage to investors and the mutual fund sector. What is known is that two employees have been suspended for allegedly misusing confidential information and that there has been some violation. He said the impact on a portfolio or whether any transgressions aided brokers or investors can be determined only in the inquiry.

Azeez noted that if this had happened to a small cap fund with Rs 5,000 crore, he would have been quite concerned because of the possible long-term consequences. He said one should wait for the investigation to be over and only then take the next course of action. Edited excerpts:

How serious is this issue? What is your understanding of it?

Manoj Nagpal: These rumours emerged around 10-15 days ago and have been gathering ground. Now, Axis AMC has clarified that they are conducting an internal investigation on a suo motu basis. That means they themselves have initiated this investigation based on their internal findings. They have also appointed two forensic auditors to go through this. And, there appears to be interim feedback from auditors saying that there were some kind of process violations. Based on this, two fund managers – one of them a chief dealer – have been suspended. The final report is to come in 4-5 weeks.

Some of the findings look like process violations – things did not function as they should have. What is the impact… on portfolios, or whether these were transgressions which helped brokers and not investors are all unclear at this point in time. It is focused on the equity schemes of Axis AMC. The first impression is that some transgressions may have happened.

You had been an investor in Axis Funds in the past. Would something like this worry you? How worried would you be if you were an investor?

Feroze Azeez: As an investor, advisor or distributor, I would be worried for sure. But in this case, my worries were not that much once I looked at the portfolios in question. The top 10 holdings of these seven funds in question are reasonably liquid. If this outcome was to a small cap fund with Rs 5,000 crore, I would be really worried about the fund. If that happens, there would be a future impact as well. Because future impacts are unknown. If you are speaking of a price impact on the NAV (net asset value). If you are speaking of frontrunning, buying and selling at unfavourable prices to the fund is all factored in. So, we should take action to address the specific situation. In this situation, I am not worried now because any future NAV impact which could be substantive doesn’t exist.

Are you saying you wouldn’t redeem if you have any holdings now?

Azeez: I am not concluding that I will never redeem. But do I need to redeem it today? Or can I wait till the investigation is over? Frontrunning might not be happening at Axis AMC because they are already in question. But we can’t conclude that we stay put here for the next three years. Can I exit today or tomorrow and get the NAV? The answer is no. Wait till the investigation is over.

What do we mean when we say price rigging, frontrunning or minor transgressions, as some say?

Nagpal: Whenever there are larger pools of money involved, globally it has been seen that a few individuals try to take benefit of it. Axis has seen positive inflows into their schemes in the last 2-3 years. And because of the Covid-induced scenario, most of the people were working from home. Protocols for working from the office are different. We will know only after investigating things like the damage caused and the quantum of money involved.

SEBI rules say the CEO has to take responsibility. Could this go beyond the two persons being investigated? Could the CEO be questioned?

Azeez: As the leader, you are responsible for a certain degree of action. Of course, the buck stops at the leadership. The case is still premature. First, we need to find out the extent to which wrongdoing has been done. Was it a process lapse or an intent lapse?

Could there be far-reaching implications? Should there be an investigation industrywide?

Nagpal: Trustees need to intimate their investors in case they notice any significant development happening in the AMC. In this case, the trustees have not really acted – they did not intimate the investors proactively. The AMC may have done the investigation proactively and it is a big lapse. Investors should have been made aware by the trustees, not by the AMC. This loophole needs to be addressed. Sebi may write to other AMCs asking whether they have done a similar investigation and whether any processes were violated.

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