The Hindu Business Line : Avid bidder, weak charge

SEBI's main charge against Samir Arora is that in 2002-03 he caused losses to investors in the fund by his efforts to buy out the company. When there were indications that Alliance Capital, US, may exit the Indian operations, Henderson Global — a vehicle in which Mr Arora had a stake — put in a bid.

Mr Arora and two analysts had indicated that they would work with the fund only if it went to Henderson. Eventually, Alliance Capital decided that it would continue its Indian operations; it also said it laid great store by the potential in India. But by the time the decision was announced, the damage had been done to the assets under management.

SEBI contends that by his action, Mr Arora scuttled the plan to sell the stake. His moves, according to SEBI,

Led to a fall in net assets by about Rs 1,300 crore in a span of five months.

Forced the fund to indulge in distress selling of the most liquid stocks in the portfolio.

Affected the NAV and returns to investors who stayed with the fund.

The pullout was mainly by corporates and high net-worth investors, leaving retail investors in the lurch. SEBI has also indicated that there was a conflict of interest as Mr Arora stood to gain Rs 30 crore — one-third of it upfront — if Henderson gained control. But SEBI's case against Mr Arora on this score rests on weak ground for the following reasons:

It is common for funds to see large outflows if there are indications of a change in ownership and/or management. When the Zurich group, at the global level, announced that it intended to exit the asset management business, the Indian affiliate suffered considerable redemption pressure. Assets under management declined from about Rs 4,560 crore in November 2002 to Rs 2,686 crore in March 2003. What happened in Alliance Capital's case was no different.

The other key factor is the style of management. Alliance has always had an aggressive fund management style, which would appeal to investors with a high-risk preference.

Such smart money is always likely to be pulled out quickly, even if there is a hint of uncertainty. The likelihood of Mr Arora's not being in charge could have accentuated the uncertainties.

Alliance Capital, by its opaque approach, probably did more damage and magnified the outflows. There was never a clear announcement of the firm's intent.

Only the appointment of an intermediary to find buyers for the strategic stake provided a clue. But months before this appointment, speculation had been rife about an imminent exit.

SEBI's point about the effects of distress selling is, indeed, valid. But it has not pinned the responsibility on the right quarters. Notably, in the first six months of 2003 — when redemption pressures were high — Alliance Capital maintained cash positions that were marginal.

The fund, clearly, had no problems in liquidating assets to meet redemption needs. SEBI has in its order provided no information to back up its case that investors suffered losses.

That Mr Arora was interested in bidding for the fund was also known for quite some time. It is not uncommon for employees to bid for their company, and it has happened in the manufacturing sector. Mr Arora — with the public identifying the equity funds more with him than probably Alliance — would have viewed this as a business opportunity.

To make clear his intent of opting out upfront, if any other fund acquired control, was also in order. In fact, SEBI should improve disclosure requirements that apply in mutual fund merger/sell-off situations, to ensure that investors get a good idea of what key fund management personnel intend to do.

If SEBI held the view that the employees should not have bid for the fund, it is surprising why it chose to remain silent till its investigations started. For the first four months of 2003, it was well known that Mr Arora was interested, and was indeed, making a bid. SEBI could have stepped in then and acted suitably.

SEBI has also said that Mr Arora stood to make a personal gain of Rs 30 crore if Henderson Global won the bid. Had the latter placed a bid, it would have been based, largely, on the fund continuing to attract fresh assets. In this scheme of things, Mr Arora was a key factor.

In this backdrop, to have an arrangement, which provided for a share — as a percentage of assets under management — to Mr Arora is only to be expected. If SEBI has reasons to suspect mala fide in this arrangement, it has to come out with the details.

Indeed, given the seriousness of the charges, the SEBI order is remarkable for its lack of detail. In cases such as this, brevity does not pay.

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