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S. Vaidya Nathan

IN ITS second order in the case involving Mr Samir Arora, former Chief Investment Officer of Alliance Capital Asset Management (India), the Securities and Exchange Board of India has come up with rather weak arguments on issues of fall in the net asset values and assets under management.

There is a disconnect with the ground realities in SEBI's reasoning for the divergence in the case of assets of Alliance and Zurich India Mutual Fund.

By dealing with these issues in an expansive, but unconvincing manner, SEBI has weakened its case against Mr Arora on his bid for Alliance Capital through Henderson Global.

On this issue, its main charge is that Mr Arora caused a deliberate fall in assets to acquire the fund at a lower price. But what happened in the case of Alliance Capital's assets is not something unusual.

Zurich India's assets fell in a more pronounced manner compared to Alliance. There were indications towards the last quarter of 2002 that both may want to exit their Indian operations.

Once this intent became clear, the assets of the two funds declined by over Rs 150 crore, with Zurich taking a bigger knock.

As there is uncertainty associated with ownership change, investors may want to pull out their investments.

This can be more pronounced if the funds have a good track record, which was the case with Zurich and, to a lesser extent, with Alliance Capital.

If the performance is also linked to individual fund managers, the outflows can get exaggerated. This happens routinely in US fund houses too.

Eventually, Alliance did not go through with the sale. Zurich was acquired by HDFC. Rather than examining the asset trends from a holistic perspective, SEBI has taken cover under a technicality.

It has cited the increase in the asset base between March 31 (when the HDFC-Zurich agreement was signed) and May 31 (just before the actual merger) in support of its case. Had SEBI viewed this from a larger perspective, it would have been hard-pressed to explain its case in a convincing manner.

When funds face such large-sized redemption pressures, it is also inevitable that they have to sell the most liquid parts of their portfolio, even if they would otherwise have preferred to hold them.

This can have a negative effect on the NAV and could lead to under-performance when compared to peer funds.

In the circumstances, the degree of under-performance has not been stark in Alliance's case.

Also, one notable aspect is that Alliance had remained fully invested in its equity schemes during this period, in tune with its usual strategy.

The outflow has also been largely from debt funds, and here SEBI's attempt to place the responsibility on Mr Arora appears out of place.

Rather than trying to pin the charge on fall in assets and NAV, SEBI may be better off pressing the issue relating to Alliance Capital-Samir Arora-Henderson Global on the score of conflict of interest.

It may then have a stronger case, which could stand scrutiny in higher legal fora.

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