Nippon India Mutual Fund (formerly Reliance Mutual Fund) has come under scrutiny after incurring a massive loss of ₹1,830 crore due to its investment in Yes Bank’s AT-1 bonds. The decision to invest in these high-risk bonds resulted in significant financial losses for investors, as the bonds were completely written down.
What Are AT-1 Bonds?
AT-1 (Additional Tier-1) bonds are high-risk debt instruments issued by banks to strengthen their capital base. These bonds can be written down or converted to equity in times of financial distress. In the case of Yes Bank, the AT-1 bonds were fully written off, leaving investors with no returns.
SEBI’s Allegations Against Nippon India Mutual Fund
In August 2024, the Securities and Exchange Board of India (SEBI) issued a show-cause notice to Nippon India Mutual Fund, alleging:
- The fund house earned ₹88.60 crore as management fees from these investments, while investors faced heavy losses.
- The transactions involved potential quid pro quo, indicating mutual benefits between parties.
- Violations of Asset Management Company (AMC) regulations and additional expenses charged to schemes
Why Is Reliance Mutual Fund Involved?
At the time of the controversial transactions, the fund was operating under the name Reliance Mutual Fund, owned by Reliance Capital. In September 2019, it was rebranded as Nippon India Mutual Fund.
Key points of contention include:
- ₹2,850 crore invested in Yes Bank’s AT-1 bonds.
- A portion of this amount went into Morgan Credit Private Limited’s NCDs, linked to Yes Bank’s promoters.
CBI Investigation and Other Findings
The Central Bureau of Investigation (CBI) is also probing the case alongside SEBI. Key highlights of the investigation include:
- January 2017: Yes Bank extended a ₹500 crore facility to Reliance Home Finance.
- October 2017: Yes Bank invested ₹2,900 crore in NCDs issued by Reliance Capital, Reliance Home Finance, and Reliance Commercial Finance.
- December 2024: Reports revealed Nippon India MF invested ₹950 crore in NCDs of Morgan Credit Private Limited, a company associated with Yes Bank founder Rana Kapoor.
Impact on Investor Trust
The controversy has raised serious concerns about transparency and ethics in mutual fund operations. SEBI has proposed:
- Recovering management fees from the fund house.
- Imposing restrictions on Nippon India Mutual Fund.
Conclusion
The Nippon India Mutual Fund controversy serves as a stark reminder of the risks associated with high-risk investments like AT-1 bonds. For investors, it underscores the importance of due diligence and understanding the risks involved in mutual fund investments.
The ongoing investigations by SEBI and CBI may reveal further details, which will be crucial for restoring investor confidence and ensuring better regulatory compliance in the mutual fund industry.
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