Star Fund Manager of Alliance Debarred

The regulator's case against the star fund manager may not be as strong as SEBI, India's securities regulator would have us believe.

Article previously published in the BNA International publication World Investment Regulation Review Vol 2, Number 9.

The Securities and Exchange Board of India (Sebi) passed an interim order on August 9, 2003, debarring Samir Arora, the chief investment officer of Alliance Asset Management Company in India, from participating in the securities markets.

Another order, passed on September 24, 2003, confirmed the first one, resulting in the continuance of Arora's bar from the securities industry until further orders.

The order is based on several erroneous applications of the law, and is not logically consistent. At best, it does nothing for the markets in terms of setting the regulatory tone and, at worst, penalises Arora's superstardom rather than a wrongdoing.

The first order was riddled with inconsistencies and failed to fully state the facts. The second one fills in some of the gaps in the logic and facts of the first order but still falls short of proving its case emphatically. This piece critically analyses the salient parts of the order.

Facts: Sale of AMC

Alliance Capital Management, United States (Alliance, United States) owns an asset management company (AMC) in India which manages mutual fund schemes.

Alliance, United States, sought to sell its Indian AMC by an offer to select bidders.

Samir Arora, the fund manager of the AMC, told the management that he would continue working with the AMC only if it were bought by one Henderson Global Investors. Arora had a contract with Henderson for a substantial equity stake in the proposed entity.

AUM erosion Vs NAV erosion

According to the regulator this proposal created panic in the markets and the assets under management (AUM) of the AMC fell, enabling the Henderson/Arora group to acquire the company at a discount to the original market value.

The first hole in the argument of the regulator is equating the AUM with the net asset value (NAV) of the fund. The order seems to suggest that unitholders of the mutual fund are somehow hurt by large-scale redemptions.

Nothing could be farther from the truth. People liquidated their units of various schemes because of the value they put in the brand equity of its fund managers.

Thus instead of staying invested in Alliance, they chose to liquidate their investment at the then current NAV. It is likely that they...