ICB to take RACE to court over Tk220cr mutual fund irregularities

Highlights

• ICB to sue RACE over alleged mismanagement of six mutual funds
• Potential investor losses exceed Tk220 crore
• ICB accuses RACE of violating trust deeds through Tk345 crore investments
• BSEC considering appointing a special auditor
• RACE denies allegations, calls them misleading and ill-motivated

The state-run Investment Corporation of Bangladesh (ICB) has decided to sue RACE Asset Management, alleging mismanagement of six mutual funds that could result in "losses exceeding Tk220 crore" for investors.

As trustee of those six mutual funds, investment bank ICB served a legal notice to RACE on 24 August, accusing the asset manager of violating trust deeds through Tk345 crore of investments in four projects. ICB says these investments resulted in losses for investors – either due to unrecovered capital and returns when bonds matured, or from shares bought at higher prices.

ICB's Managing Director, Niranjan Chandra Debnath, told TBS, "Under the trust deeds and the law, the trustee ICB has numerous responsibilities. Our trustee division has found irregularities in the management of the funds, and the securities regulator [BSEC] has also raised observations regarding the funds managed by RACE Asset Management."

"To protect investors' interests, ICB as trustee has therefore decided to take legal action against the asset manager RACE," he added.

RACE, however, did not respond to ICB's legal notice. Instead, it sent legal notices to ICB officials asking them to specify which laws were broken, a RACE official told TBS, without providing further details.

On 27 August, ICB also wrote to the Bangladesh Securities and Exchange Commission (BSEC), detailing the losses and overall condition of the funds. The letter recommended a special audit to investigate alleged breaches of the trust deeds and multiple violations of the 2001 Mutual Fund Regulations. 

BSEC spokesperson Abul Kalam confirmed to TBS that following the regulator's directives, ICB first issued show-cause notices and, subsequently, a legal notice to RACE.

He added that complaints about RACE's fund management and alleged irregularities had existed for some time. "The commission instructed the trustee to take legal action in response to these irregularities," he said.

Kalam confirmed that the appointment of a special auditor is under consideration to scrutinise potential losses more closely.

Meanwhile, RACE Asset has rejected ICB's allegations, insisting that no irregularities occurred in its investment decisions. The company also questioned why the trustee is raising concerns and pursuing legal action over investments made long ago.

According to its website, RACE Asset manages six mutual funds with a combined size of Tk1,220 crore, for which ICB serves as trustee and custodian.

RACE, founded by banker-turned-businessman Chowdhury Nafeez Sarafat and Bangladeshi-US investment professional Hasan Taher Imam, obtained an asset management licence in September 2008 from the BSEC.    

Six funds, investments by RACE, and alleged irregularities   

According to ICB, the potential losses in the six funds are substantial: Trust Bank First Mutual Fund faces Tk34.88 crore in losses; Exim Bank First Mutual Fund Tk13.20 crore; First Janata Bank Mutual Fund Tk33.97 crore; EBL First Mutual Fund Tk20 crore; First Bangladesh Fixed Income Fund Tk98 crore; and IFIC Bank First Mutual Fund Tk19.34 crore.

Sources said RACE invested in four major projects across its six funds: bonds of Regent Spinning Mills and Best Holdings, and pre-placement shares of Padma Bank and Multi Securities. 

As of 30 June 2024, total investments in these four projects amounted to Tk333.71 crore, initially placed between 2013 and 2017 with an original capital of Tk345 crore.

For example, Best Holdings shares were priced at Tk35 each through a book-building process during a Tk450 crore capital raising. While general investors bought shares at Tk35 each, RACE funds purchased the same shares at Tk65 each.

Despite a BSEC directive on 29 November 2023 requiring bond conversion to equity at book-building prices, all six funds converted Best Holdings bonds at higher prices.

The trustee for the Best Holdings bond was Green Delta Insurance, while RACE Portfolio and Issue Management was the registrar.

Under the 2001 Mutual Fund Regulations, investments by the same asset manager across schemes are prohibited, a restriction that was violated, constituting a breach of Clause 7 of the Fifth Schedule, said ICB officials. 

Furthermore, funds failed to provide detailed bank transaction information regarding new investments and withdrawals, violating Clause 33(2). The bond's 25% equity conversion rule was also breached, with full conversion executed, they added.

ICB also reported violations in Padma Bank investments under Clause 56 of the regulations, which requires asset managers to conduct proper financial analysis before making investment decisions. 

In the case of Regent Spinning Mills, investment and transaction details were not shared with the trustee or custodian, violating Clause 33(2), with investments made from 8 April, even though the trust deed was completed on 7 June.

Similarly, the pre-IPO placement shares of Multi Securities and Services Limited were purchased at a premium without following Clauses 55(1) and 56 of the Mutual Fund Regulations.

Overview of investment

Analysis of fund data shows that the largest investment across the six funds was in Best Holdings' Tk1,200 crore bond. While the initial investment totalled Tk184 crore, by 30 June 2024, it had declined to Tk149.94 crore.

The second-largest allocation was to Regent Spinning Mills' Tk200 crore bond. The initial investment of Tk65 crore had grown to Tk96 crore by 30 June 2024. The bond was secured against co-collateral in shares of Regent, listed on the stock market. 

However, Regent is now defunct, prompting ICB to file a case against the defaulting company.

Investments in Padma Bank's pre-placement shares stood at Tk52 crore, while Multi Securities attracted Tk35.66 crore, compared with an initial brokerage allocation of Tk44.50 crore.

First Bangladesh Fixed Income Fund: Tk98cr losses

The First Bangladesh Fixed Income Fund, sponsored by Eastern Bank, Janata Bank, Sonali Bank, and ICB Unit Fund, has incurred potential losses of Tk98.69 crore.

According to the trustee's calculations, the fund lost Tk33.31 crore from investment in Best Holdings bonds. Investments in Regent Spinning bonds resulted in a Tk33 crore loss, Padma Bank pre-placement shares incurred Tk25.55 crore in losses, and Multi Securities investments led to Tk6.82 crore in losses.

Trust Bank First Mutual Fund: TkTk35cr losses

The Trust Bank First Mutual Fund, launched in 2010 with a fund size of Tk200 crore, is sponsored by Trust Bank. According to ICB, the fund's potential losses amount to Tk34.88 crore.

Of this, an estimated Tk5.12 crore loss stems from bond investment in Best Holdings, Tk17 crore from Regent Spinning Mills bonds, Tk9.94 crore loss from Padma Bank investments in 2013, and Multi Securities' pre-IPO placement resulting in a potential loss of Tk2.81 crore.

Exim Bank First Mutual Fund: Tk13cr losses

The Exim Bank First Mutual Fund, sponsored by Exim Bank, was established in 2013 with a fund size of Tk100 crore. According to ICB, the fund has incurred potential losses of Tk13.20 crore.

A Tk2.05 crore loss arose from converting Best Holdings bonds into shares. Although the bond matured, the Tk8 crore invested in Regent Spinning Mills has yet to be recovered. The fund reported a Tk3.15 crore loss from its pre-IPO placement in Multi Securities and Services Limited.

First Janata Bank Mutual Fund: Tk34cr losses

The First Janata Bank Mutual Fund has a fund size of Tk200 crore. According to a letter submitted by the trustee to the commission, the fund has incurred potential losses of Tk33.97 crore.

These include Tk8.82 crore from Best Holdings bonds, Tk15 crore from Regent Spinning bonds, Tk6.38 crore from Padma Bank pre-placement shares, and Tk3.75 crore from investments in Multi Securities.

EBL First Mutual Fund: Tk20cr losses

The EBL First Mutual Fund, sponsored by Eastern Bank, has a fund size of Tk100 crore. According to the trustee's calculations, the fund has incurred potential losses of Tk20.01 crore.

Of this, Tk1.23 crore was lost from investment in Best Holdings bonds. Investments in Regent Spinning Mills bonds caused a Tk13 crore loss, Padma Bank pre-placement shares Tk4.47 crore, and Multi Securities investments Tk1.30 crore.

IFIC Bank First Mutual Fund: Tk19cr losses

The IFIC Bank First Mutual Fund, sponsored by IFIC Bank, has a fund size of Tk120 crore. The fund has incurred potential losses of Tk19.34 crore.

According to the trustee's calculations, the fund lost Tk1.99 crore from investment in Best Holdings bonds. Investments in Regent Spinning bonds resulted in a Tk10 crore loss, Padma Bank pre-placement shares incurred Tk5.75 crore in losses, and Multi Securities investments led to Tk1.60 crore in losses.

Statements from RACE and ICB

Despite phone calls and SMS, The Business Standard received no response from Bangladesh Race Asset Management's CEO and MD, Hasan Taher Imam, regarding ICB's allegations.

When contacted through RACE's communications department on three issues, they sent a written statement. On Tuesday, RACE's lawyer called this reporter and expressed willingness to provide a statement, but did not submit one as of the filing of this report on Wednesday.

When contacted by TBS, the ICB also provided a written statement.

Their arguments are summarised below:

RACE: The matters are currently sub judice, and ICB has been informed. The court, finding no conclusive truth in the allegations, directed that the fund operations continue.

ICB: Based on the investigation committee's findings, the securities regulator froze fund operations due to irregularities. When RACE challenged this validity through a writ petition, the court issued a Status Quo order for six months. This order only instructed operations to continue and did not dismiss the trustee's complaints.

RACE: These old, unreasonable, and misleading issues are being periodically publicised in the media, which is ill-motivated and amounts to contempt of court.

ICB: RACE is repeatedly using the court's Status Quo order as an excuse, attempting to create confusion by raising unrelated and irrelevant matters instead of addressing the complaints and questions.

RACE: The BSEC directly approved investments in four non-listed securities (one of which later got listed), so there has been no violation of the 2001 Mutual Fund Regulations or the trust deeds.

ICB: BSEC's recent directives are not consistent with RACE's investment guidelines or the trust deeds. RACE has used the Status Quo order as an excuse to obstruct a special audit.

RACE: Members of the trustee committee approved these investments at different times.

ICB: Investment decisions are entirely the responsibility of the asset management company. Therefore, the claim that the trustee approved the investments is factually incorrect and misleading.

RACE: Who bears responsibility for losses arising from investments in listed or non-listed securities — the asset manager? Fund documents clearly warn about market investment risks. Who is accountable for losses caused by various decisions of policymakers over time? In such cases, is the trustee's role not also questionable?

ICB: Determining which securities the fund invests in is the sole and full responsibility of the asset manager. If any losses occur from investments, the responsibility lies entirely with the asset manager.