Why NRE Investors Sue ICICI for $ 103 Mn in Dynamic Bond Fund-III?
Some of the NRE investors sue ICICI firms in Mauritius for $ 103 Mn for worst performance of one of the fund named Dynamic Bond Fund-III. What really happened in this case? What ICICI Bank has a say on this? Does it repeat in Indian Mutual Fund Industry? What lessons investors need to learn from this incident?
What is ICICI Dynamic India Fund-III all about?
ICICI has floated Dynamic India Fund-III, which identified its objectives that it would invest in multiple real estate projects in India.
Why NRE Investors Sue ICICI in this case?
Some of the NRE Investors in Mauritius have invested in the Dynamic India Fund-III. A group of 69 NRE Investors moved to the Supreme Court of Mauritius seeking USD 103 Mn / Rs 618 Crores as damage on ICICI Group for the under performance of the fund. They claim that ICICI Bank made false promises while mobilizing funds, however it failed miserably. The petitioner says ICICI Firm invested in 13 projects which includes, 3 in Hyderabad and 2 in Mumbai accounts for 60% of its corpus. Though the prospectus indicated that it would invest in multiple real estate projects, in reality it invested in a few projects without diversification. Even after 9 years, except one, none of the projects are completed. One of the projects in Chennai is not even commenced work after 9 years because of serious infrastructure problems. Petitioners indicate that its total negligence of the ICICI Firm in doing proper research and identifying right properties which are being funded through Dynamic India Fund-III.
What does ICICI Bank say on this?
ICICI Venture, a unit of ICICI Bank, which has total assets of USD 2.5 Billion dismisses allegations indicating “totally baseless” and indicate that it would take necessary steps to respond to the legal proceedings.
ICICI Venture further adds saying it is common knowledge that the Private Equity as an asset class does not guarantee returns. Projects in real estate have a longer gestation period, hence return would be accrued over a period of time. Hence fund period is increased for 3 more years compared to 9 years earlier. However, it says it has given a cash exit option that is in line with global best practices.
Where could be the real problem?
Investors had complaint saying in the executive summary of the fund presented to investors in April, 2005, it states that the fund would seek to deliver more than 25% returns per year. They also claim that insufficient documents were given during investment and risks / disclaimers were not communicated.
Apart from Supreme Court of Mauritius, they also filed a complaint with the Securities Exchange Board of India (SEBI) and Reserve Bank of India (RBI).
What are the lessons learnt from this?
It is immaterial whether it is ICICI Bank or some other mutual fund AMC. I feel we should learn some lessons from this incident.
- Don’t get into false alarms that you would get bumper returns for short term or for the long term. None of the investment options would give 25% returns per annum, unless it is an equity stock market, that too after taking a risk. Even Real Estate properties, corrections are expected sometimes.
Example: There were thousands of LIC agents who tried to promote LIC Market plus insurance plan indicating Rs 10,000 investment per annum for 10 years would create Rs 50 Lakhs wealth. They even printed brochures and fooled everyone. When I was reviewing it I told my friends and colleagues that you can expect max of 10% return, not more than that. Currently, such fund is just at Rs 85,000 after 6 years of premium payment.
- Ask for disclaimers / facts / references before you proceed for any investments.
If you observe, all mutual fund advertisements /NFO’s, SEBI has given mandate about disclaimer. This would catch attention of investors on the first page and not on last page / hiden with small font.
- Investment in real estate would yield results in the long run. Have patience.
Conclusion: Don’t get into the trap of thinking that you would make big money with investment. Read the documents carefully, understand the risks involved and invest in such funds.
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Why NRE Investors Sue ICICI for $ 103 Mn in Dynamic Bond Fund-III