Fairfax has more than 10% shareholding and voting rights indirectly in two MFs – IIFL and Quantum. Fairfax said it’s in the process of paring its stake in IIFL Wealth to comply with Sebi norms.
“Sebi had issued a show cause notice dated October 8, 2021 (SCN) against Fairfax Financial Holdings Limited (FFHL), the ultimate parent entity of the Fairfax Group, alleging a violation of Regulation 7B of the Sebi (Mutual Funds) Regulations, 1996 by FFHL,” Fairfax said recently in the offer document filed by insurance company Go Digit, in which the Canadian fund is a major investor.
IIFL MF is a wholly owned subsidiary of IIFL Wealth. An associate fund of Fairfax, FIH Mauritius, owned a 13.6% stake in IIFL Wealth as of June this year, shareholding data showed. Quantum MF is a subsidiary of Quantum Advisors Pvt Ltd, a joint venture between Ajit Dayal and Fairfax in which Fairfax owns a 49% stake through its associate Hamblin Vasta Investment Counsel.
The regulator has in the past been strict about crossholding norms. It had penalised three public sector entities –
, Life Insurance Corp of India and – for violating these rules due to their stakes in UTI MF.
‘Inadvertent Violation’
“The show cause notice, which was replied to on December 22, 2021, alleges, amongst other things, that: (i) FFHL indirectly holds over 10% voting rights in an asset management company and trustee company of one mutual fund, while being an ‘associate’ of the sponsor of another mutual fund; and (ii) FFHL indirectly holds over 10% of the voting rights in the asset management company and trustee company of more than one mutual fund,” Fairfax said in the document.
Sebi and Fairfax didn’t respond to queries.
The fund said it has already embarked on compliance.
“FIH Mauritius Investments Ltd… has since entered into a binding agreement for sale of certain of its shareholding in
Limited, the sponsor of IIFL Asset Management Limited and IIFL Trustee Limited, subject to regulatory approvals,” Fairfax said in the document. “Further, FFHL had filed a settlement application dated June 3, 2022, with Sebi under the Sebi (Settlement Proceedings) Regulation, 2018.”
According to various media reports, Fairfax had decided to divest a part of the IIFL Wealth stake in March 2022. ET could not ascertain whether the transaction has been concluded.
Legal experts say Sebi has the powers to continue the probe and levy penalties on Fairfax even if the Canadian fund divests its stake in one of the entities in compliance with norms.
“The violation in this case is inadvertent since Fairfax is a strategic investor only in one MF, Quantum, and hope Sebi allows the violation to be settled,” said a leading fund practice lawyer. “Both investments are more than seven years old, and the violation is a result of stock split in IIFL group shares.”
Fairfax first invested in IIFL in 2011 when it acquired a 9% stake in the company. Back then, all IIFL group entities were under the same stock. Subsequently, Fairfax increased its stake in IIFL through a series of capital infusion transactions.
