Order in the matter ICICI Prudential Dynamic Plan

For ICICI Prudential Trust Limited: Mr. Indranil Deshmukh, Advocate Mr. E.B. Desai, Chairman For ICICI Prudential Asset Management Company Limited and Chief Executive Officer: Mr. Virag Tulzapurkar, Senior Advocate Mr. Nimesh Shah, Chief Executive Officer and Managing Director Ms. Supriya Sapre, Head- Legal & Compliance

For the Securities and Exchange Board of India: Mr. Vijayakrishnan G., Deputy Legal Adviser Mr. T. Vinay Rajneesh, Legal Officer Ms. Chhavi Sinha, Legal Officer Ms. Pooja Mirchandani, Manager

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI), noticed that the advertisements issued in respect of “ICICI Prudential Dynamic Plan” in various newspapers during July 2, 2009–July 10, 2009 and through hoardings at 30 locations in 9 cities were not in conformity with the Advertisement Code as specified in the VIth Schedule to the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 (hereinafter referred to as the Mutual Funds Regulations) more particularly Clause 3 of the said code and Clauses 2(3) and (5) of Section III of the Guidelines for advertisements by Mutual Funds issued vide SEBI Circular dated June 5, 2000. It was alleged that ICICI Prudential Mutual Fund and ICICI Prudential Asset Management Company Limited (hereinafter referred to as AMC) have violated Regulation 30 read with SEBI Circular dated June 5, 2000 and that the Chief Executive Officer of the AMC has failed to ensure that the mutual fund complies with the provisions of the relevant regulations, guidelines and circulars issued from time to time, in violation of 25 (6A) of the Mutual Funds Regulations. In view of the above, SEBI issued a notice dated September 7, 2009 requiring ICICI Prudential Mutual Fund and AMC (including its Chief Executive Officer) to show cause as to why appropriate action should not be taken against them. Thereafter, AMC, the Chief Executive Officer of AMC and ICICI Prudential Trust Limited filed separate replies, vide letters dated September 30, 2009. Their submissions are being considered in the later part of this Order.

2. Thereafter, an opportunity of personal hearing was granted to the aforesaid entities on November 24, 2009 wherein, Mr. Virag Tulzapurkar, senior advocate made submissions on behalf of AMC and its Chief Executive Officer. Mr. Indranil Deshmukh, Advocate made submissions on behalf of ICICI Prudential Trust Limited. Mr. Nimesh Shah (Chief Executive Officer and Managing Director) and Ms. Supriya Sapre, Head- (Legal & Compliance) of AMC and Mr. E.B. Desai, Chairman, ICICI Prudential Trust Limited were also present during the hearing. The learned senior advocate made submissions on the lines of the reply dated September 30, 2009.

3. I have considered the oral as well as written submissions made on behalf of the parties and other material available on record. As per the show cause notice, the advertisements issued in respect of ICICI Prudential Dynamic Plan were alleged to be not in conformity with the Advertisement Code as specified in the VIth Schedule to the Mutual Funds Regulations more particularly Clause 3 of the said code and Clauses 2(3) and (5) of Section III of the Guidelines for advertisements by Mutual Funds issued vide SEBI Circular dated June 5, 2000, by not complying with the following requirements:

a. Only compounded annualised yield can be advertised if the scheme has been in existence for more than one year. b. The calculation of returns shall assume that all payouts during the period have been reinvested in the units of the scheme at the then prevailing Net Asset Value (NAV) and it should be clarified in the advertisements. c. All the advertisements displaying returns/yields must disclose in the main body of the advertisements, immediately after the returns/yields and in the same font that past performance may or may not be sustained in future. The aforesaid requirements flow from Clause 2(3) and (5) of Section III of the Guidelines for advertisements by Mutual Funds issued by SEBI, vide Circular dated June 5, 2000, which are reproduced below:

“2. Performance Advertisement: If any mutual fund uses performance figures in any of its advertisements or sales literature or release/issue exclusive performance advertisements, such performance advertising must adhere to the following guidelines: 1. ……. 2…… (3) Only compounded annualised yield can be advertised if the scheme has been in existence for more than 1 year. For the calculation of compounded annualised yield the procedure prescribed in the Standard Offer Document shall be followed. All performance calculations shall be based only on NAV and the payouts to the unit holders. The calculation of returns shall assume that all payouts during the period have been reinvested in the units of the scheme at the then prevailing NAV and it should be clarified in the advertisements. The type of plan/option of the scheme for which yield is advertised shall also be mentioned. ……….. (5) All advertisements displaying returns/yields must disclose in the main body of the advertisement, immediately after the returns/yields and in the same font, that past performance may or may not be sustained in future.

If the returns/yield are unrealistically higher due to extraordinary circumstances (e.g. rise/fall in interest rates) may be clarified in the advertisement. ……………..” 4. I note that in respect of the violation of Clause 2(3), AMC submitted that the statement “Your investments have grown 6.8* times” in the advertisement is factually a correct statement. According to it, the NAV of the concerned scheme as on June 22, 2009 was Rs. 68.285, which when compared with the face value of ICICI Prudential Dynamic Plan (the Scheme) as on inception translates into 6.8 times growth. It had also stated that in the main body of the advertisement, it was stated “Rs. 1 lakh invested as on October 31, 2002 would have grown to Rs. 6.82 lakhs”. Thus, according to the noticees, 6.82 times growth in investments has been amply clarified and the advertisement does not suffer from any of the infirmities to be regarded as “misleading”. It was also submitted that the advertisement discloses only compounded annualized yield and no other yield. According to them, the yield is annual return on investment, expressed in terms of percentage which was 33.51% [Compounded Annualised Growth Rate (CAGR)] and that the same was disclosed accordingly in the advertisement.

It was also stated that for complete understanding, an asterisk (*) had been inserted immediately after the reference to 6.8 times, to indicate that such figure was wholly based on CAGR. Therefore, according to the noticees, the reference to “your investments have grown 6.8* times” in the advertisement cannot be considered as display of return/ yield, since 6.8 times reflects growth in the value of the investment over a span of seven years and not annual return/yield. The noticees further claimed that the figure advertised is wholly based on CAGR and nothing else. They further submitted that since the calculation of the compounded annualised yield was based on NAV of the growth option, there arises no requirement of considering payouts made, if any as reinvested, which is applicable only in case of NAV of dividend option. They also stated that reference to return/yield disclosed in the advertisement was 33.51% (CAGR) and the same was disclosed in the main body of the advertisement. According to them, the required disclaimer ‘past performance may or may not be sustained in future’ has been stated in the same font as the disclosure of CAGR.

One of the other contentions was that it was only after obtaining guidance/clearance from the dealing officer of SEBI that the compliance team approved the advertisement and the same was subsequently released for circulation. In this regard, I find that the advertisements of the mutual funds are not approved or cleared by SEBI and that the same are only to be submitted to SEBI, within a specified period from the date of the issue, in terms of Regulation 30(1) of the Mutual Funds Regulations. Further, the said provision prescribes that the advertisements shall be in conformity with the Advertisement Code as specified in Sixth Schedule. Therefore, the contention of the noticees that they had discussed with the dealing officer before issuing the advertisements would not benefit them.

5. In terms of Clause 2(3) of Section III of the Guidelines for advertisements by Mutual Funds prescribed under SEBI Circular dated June 5, 2000, only Compounded Annualised Yield can be advertised, if the scheme is in existence for more than 1 year. The said clause is clear and unambiguous. Thus, the stipulations imposed under the said circular are statutory and mandatory in nature. The requirements prescribed by the Regulator do have a purpose behind the same. Therefore, only Compounded Annualised Yield can be advertised in the performance advertisements. It is well settled that when something is to be done statutorily in a particular manner, it can only be done that way. I note that the requirements (advertising compounded annualised yield) were specified by SEBI, vide the aforesaid circular which was framed in terms of the powers conferred upon it under Section 11(1) of the Securities and Exchange Board of India Act, 1992 read with Regulation 77 of the Mutual Funds Regulations. Moreover, the requirements were primarily issued to ensure that the investors get truthful, fair and clear information about the schemes offered by the mutual funds.

The intention or the reason behind the same was that the advertisement is not designed in content and format or in print likely to be misunderstood or likely to disguise the significance of any statement. Such measures have been introduced towards investor protection and the non-compliance cannot be ignored as a trivial failure. Therefore, all mutual funds are mandated to comply with the said requirement. The contention of the noticees was that CAGR was mentioned in the advertisement. Even, the said plea cannot be accepted as I note that the impugned advertisements contain returns (6.8 times) in large font size, whereas CAGR and the disclaimer have been mentioned in a much smaller font. It is specifically mentioned in the Guidelines that only compounded annualised yield can be advertised if the scheme has been in existence for more than one year. It prohibits any other manner of advertising the growth of the fund. The fact that the scheme ‘ICICI Prudential Dynamic Plan’ was in existence for more than during the time of the impugned advertisements is not disputed before me. Therefore, I cannot accept the contention of the noticees that the insertion of an asterisk (*) immediately after the reference to 6.8 times (in the advertisement) to indicate that such figure was wholly based on CAGR would satisfy the requirement.

In view of the above, the contravention of Clause 2(3) of Section III of the Guidelines for advertisements by Mutual Funds prescribed under SEBI Circular dated June 5, 2000 stands established.

6. In response to the allegation that the noticees have not complied with the requirement of clarifying in the advertisement that the calculation of returns shall assume that all payouts during the period have been reinvested in the units of the scheme at the then prevailing NAV, it is submitted that since the calculation of compounded annualised yield was based on NAV of growth option, there arises no requirement of considering payouts made if any as reinvested, which is applicable only in case of NAV of dividend option. I am unable to accept the contention of the noticees in this regard as the said advertisement did not disclose that the calculation of the compounded annualised yield is based on NAV of Growth Option and thus does not comply with Clause 2(3) of Section III of the Guidelines for advertisements by Mutual Funds prescribed under SEBI Circular dated June 5, 2000. This is more so as Clause 2(3) prescribes that the type of plan/option of the scheme for which yield is advertised shall also be mentioned. However, the same was not done in the impugned advertisements.

7. It was also alleged that the advertisements did not comply with the requirements of displaying returns/yields in the main body of advertisement, and also the disclaimer that the ‘past performance may or may not be sustained in future’ in the same font, immediately after the returns/yields. In terms of Clause 2(5) in Section III of the Guidelines for advertisements by Mutual Funds prescribed under SEBI Circular dated June 5, 2000, all advertisements displaying returns/yields must disclose in the main body of the advertisement, immediately after the returns/yields and in the same font, that past performance may or may not be sustained in future. In this regard, it is submitted that the said disclaimer was put in the same font size as that of CAGR. I am unable to accept the said plea. As stated hereinabove, in terms of Clause 2(3) of Section III of the Guidelines for advertisements by Mutual Funds prescribed under SEBI Circular dated June 5, 2000, only compounded annualised yield can be advertised, if the scheme is in existence for more than one year. In the present case, it was advertised in large font in the main body “Your investments have grown 6.8* times”, wherein the * (asterisk) referred to the CAGR of the scheme, which was printed along with the disclaimer in small font size.

The statutory disclaimer (past performance may or may not be sustained in future) was smaller than the font size of the returns/yield (Your investments have grown 6.8* times) displayed in the advertisement, thereby contravening Clause 2(5) of Section III of the Guidelines for advertisements by Mutual Funds prescribed under SEBI Circular dated June 5, 2000. Thus, I have no hesitation to hold that the mutual fund and the AMC have contravened the aforesaid provisions of the SEBI Circular dated January 5, 2000. The impugned advertisement could have misled the investors thereby contravening Clause 3 of the Advertisement Code specified under Sixth Schedule of the Mutual Funds Regulations. Consequently, the Chief Executive Officer of the AMC had failed to ensure that the Mutual fund complied with all the provisions of the Mutual Funds Regulations and the guidelines or circulars issued from time to time and thereby violated Regulation 25(6A) of the Mutual Funds Regulations. I further note that the AMC had informed SEBI that it withdrew the advertisements on receipt of the show cause notice from SEBI.

Considering the case in its totality, the show cause notice dated September 7, 2009 is disposed of as ordered hereinbelow.

8. In view of the foregoing, in exercise of the powers conferred upon me under Sections 11 and 11B of the Securities and Exchange Board of India Act, 1992 read with Section 19 thereof and Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, I hereby dispose of the proceedings initiated vide the show cause notice dated September 7, 2009 with a direction to ICICI Prudential Mutual Fund, ICICI Prudential Asset Management Company Limited to ensure that they abide strictly by the stipulations on advertisements by mutual funds, issued by the Securities and Exchange Board of India, from time to time, both in letter and spirit. The Chief Executive Officer of ICICI Prudential Asset Management Company Limited shall ensure that the Mutual Fund complies with all the provisions of Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 and the Guidelines and Circulars issued from time to time.

DR.K.M.ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA PLACE: MUMBAI DATE: MARCH 17, 2010