Monday, March 10, 2014

SEBI plans to reduce number of Mutual Fund Houses


R BALAKRISHNAN | 03/03/2014 11:05 AM |

Another new twist to mutual fund regulations—as regressive as the previous ones

The mutual fund industry is once again at the receiving end of regulatory manipulation. Every few months, the Securities and Exchange Board of India (SEBI) develops an urge to mess with the fund companies. This time, it has issued two new fatwas. One, SEBI wants the asset management companies (AMCs) to have a minimum net worth of Rs50 crore, as opposed to the present minimum of Rs10 crore. Two, it also wants the AMCs to invest at least 1% of the corpus of each scheme (up to a maximum of Rs50 lakh) to demonstrate their ‘skin in the game’. Does this, in any way, make things better for the mutual fund investor?

SEBI, to my mind, seems to be aligned with the interests of the big fund houses. There are at least 10 AMCs who will be short of the Rs50 crore equity base. If they cannot raise the fund, it is logical to presume that they would have to sell out or shut shop.

Nowhere in the world does such a comical regulation exist. It is not for SEBI to promote or decide on the business strategy for a fund house. Some fund houses may not want to go retail or serve every nook and cranny and so may need less of capital. Can SEBI decide what is right?

SEBI, anyway, micro-regulates fund houses on where they can invest. And an investor is only entitled to the NAV of his investment and nothing more. An increased capital does not mean he would get a better return. I recall that, in the early days, when the net worth was raised from Rs5 crore to Rs10 crore, one of the fund houses simply ‘bought’ the premises of the promoter company for Rs9 crore or so. All that the promoter did was to shift the ownership of a property from one to another. And did SEBI do anything? No. The net worth ‘criterion’ was met. This time, it is unlikely that professionally-run fund houses, like Quantum, can find this Rs50 crore very easily. And pray, what is the need for this? The SEBI press release justifies the hike with the following words of wisdom: “objective is to ensure that Mutual Funds achieve a reasonable size and play an important role in achieving the objective of financial inclusion while further enhancing the transparency,” so that investors can take informed decision.

A mutual fund will expand its business, if it sees a benefit in doing so. SEBI, or the government, cannot force it. And the second part of the sentence is incredible: “while further enhancing the transparency A higher capital base will enhance transparency?

What SEBI does not seem not to realise or understand is that the mutual fund industry’s expansion is a function of the per capita disposable incomes. If SEBI can regulate well, as they are supposed to, investors would be delighted.

Finally, what does this mean for the investor? I think this should not impact investors in any way. Either the fund house with a lower capital base will find the money or sell out the schemes or fold up the schemes. In any case, the NAV is not at any kind of risk. So, if you are happy with the performance of the scheme, do not rush to exit.

The ‘seed’ capital of the AMC investing 1% (subject to a maximum of Rs50 lakh) also means nothing to you. It does not give any increased confidence to anyone. Funds are managed by professionals who are not going to do any better or worse, simply because there is some money of the AMC invested in it. What impact will Rs50 lakh have on a Rs10,000 crore plus scheme like HDFC Top 200?

So, ignore this SEBI missive and carry on what you were doing. SEBI, run by an ex-IAS officer, possibly believes in financial inclusion, social justice, etc. But its actions are creating nightmares for fund houses especially the smaller ones.

1 comment:

Vijay said...

This looks a plan cooked up by the larger fund houses and mega distributors. They must be feeling the heat from well performing funds like Quantum.