‘Stateless’ investors own equity mutual funds worth ~23,000 crore

Five fund houses account for 80% of assets from ‘other’ states

People who do not belong to any of the Indian states or Union territories own a significant amount of investment in equity mutual funds in the country, according to data published by the MF sector.

Investments classified as originating from ‘others’ in the state-wise declaration of assets under management (AUM) totalled ~23,118 crore or nearly seven per cent of total equity assets of the sector at the end of April, raising questions over who these investors are.

The Securities and Exchange Board of India (Sebi), which made the monthly state-wise assets disclosure mandatory for funds in March 2014, had described a format, which included all the states and Union territories. It also had a footnote that required funds to add any new state or territory formed to the list according to alphabetical order. Accordingly, including Telangana, formed in June 2014, India has 29 states and seven Union territories.

Data experts question the logic of presence of such a huge amount in ‘others’, when all 36 geographic divisions have been enumerated separately. The anomaly points to possible chinks in the data gathering and Know Your Customer (KYC) processes followed by the sector, as the name of the state and PIN code are important fields in any KYC format, they say. Four out of the 42 MFs did not have any asset under this category. Of the rest, all but one registered growth in assets in the ‘other’ states. The assets in this category grew by 80 per cent in the past year in line with sector growth rate, riding on the equity rally.

“It could be a data entry issue. But, that in turn means there is a KYC problem to the extent that the prescribed mandatory procedures are not being strictly adhered to,” said Pranav Haldea, managing director, Prime Database. He added this was not an issue of ‘clubbing’ of states with lesser assets, as the Sebi format itself listed out all the states and territories.

While distributors had little clue about these ‘stateless’ investors, asset managers attributed this large number to incomplete applications by investors, legacy accounts and data classification issues at the registrar and transfer agents’ (RTA) end. Many fund houses also said a significant portion of funds they classified as ‘others’ came from non-resident Indians and foreign portfolio investors (FPI). Business Standard reached out to seven fund houses, including the five which accounted for about ~18,000 crore or 80 per cent of equity assets under the ‘others’ category. The responses were very different from each other and brought out the confusion in the system.

In an emailed response, the spokesperson of Birla Sun Life AMC, which has ~2,430 crore in such assets, said, “‘Others’ is basically those records where state is not available. This could happen for the following reasons: old folios, where there was no provision to write state as part of application form; NRI folios, where foreign address is given; investor has not provided state as part of application form; and, electronic feed from channels/exchanges without state for certain folios.”

HDFC MF, which had the highest such assets in the system at ~8,712 crore, said: “As per HDFC Mutual, AUM is classified based on the address of the investor. ‘Other’ category includes primarily investors from outside of India - that is NRIs and FPIs.”

ICICI Prudential AMC, which had ~4,739 crore of assets originating from ‘others’, said: “The ‘other states’ will comprise investors who have provided overseas address and where states code don’t match with state code master of RTA database.”

The spokesperson of IDFC Asset Management said, “The reporting requirement for state-wise AUM data is prescribed by the Association of Mutual Funds of India (Amfi). The format containing the list of 36 states is issued by Amfi in which the reporting needs to be made. States, which are not included in the Amfi list and investments made by NRIs/FIIs/FPIs would be grouped under the head ‘Others’.”

This argument sounds weak because at the last count, India had only 36 geographical divisions — 29 states and 7 Union territories. Therefore, a state not included in the socalled Amfi list does not exist. Also, when Sebi has clearly prescribed a format with all states, the funds following a different list of states due to an old state master code in the RTA database, might not go down well with the regulator.

Legacy accounts, which refer to those opened several years before the current KYC and disclosure norms came into being, could be another contributor, say funds. A UTI MF spokesperson said, “These could be persons who did not mention state in their applications or those whose state

The assets in this category grew by 80 per cent in the past year in line with industry growth rate, riding on the equity rally

could not be identified. Some of these also belong to legacy accounts.” The spokesperson of SBI Funds Management did not respond to an email questionnaire sent on Friday.

Though three of the four respondents above attributed the discrepancy to NRI and overseas investors, even here there is no consistency in data or KYC practices among sector players. Prime Database data showed MFs had reported ~726 crore as ‘foreign’ equity assets, apart from the corpus declared as ‘others’. G Pradeep Kumar, chief executive of Union KBC Asset Management, one of the younger fund houses and had ~20 crore assets under ‘others’, said: “The issue could be due to people not mentioning states in their application forms. In non-resident applications, the person is required to mention his home state. Wherever the NRI mentions his home state address, his investment is classified in the respective home state, if this is not mentioned, this again goes to ‘others’ category.”

Some MF executives put the entire blame on the RTAs saying they only reproduced the data supplied by RTAs. “CAMS said this could be because of three reasons. First, people leave the state code blank. Second, overseas investors are also classified as others. Finally, Amfi has a list of states, which leaves out many states and union territories, all states that does not come under this master list are classified as ‘others’,” the executive said.

Business Standard sent emails seeking comments to the chief executives of Karvy and CAMS, the two RTAs, who between themselves handle most of the sector assets. Both did not respond.