Funds in a Bind as Sebi Acts Tough on Min­i­mum Cap­i­tal

Reg­u­la­tor stops ap­prov­ing new of­fer­ings from fund houses with net worth less than .` 50 cr

The Economic Times - - Markets + Finance - REENA ZACHARIAH

The Se­cu­ri­ties and Ex­change Board of In­dia (Sebi) has started cracking the whip on mu­tual funds, whose net worth is be­low the re­quired lev­els. The cap­i­tal mar­ket reg­u­la­tor has stopped clear­ing ap­pli­ca­tions for any new fund of­fers (NFOs) -- both eq­uity and debt schemes -- of such fund houses though they are re­quired to com­ply with the min­i­mum cap­i­tal re­quire­ments only by May 2017. The move may im­pact the busi­ness of about 14 funds, in­clud­ing Reli­gare In­vesco, IDBI Mu­tual, Motilal Oswal As­set, Quan­tum Mu­tual and Prin­ci­pal PNB As­set Man­age­ment that have net worth less than .` 50 crore, ac­cord­ing to Sebi’s in­ter­nal anal­y­sis. The reg­u­la­tor has re­ceived of­fer documents from many of these fund houses to launch new schemes, but it won't be ap­prov­ing them, said a reg­u­la­tory source. A top of­fi­cial said Sebi is en­forc­ing a rule that em­pow­ers the reg­u­la­tor to stop per­mit­ting NFOs by mu­tual funds, which are yet to ful­fil the net worth cri­te­ria even in the in­terim pe­riod. “There is a clause which says that pend­ing in­crease of net worth, no new scheme will be al­lowed to be launched,” said a Sebi of­fi­cial. On May 6, Sebi an­nounced mu­tual funds have to meet the .` 50 crore min­i­mum net worth re­quire­ment within three years as part of its at­tempts to dis­cour­age ‘non-se­ri­ous’ play­ers from stay­ing in the busi­ness. Till then, these as­set man­agers needed to main­tain a min­i­mum cap­i­tal of only .` 10 crore.

“Less cap­i­tal be­ing the rea­son for not ap­prov­ing new fund of­fer­ings is de­priv­ing smaller play­ers of a growth av­enue,” said Dhiren­dra Ku­mar, CEO of Delhi-based mu­tual fund tracker Value Re­search. Quan­tum Mu­tual Fund, which has a net worth of .` 26 crore, is a vic­tim of this rule. In March, the fund house had re­ceived Sebi ap­proval to launch a dy­namic bond fund, but it planned to hit the mar­kets post the for­ma­tion of the new govern­ment. “But by then, this no­ti­fi­ca­tion came and our plan got stalled,” said Jimmy Pa­tel, CEO of Quan­tum MF.

Smaller play­ers have ar­gued that mu­tual funds are pass-through ve­hi­cles and do not need to have a high level of cap­i­tal

“This move af­fects our bot­tom­line and brand value which in turn di­rectly im­pacts the po­ten­tial in­crease in the net­worth. We will now fo­cus on the ex­ist­ing schemes per­for­mance, mar­ket­ing and con­trol costs, while also con­sider to grad­u­ally in­crease the net­worth over the next three years,” Pa­tel said.

Smaller fund houses have re­sisted the move to in­crease the min­i­mum net worth in the past, ar­gu­ing that mu­tual funds are pass-through ve­hi­cles and do not need to have a high level of cap­i­tal.

But Sebi felt that if fund houses are not well cap­i­talised, in­vestors’ in­ter­est will not be pro­tected spe­cially when there is a huge re­demp­tion. At times, schemes have to bor­row heav­ily and the cost of such bor­row­ing has to be borne by the fund house. “Only an en­tre­pre­neur will know the pain of in­ef­fi­cient al­lo­ca­tion of cap­i­tal,” said Parag Parikh, chair­man of the epony­mous as­set man­age­ment firm. “Whether we like it or not, now that it's the law we will in­crease it be­cause we are here for the long haul.” Oth­ers said this could lead to con­sol­i­da­tion as some fund houses, which are not se­ri­ous about grow­ing the busi­ness may choose to exit at the end of the third year.

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