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 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.