Sebi’s Next Frontier: MF Consolidation
Securities and Exchange Board of India (Sebi) has ‘restarted’ its push for consolidation of mutual fund schemes. Instead of coming out with detailed regulations, Sebi is trying to achieve this objective indirectly by putting pressure on asset management companies (AMCs). For example, the regulator is pressurising AMCs to consolidate existing schemes before applying for New Fund Offers (NFOs). Similarly, Sebi is also clearing new mergers and acquisition (M&A) activities among mutual funds only after the merger of similar schemes.
We agree that Indian mutual funds now offer too many schemes and this is creating confusion among investors. The problem becomes acute when AMCs have several schemes within same category. This has to stop and AMCs should ensure that they have only one scheme per category.
Though this ‘one scheme per category’ sounds ideal, problem comes when one get into details and starts defining a ‘category’. For example, AMCs that already have mid cap and small cap equity funds may want to come out with ‘mid and small cap fund’, claiming that ‘it is another category’. Currently, rating agencies classify schemes into categories and they do it mostly based on the historical investment pattern of the schemes. The problem in this structure is that several thematic equity schemes such as dividend yield funds and international funds get clubbed as large cap or mid cap or flexi cap funds.
Sebi officials also are aware about these problems and have started thinking about restricting the number of schemes at the AMC-level itself. For example, Sebi may put an overall cap of 10 schemes for equities and 10 schemes for debt and then leave it to AMCs. This will be a good move, if implemented. The only caveat — close-ended schemes should also come under this overall cap. Else, AMCs will circumvent this restriction by coming out with large number of close-ended schemes.
In addition to making investors’ life easier, scheme consolidation makes it operationally easy for fund houses to manage their schemes. AMCs can also kill underperforming schemes (i.e. many AMCs will be more than happy to kill ‘infra’ funds that have become embarrassment for them) by merging them to their outperformers.
Why are most AMCs still ignoring the repeated warnings from Sebi? The layered expense slab structure (i.e. small-sized scheme can charge higher expense ratio) is the main villain here. Say, if a mutual fund consolidates five small equity schemes of Rs 300 crore AUM each into one, its total AMC fee will come down. So the solution is simple: scrap this special favour and keep a flat expense rate structure.
While pushing for consolidation of schemes, Sebi also needs to do its part by amending regulations. For example, it is not possible to merge two tax-saving schemes at present because Sebi regulations mandate AMCs to give a ‘no load exit window’ and the same is not allowed as per Income Tax regulations (i.e. due to threeyear lock-in periodin tax saving schemes). So, Sebi should offer some special exemption for tax-savings funds.