Sebi’s Next Fron­tier: MF Con­sol­i­da­tion

The Economic Times - - Money - NAREN­DRA NATHAN

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.

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