Sebi gets tough on mutual funds

Higher net worth, more voting disclosure, money in own schemes—MFs have a lot on their plate

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Hemant Mishra/Mint

In a move that the capital markets regulator, Securities and Exchange Board of India (Sebi), believes will broaden the reach of mutual funds (MFs) in India, it increased the minimum net worth required to set up asset management companies (AMCs) to Rs.50 crore, up from Rs.10 crore earlier. This—and many other sweeping measures—were finalized in a board meeting held last week. Some of these measures will get implemented soon, while others are proposals that Sebi will now put forth to the central government.

Here, we focus on the ones that will be implemented soon.

Increase in net worth

Industry view on this move is mixed—some say it will encourage MFs, others say it doesn’t improve quality.

Nikhil Johri, chief executive officer, BNP Paribas Asset Management Co. Ltd, belongs to the former school. “A higher net worth is important so that companies invest in a meaningful way in growing the business over a longer period. Else, it may not cost the AMC too much to remain small.”

“A high net worth may protect us from risk. What if, say, a foreign branch of an MF gets fined in that country? In India, too, Sebi could slap huge fines. A high net worth gives us a cushion in such cases,” says a chief of a fund house on conditions of anonymity.

Of the 43 AMCs (data from Value Research), 15 have a net worth of less than Rs.50 crore. Parag Parikh, chief executive officer, PPFAS Asset Management Co. Ltd, says it doesn’t make sense to have a higher net worth to be able to setup a fund house. “Abroad, even Rs.3 crore is enough for fund houses to build a globally strong company. In India, however, the message is that now Rs.50 crore is required to be just an Indian firm,” he says. When asked what action his fund house, whose net worth at the moment is Rs.14.95 crore, will take, Parikh replied, “We will now have to waste our time and resources to bring our net worth to Rs.50 crore.”

Evidence, however, shows that a fund’s net worth has nothing to do with its performance. Fund houses such as Religare Invesco Asset Management Co. Ltd and Quantum Asset Management Co. Ltd have shown significant outperformance over their benchmark indices despite low net worths.

Seed capital

Sebi also wants MFs to put their money where their mouth is. It has told fund houses to put 1% of their own money in all their open-ended schemes, subject to a maximum of Rs.50 lakh. “We should have our skin in the game because it’s our own money also on the table, along with that of our investors,” says Jimmy Patel, chief executive officer, Quantum Asset Management.

Sebi’s press note, however, did not specify whether this rule applies to schemes to be launched or existing ones as well. The note says “1% of the amount raised”, which begs the question: if the scheme was launched, and money collected, several years ago, will it have to put in 1% of the initial collection? We will wait for Sebi’s clarification on that one.

Voting pattern

Sebi wants fund houses to update their voting pattern to once every quarter. According to Sebi’s MF guidelines, all fund houses are supposed to vote on resolutions of the companies in which their schemes have invested. Till now, MFs had to disclose their voting pattern once a year. They could either vote a “yes” or a “no”, or abstain.

Over the past few years, Sebi has nudged fund houses to get serious about casting their votes in company resolutions. This, Sebi says, will protect the interest of minority shareholders. “This would put pressure on companies as they will be forced to care about small investors. Companies cannot just raise capital and take minority shareholders for a ride”, says Shriram Subramanian, founder and managing director, InGovern, India’s first proxy advisory firm.

By and large, fund houses have been slow in making their vote count. In a report that InGovern issued last year, after analysing MF voting pattern in 2012-13, it noted that MFs voted “against” only in 1.5% of the total number of resolutions put forth by companies (in which one or more MF had invested). Two of 43 fund houses abstained completely from voting in financial year 2013, and hence did not make any voting disclosures.

But what if fund houses abstain from voting on a large scale? “Sebi cannot pressurize anyone to vote. These MFs can only be shamed by saying that they have done nothing,” says Subramanian.

Education

If all goes well, our children may soon study about MFs in their schools. In its board meet, Sebi emphasized on including MFs in school curriculum. Sebi’s effort joins those of the Reserve Bank of India, Insurance Regulatory and Development Authority, and others.

One of the things that the Financial Stability and Development Council (FSDC; a meeting ground for all financial sector regulators) has been looking at is the spread of financial literacy in India. In association with the National Institute of Securities Markets (NISM; Sebi’s education arm), FSDC has been trying to get financial sector education into the mainstream curriculum.

NISM’s director, Sandip Ghose, told us that the time is ripe because the National Curriculum Forum—which decides the Central Board of Secondary Education’s (CBSE) curriculum—is due to meet for a revision this year. “It decides the CBSE curriculum once every five years; the agenda for 2014-19 will be set this year. There is a strong effort that as a part of financial literacy, MFs will be included in the curriculum this year,” says Ghose. He is also hopeful that the various state-level education boards would also include MFs and capital markets in their curriculum.

While most of the measures benefit you—the investor—in the long run, the higher net worth requirement is a dampener for innovation and entrepreneurs.

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First Published: Fri, Feb 14 2014. 08 10 PM IST

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