The Securities and Exchange Board of India (Sebi) is still considering the proposal put forth by the mutual fund advisory committee on raising the minimum capital requirement to R25 crore and has not yet made up its mind on whether this limit is sufficient, said sources familiar with the development.
Sebi has been keen on raising the minimum capital requirement for fund houses for some time now to ensure that only serious players remain in the business. “Even the MF advisory committee was fairly divided on the issue and several members were not in favour of increasing the networth requirement. Sebi will be keen to raise the networth limit but it will be interesting to see how they take it up considering that there has been no consensus on the issue,” said a fund official, on condition of anonymity.
The market regulator may bring up the issue during its next board meet, later this month. The current minimum networth requirement for an AMC is set at R10 crore.
In June, Sebi chairman UK Sinha had expressed displeasure over the meagre amount of assets managed by the bottom 10 AMCs: “I am very clear that this industry needs some very serious players. Serious means you have to commit capital,” Sinha had said.
About two years back, a Sebi panel had proposed to increase the minimum net worth for AMCs to R50 crore, but the proposal was subsequently turned down by the MF advisory committee. “Although the operations of AMCs are in the nature of a pass-through, a larger net worth is required to build up the minimum infrastructure that is sufficient to service investors,” the panel’s study paper had argued.
However, experts say that while some funds are needed for basic infrastructure, the pass-through nature of the business — which means that losses incurred by a scheme have to be borne by the investor — limits the need for capital. “There is no need for increasing the networth requirement if a fund house has prudent investment policies in place and passes on the risk to the investor after appropriate disclosures,” said Jimmy Patel, CEO, Quantum MF.
Another fund official opined that while higher capital may not be required in good times, it can come in handy in difficult situations. “During tough times, a fund house’s AUM and revenues may decline but the fixed costs remain the same. Additional capital can be useful in these situations,” he said.
The assets under management of the bottom 10 fund houses stood at a paltry R3,546 crore, just 0.4% of the industry’s overall AUM base (excluding domestic fund of funds) for the period ending September 30, 2013. In contrast, the top 10 fund houses contributed 79% to the total industry asset base. However, experts pointed out this was nothing new and that the Indian MF industry has always been ‘top-heavy’.
Those in favour of maintaining the status quo also argued that size itself did not guarantee the fund house had quality and long-term assets, particularly if the assets were mostly in short duration debt funds.