Banks in a fix on AMC net worth norm

New rule clashes with finance ministry, RBI diktat on investments in non-core businesses

Public sector banks (PSBs) are facing a dilemma over raising the net worth of their mutual fund arms, as deploying more capital could go against a diktat issued by the finance ministry and the Reserve Bank of India (RBI), directing lenders to predominately focus on core operations.

Essentially, mutual fund businesses of banks are categorised as ‘non-core’ businesses.

Earlier this year, the Securities and Exchange Board of India (Sebi) had raised the minimum net worth criteria of asset management companies from Rs 10 crore to Rs 50 crore.

Currently, four PSB-sponsored asset management companies have net worth of less than Rs 50 crore each. Sebi’s new net worth norms are likely to hit five PSBs — Punjab National Bank (PNB) and Vijaya Bank, the promoters of Principal Mutual Fund; Bank of India, which operates BOI AXA Mutual Fund; and IDBI Bank, which runs IDBI Mutual Fund.

Though Sebi has given AMCs three years to comply with the new norms, officials at PSBs say these entities have already approached RBI, seeking more clarity on the issue.

The finance ministry had asked PSBs to review their exposure towards non-core operations such as mutual fund and insurance. The move was aimed at conserving capital at a time when stricter Basel-III norms were to be implemented. Under the new norms, PSBs have to secure approvals before investing in any non-core business.

“As a practice we approach our shareholders with any information that could potentially impact our business. After Sebi’s decision to enhance the net worth norm, we have informed our banking affiliate. So far, we haven’t asked them for funds, as the regulator is yet to issue a circular to that effect,” the chief executive of a state-owned bank-sponsored mutual fund said, on condition of anonymity.

“RBI hasn’t prohibited us from investing in non-core businesses; it wants us to focus on core banking activities. We have kept the central bank in the loop and will take the necessary permissions when required,” said a senior official at IDBI Bank.

Sources said the additional capital to meet the net worth norm might have to come from banking sponsors, as most foreign partners were wary of committing more capital. A strict regulatory regime and no profitability have forced several foreign companies to exit the AMC business in India.

Some fund houses have also approached Sebi, asking it to review the higher net worth norm. The regulator had raised the net worth requirement to ensure only serious companies remained in the business. Of the 43 Sebi-registered AMCs, about 15 have net worth of less than Rs 50 crore.