AMCs keen to outsource non-core activity

Asset management companies (AMCs) are gearing up to outsource fund administration to improve efficiencies.

The providers of custodial services are waiting for such a business to come their way from a sector which manages assets worth Rs 1.4 lakh crore.

Fund administration involves fund accounting and requires specialised skills that may not always be available with the custodians.

However, according to the Reserve Bank of India (RBI) guidelines, custodial services and fund administration cannot be delinked and have to be bundled and offered as a total package.

So the fund houses have no choice but to offer fund administration activity to their custodial services partner or do it in-house.

At present only Deutsche Bank and J P Morgan Chase Bank have the sufficient expertise to cater to this particular demand.

Interestingly, regulations by the Securities and Exchange Board of India (Sebi) are largely silent on the issue of fund administration, though there are detailed guidelines on custodial services.

Nikhil Johri, chief executive officer of ABN Amro Asset Management said, "When a multinational fundhouse sets up its operations here, it would like to focus on its core activity of investment management and outsource the rest of its peripheral activity." In addition, new entrants would like to keep their staff expenses low.

He pointed out that funds would ideally like a wider choice of outsourcing agencies, but due to the regulatory regime they have to stick with a few players.

At present, only a handful of asset management companies - Deutsche AMC, HSBC AMC, ABN Amro AMC and Birla SunLife AMC - outsource their fund administration activities. Rest in the industry is waiting to see how the others fare before making a move in that direction.

Deutsche AMC was the first to outsource its fund administration to J P Morgan Chase Bank. Sandeep Dasgupta, head of Deutsche AMC in India said, "Funds might like to outsource their administration as they can then concentrate on their core activity of investment management."

It is also far more efficient and cost effective in the long run. Further it leads to a more uniform way of accounting since, at present there is no standardised accounting procedure across different mutual funds. It also saves on staff costs and salaries, expenses which can be better utilised by the fund house.

Industry circles said that they would like to outsource their fund administration but want flexibility in appointing a fund administrator of their choice, which is not allowed under RBI regulations. This is one reason why nearly 80 per cent of the industry is yet to take to outsourcing.

Incidentally, most of the domestic players have developed their own in-house expertise since they do not face the same issues that the multinationals do especially with regarding to staffing.