AMCs split over plan to increase net worth

Domestic fund houses are divided over the proposed increase in the minimum net worth of asset management companies (AMCs) from Rs 10 crore to Rs 50 crore.

The increase has been recommended by the Committee on Review of Eligibility Norm, constituted by the Securities and Exchange Board of India (Sebi).

While large fund houses say this will ensure entry of only serious players, smaller AMCs are opposed to the proposal. The committee said large net worth would signal the company’s seriousness.
 

SIZE MATTERS
Reasons cited by the Sebi committee for AMCs to have a higher net worth:

• To build infrastructure sufficient to service investors
• To ensure seriousness
• To build capability to bear initial losses without facing serious financial strain
•   Large AMCs will be able to get liquidity lines from banks to provide protection to investors from market-driven stress

Sources say this is becoming a hot issue and is likely to come up for discussion at the general body meeting of the Association of Mutual Funds in India next week.

“Does it mean that fund houses with high net worth are serious and smaller players are not?” said the chief executive (CEO) of a small fund house. “I believe the minimum net worth should be reduced to Rs one crore. We are here to provide services to investors. In the outside world, the net worth requirement (for AMCs) is minuscule and it’s unfortunate that in India we are moving in the opposite direction.”

“Seriousness should not be connected with the money a fund house manages. It has to be linked with ethics, policies and business models. The move favours bigger players,” said another executive.

However, the CEO of a leading fund house said, “On Wednesday, anybody can get into the fund management business. There has to be a certain base capital requirement. I am in favour of raising the net worth.”

Echoing this, the head of another establishment said, “As public money is involved, the capital requirement should be higher. I strongly support this. The net worth of sponsors of mutual fund houses should also be re-looked at.”

The smaller AMCs questioned the committee’s observation that a higher net worth was required to protect investors from market-driven stress as large AMCs would be better placed to obtain liquidity lines from banks.

“Had it been the case, why did larger fund houses knock the doors of the central bank in October 2008, when the industry suffered immense redemption pressure?” said the head of a mid-sized AMC.