MF business needs serious relook: U K Sinha

The regulator could also introduce a framework to penalise AMCs that fail to generate business from beyond top 15 cities

The Securities and Exchange Board of India (Sebi) intends to crack the whip on mutual funds (MFs), which it considers are not serious. The capital market regulator is looking at raising the net worth requirements for MFs and introducing rules to penalise those asset managers who fail to generate more business from beyond top-15 cities.   

“Since last one year, we have provided incentives to the mutual fund industry to go beyond top-15 cities. In the new mutual fund policy, we are going to have disincentives for those who don’t meet this requirement,” said Chairman U K Sinha at an MF summit organised by Confederation of Indian Industry.

Currently, top-ten cities contribute 84 per cent of the sector’s total assets under management (AUM). “If you are a player not keen to go to retail and small towns, you need not be an AMC under the MF regulations. You can decide to be a portfolio manager or an alternative investment fund,” he said.

Sinha said the net worth requirement could be raised so MFs invest for the long term.

“If you want to be an MF, you have to be serious. We require capital because we want players who invest in their business for next 10-15 years,” Sinha said. Presently, the net worth required to set up an AMC stands at a mere Rs 10 crore. For the past few years, there have been deliberations to raise the entry barrier. However, such moves met with stiff resistance from the smaller MFs, which argued that these are just pass-through vehicles, intermediaries that collect a fee for facilitating investments.

Sinha said the total number of MF branches in the cities beyond top-15 are just 52, while the total number of branches are 1,600. Comparing this to an insurance company which recently opened 300 branches on a single day, he said, “The way MF industry is doing business needs serious relook at a very fundamental level.”

“Certain networth requirements which Sebi has talked about is in the context of ability of an entity to expand. Since the entry barrier is currently very low, the objective behind raising it could be to have only serious players,” said Deepak Chatterjee, managing director and chief executive, SBI Mutual Fund.

“The regulator has sent a strong message that retail and market expansion are very important for all MFs. Networth criteria of Rs 10 crore was made 20 years ago and I feel it is too less for any MF to have serious retail operations across the country," Sundeep Sikka, CEO, Reliance MF.

Sebi has formed a committee to suggest a long-term plan for the mutual fund industry. The panel, expected to file its report in the next few months, is likely to suggest these critical changes.

Sinha also expressed concerns over falling retail participation in equities and pointed out that of the total free float market cap of the National Stock Exchange, mutual funds’ custodians had only seven per cent.