Mutual Fund sector was abuzz with M&As in 2014

Three foreign fund houses exited while one raised stake; fund houses adjusting to steep rise in minimum net worth

Despite exponential growth of India’s mutual fund (MF) sector in 2014, the sector has gone through consolidation with a slew of mergers and acquisitions.

The Rs 11-lakh crore sector saw three foreign entities selling out to domestic peers. The year began with the surprise exit of Morgan Stanley, acquired by HDFC MF for an undisclosed sum. It was the second US-based fund house, after Fidelity, to exit India operations in as many years.

 

Then, in May, Birla SunLife MF acquired ING MF, again for an undisclosed sum. The third deal was between Kotak MF and Pinebridge Investments in September.

In November, Nippon Life Insurance said it would buy an additional 23 per cent in Reliance MF, this country third largest fund house by asset size. The deal valued Reliance MF at Rs 7,300 crore, as the first tranche of acquiring nine per cent was at Rs 657 crore.

Market watchers said the exit of the three smaller fund houses was due to the challenging landscape in MFs, dominated by larger entities. Experts say small fund houses find the cost structure too high to sustain in a tightly-regulated sector.

A Balasubramanian, chief executive officer, Birla SunLife, said: “With only five per cent of the savings coming into the capital market, there is ample scope for players to increase the size of the MF sector. Therefore, consolidation will be as normal for us as with any other sector. We might also see new players coming in, as the size of the opportunity is fairly big.”

The year had begun with 46 asset management companies but ended with three less after the exits.  Milind Barve, managing director, HDFC MF, said: “It would not be a surprise to see more players opting to move out. The industry will continue to see consolidation.”

A higher net worth norm of Rs 50 crore introduced by the Securities and Exchange Board of India (Sebi) was also blamed for the exits. The net worth criteria acts as a filter — there has always been an informal debate among fund houses about the definition of ‘serious’ entities. Early this year, when Sebi scaled up the capital infusion requirement by five times from Rs 10 crore, it caught many by surprise. Most experts thought it would be raised to Rs 25 crore.

 Though the regulator has given three years ending May 2017 to comply, the step invited criticism from several stakeholders. Now, with things settling, there is an increasing acceptance and seriousness among fund houses to meet the rule. This year, 10 fund houses have raised their net worth to Rs 50 crore or above. Another 10-odd are below the new floor. These include Taurus, Escorts, PPFAS, Quantum, Sahara and Shriram, as on end-March.