Push by Sebi gets MF scheme mergers rolling

Last year, Sebi had made it clear that it would not clear new schemes until fund houses merged existing ones with similar characteristics

The Securities and Exchange Board of India (Sebi)’s insistence that mutual funds cut down on the number of schemes they manage is beginning to yield results, but the scope for merging plans still remains large.  

In the first five months of this calendar year, more than 30 schemes have been merged, compared with almost half that number in the whole of 2015, according to Value Research. From 2010 till now, roughly 150 schemes have been merged. At present, the mutual fund industry has roughly 350 equity schemes and 1,500 debt schemes.

“There is a scope for more mergers across all categories, whether debt or equity,” said Manoj Nagpal, chief executive officer, Outlook Asia Capital.

“Several fund houses have paid a price for acquiring schemes from other fund houses during mergers, with a view to boost assets and valuations. That is the main reason why they are reluctant to cut down on schemes,” added a senior fund manager on condition of anonymity.  

Experts said the older and larger fund houses mostly had multiple debt schemes with the same characteristics. However, these schemes are positioned differently to cater to the needs of different institutional investors.

For example, there could be two liquid schemes, one with a high expense ratio and the other with a low expense ratio. Also, the schemes could differ in terms of their maturity profiles.

The regulator has been tightening the screws on scheme mergers for some time. Last year, Sebi made it clear it would not approve new schemes until fund houses merged similar ones. Experts said the regulator was insisting on scheme mergers prior to approvals for mergers between fund houses.

“The focus should be on merging small schemes as these typically have a high cost structure,” said Nagpal.

This year’s budget extended the capital gains tax exemption to the merger of plans — dividend, growth, and bonus — within a scheme. Last year's budget had done away with the capital gains tax for scheme mergers.

"The tax impact was the biggest hindrance to consolidation of schemes. Now the fund houses can go ahead with scheme mergers," said Rajiv Shastri, managing director and chief executive officer of Peerless Mutual Fund.

Under Sebi regulations, two schemes can be merged if the fundamental attribute of the surviving one remains the same. Fund houses before merging two schemes need to seek approval of the board members and trustees. After fund houses receive necessary approvals from Sebi, they offer an exit to existing investors.

Sebi's ban on entry loads in August 2009 had significantly affected the number of new equity fund launches. In 2010, the regulator had asked fund houses to merge similar schemes, saying too many schemes could confuse investors. Fund houses had introduced several similar schemes when the markets were on a roll during 2006 and 2007.

A 2011 report by fund tracker Morningstar said the motive behind a host of scheme mergers was either to bury below-average performance or simply cut the number of offerings.