Sebi mulls raising MFs' minimum capital base to Rs 25 cr

Sebi is keen on raising the minimum capital to ensure only 'serious' firms stay in the business

The Securities and Exchange Board of India (Sebi) is considering raising the minimum capital for a mutual fund to Rs 25 crore from the existing Rs 10 crore. The capital markets regulator initially wanted to enhance the net worth requirement to Rs 100 crore. Strong protest from the segment has prompted the Mutual Fund Advisory Committee (MFAC) to recommend raising the capital base to Rs 25 crore.

Sebi is keen on raising the minimum capital to ensure only ‘serious’ companies stay in the business. The MFAC proposals allow some flexibility for MFs to define their net worth, said two people familiar with the discussion.

The panel has proposed that ‘seeding’ of a fund by sponsors or promoters can be treated as capital, said one of the two people mentioned. This means if a sponsor of an MF invests in the schemes, it would be considered part of net worth.

MFs might be allowed fulfill the minimum capital requirement by allowing sponsors to invest Rs 15 crore out of the proposed Rs 25 crore across their schemes. Else, they could be required to set aside one per cent of the size of the scheme. “The rule to reserve a percentage of the scheme's size works for smaller fund houses. The larger fund houses might prefer the other route,” the person said.

A source, who is part of the 15-member MFAC, said Sebi was yet to take a decision on the proposals. “The final call has to be taken carefully because it can shake up the industry. If it is adopted, India will be the first market to do so and we don’t know what would be the real impact,” said the member.

Critics have been opposing this proposal on the argument that Mfs are pass-through entities and don't need a sizable balance sheet. The thinking in Sebi is that entities unable to come up with higher capital should register as portfolio management service providers.  

Officials in the sector said many smaller MFs might not want to continue even if Sebi decided to raise the minimum net worth to Rs 25 crore instead of the Rs 100 crore proposed earlier.

“Many small MFs are finding it tough to continue even now, due to the business slump. So, sponsors would not be interested to continue if they have to bring in more capital,” said a chief executive with a mid-sized MF.