Sebi's diktat on greater 'skin in the game' may slow down NFO gravy train

At present, AMCs have to invest the lesser of 1% of amount raised during a NFO or Rs 50 lakh. Sebi board has now linked minimum amount to the risk associated with each scheme

The Securities and Exchange Board of India’s move directing asset management companies (AMCs) to invest more in their new fund offerings (NFOs) could force the industry to go slow on new product launches.

At present, AMCs have to invest one per cent of the amount raised during a NFO or Rs 50 lakh, whichever is less. The Sebi board on Tuesday said asset managers will have to “provide for investment of a minimum amount as skin in the game…based on the risk associated with the scheme.”

A circular detailing the new framework is expected soon. However, industry players said the investment threshold could increase multi-fold compared to the current level.

People privy to the development said fund houses could be asked to invest around 10-20 basis points of total assets for actively-managed equity schemes and 5-10 basis points for debt funds.

The exact quantum will depend on the scheme category and the underlying risk. For example, the investment threshold will be lower for ultra-short funds or liquid funds, while higher for credit risk funds under the debt category.

Similarly, in the equity category, passive funds will attract lower investment limits, whereas active funds will have higher limits.

“Currently if the scheme underperforms fund houses continue to get their fees. If AMCs have to put in a substantial amount of their down, their interests will align with that of the investors,” said a senior official from the industry on condition of anonymity. 

Industry players believe that this move might bring in more disparities between ‘new age’ technology companies and established fund houses.

“Fintech players who are planning to set up their shop in the industry are preparing to launch only passive products and they are likely to give lower amounts compared to the players who have active equity schemes,” said a CEO of the leading fund house.

Industry experts also said that regulators have been keeping an eye on the numerous NFOs launched by the fund houses in the last few months. AMCs have launched around 60 NFOs in the last six months and mobilised around Rs 27,000 crore amid buoyancy in the equity markets.

“This move will lead to more seriousness among the MF players. The focus of the fund house should not be asset gathering, but also serve the existing investors,” said a top official of the industry. 

This is the latest step by Sebi to ensure fund houses have more skin in the game. Earlier, the regulator had asked fund houses to pay 20 per cent of the salary for key employees in the scheme unit.

Market participants will wait for more clarity whether this is eligible only for NFOs or even for existing schemes.