Small debt funds under Sebi microscope

Might ask schemes with less than Rs 20 cr to merge or close; similar condition could follow for equity schemes

Sources indicate the Securities and Exchange Board of India (Sebi) could soon ask fund houses to maintain an average AUM of Rs 20 crore for all open-ended debt-oriented schemes, on a half-yearly basis. They say it recently wrote to fund houses, asking how these schemes were meeting their investment objectives and what was being done to increase their AUM.

Based on the reply from the asset management companies (AMCs) and trustees, Sebi is likely to advise fund houses to either end such schemes or merge these with existing debt schemes. “There are some open-ended debt schemes that have AUM of less than Rs 1 crore. We want to reduce complexity and want fund houses to focus on schemes that maintain a minimum AUM,” said a Sebi official, on condition of anonymity.

SIZE MATTERS

• At least 80 debt schemes have AUM of less than Rs 20 crore
• Sebi might ask these to merge or shut
• Move aimed at reducing complexity, improving transparency
• Cumulative AUM of these schemes over Rs 600 crore
• Fund houses might oppose move; say it’d lead to malpractices

An email sent to Sebi, seeking comments, remained unanswered.

According to data from mutual fund (MF) tracker Value Research, there are 84 open-ended debt schemes with an AUM of less than Rs 20 crore, a total of Rs 624 crore of assets.  

Dhirendra Kumar, chief executive officer (CEO), says the debt space is unnecessarily complicated. “The move to consolidate it will be advantageous to both the regulator and investors. It would reduce the regulatory burden for Sebi and institutional investors will not suffer as well, as there is no dearth of schemes,” he explains.

A total of 12 schemes of Kotak MF have an AUM less than Rs 20 crore. Eight schemes of Tata MF do not meet the criteria as currently envisaged by the regulator. Six schemes of ICICI Prudential will also be impacted.  

Dwinjendra Srivastava, head, fixed income, Sundaram MF, says these are seasonal schemes, with liquidity as the most important feature. “We will get in touch with the regulator as and when Sebi comes out with the circular, for more clarity on the issue,” he said.

Jimmy Patel, CEO, Quantum MF, believes this move will be detrimental to investors. “The MF industry in India is not mature enough to handle such compulsions and it might lead to malpractices,” he said.

The regulator’s rationale is that a low AUM for a debt scheme is detrimental to investors, as it would not be able to buy in line with the market lot requirement of Rs 5 crore. In a reply to Sebi, the fund houses have said there is already a well-developed odd-lot market available to meet the requirement of investors and such a compulsion to maintain a minimum AUM is not required. Sources indicate equity MFs are likely to face a similar compulsion. The regulator could mandate that equity schemes maintain a minimum AUM of Rs 10 crore. Sources in the sector suggest fund houses are already informally maintaining a Rs 10 crore AUM for equity schemes in anticipation.