Web Column: Sinha hits MFs where it hurts

Consolidation - whether it is schemes or fund houses - will be the name of the game after Sebi's latest guidelines

For the smaller fund houses, it will be a question of existence. The latest shock by market regulator, the Securities and Exchange Board of India (Sebi) – increase in the net worth to Rs 50 crore – puts at least one-third of the industry under stress.

But even the large fund houses will not have it easy.  With Sebi saying that asset management companies need to put in one per cent (up to a maximum limit of Rs 50 lakh) of the assets, there could be scramble to consolidate schemes. With some fund houses having as much as 70-80 schemes in their portfolio, it would mean an additional requirement of resources of Rs 30-40 crore (if they have more than Rs 50 crore in all the schemes).

Consequently, even the bigger fund houses will have to commit a significantly higher amount of capital – around Rs 80-90 crore, if they wish to continue operations. Most market experts feel that even the bigger fund houses would not be too comfortable with this additional capital requirement.

For the past three years, U K Sinha, chairman, Sebi, has been telling the fund houses to reduce the number of schemes and if a fund house is not serious, it should get out. Now, these guidelines will make the environment more hostile where, as they say, only the fittest will survive.  

While many fund houses, especially smaller ones, will complain that they want to manage money efficiently and not become a marketing organisation like bigger players. But there are many fund houses as well, who have been around for years but haven’t raised enough money or shown enough seriousness to expand business.

Whether Sinha is right with his aggressiveness guidelines or not is a different matter. But he is finally telling the mutual fund industry that they need to pull their socks up. During his tenure as chairman, Sinha has acceded to most of their requests – some leeway on entry load, fungibility of expense ratio and higher expense ratio for diversifying into smaller cities. But the results have not been too impressive.  

According to reports, collections from B-15 cities have risen by only 40 bps in 15 months since Sebi allowed higher expense ratio of 30 bps from these cities. Of course, stock market conditions are largely to be blamed for this state of affairs. But debt has been doing rather well, and gives better returns than fixed deposits.  

The number of branches that have been opened are also not very impressive. Despite having almost 50 players, fund houses had opened only 51 branches till December. In January and February, SBI Mutual Fund and UTI Mutual Fund have become aggressive by opening 150 branches together.

In its recent guidelines, Sebi has sought more disclosures such as, assets under management (AUM) from different categories of schemes such as equity schemes, debt schemes, etc., AUM from B-15 cities, contribution of sponsor and its associates in AUM of schemes of their mutual fund, AUM garnered through sponsor group/ non-sponsor group distributors etc. All this data will now have to be disclosed on a monthly basis on respective website of AMCs and on consolidated basis on website of AMFI.

With all this data, the market regulator will be able to pin point fund houses which are working towards expanding the industry. Many say that the market regulator is tightening the screws a bit too much and this could lead to exits as well. But it seems, Sinha, finally ran out of patience.