Loss-making fund houses may slip up on net worth norm

Experts say even if the norm is met, sustaining it will be a challenge for loss making fund houses

Most of the 40-odd mutual fund houses are likely to adhere to the May 2017 deadline set by the Securities and Exchange Board of India (Sebi) to raise their net worth to Rs 50 crore. However, experts believe that sustaining the net worth may be a challenge, especially for AMCs that are making losses.

Fund houses, especially the smaller ones, have been steadily upping their net worth over the last year. Quantum MF met its net worth requirement in September, while Union KBC MF did so in December. Last week PPFAS MF announced that it had complied with the Sebi criteria. A few fund houses such as Taurus MF, Escorts MF, Shriram MF and Baroda Pioneer MF are yet to raise their net worth to Rs 50 crore, data provided by Value Research shows.

"We are confident of meeting the target before the deadline," said Waqar Naqvi, CEO, Taurus MF, whose fund house currently has a net worth of Rs 37 crore. Baroda Pioneer MF is about two crores shy of meeting its net worth target and is in the process of meeting the same, said a person familiar with the matter.

In February 2014, Sebi's board of directors had approved a proposal to raise the minimum capital requirement for an AMC to Rs 50 crore from the earlier Rs 10 crore, and had given AMCs three years to meet the new norm. As on September 2013, as many as 19 fund houses had a net worth of less than Rs 50 crore, of which 11 were below Rs 25 crore. The regulator had also barred fund houses with a net worth below this limit from launching new schemes.

According to experts, even if the net worth criteria is met, maintaining the same may be a challenge, especially for those fund houses that were making losses. In FY16, one out of every three fund house posted net losses, with losses of six AMCs exceeding Rs 10 crore. Funds that do not meet the net worth criteria may have to exit the business, said sources.

Thus far, there has only been one instance of a fund house defaulting on its net worth requirement. Lotus MF, which had seen a sharp dip in its AUM in 2008, also saw its net worth dip below Rs 10 crore when the financial crisis hit home. The AMC was unable to shore up its net worth, say sources, and got subsequently sold off to Religare-Aegon.

"If there is a similar crisis, funds which are just about meeting their net worth criteria may be in a spot of bother," said a person, not wanting to be named.

In 2013, several fund officials had opposed Sebi's move to raise the net worth requirement to Rs 50 crore, arguing that AMCs were pass-through vehicles and the losses incurred by any scheme had to be borne by investors, not the AMCs. They had also said that net worth was not the right yardstick to measure the seriousness of an AMC and there were other parameters that needed to be considered, including performance of schemes, innovativeness and the AMC's corporate governance set-up.