MF minimum net worth may not rise to Rs 50 cr

Sebi panel had suggested a rise in the threshold.

The capital market regulator, the Securities and Exchange Board of India (Sebi), may not accept the recommendation to raise the minimum net worth of asset management companies (AMCs) to Rs 50 crore. “There could be some rise in the eligibility criteria, but the increase may not be up to Rs 50 crore,” said a person familiar with the development. The present figure is Rs 10 crore.

Sebi had appointed a committee to review the eligibility norms for market players and intermediaries. The committee recommended that the minimum net worth of AMCs be increased to Rs 50 crore. The committee submitted its report in May. Its recommendations have been put up for public comments on the regulator’s website.

Sebi’s Executive Director K N Vaidyanathan, who looks after the mutual fund segment, said: “The committee’s recommendations have been put up for public comments. Sebi will evaluate according to the feedback.”

The committee justified the proposal by saying that it would reassure investors in case the sponsor faced any financial crunch. This is particularly true for foreign sponsors, who may need a line of credit from banks to protect investors from market-driven stress. In addition, a higher net worth could help AMCs plough in more money into the business and build infrastructure to service investors, it said.

While coming to a figure of Rs 50 crore, the committee said, “This limit will cover 0.33 per cent assets under management of Rs 15,000 crore.”

There is a strong counter argument that many smaller fund houses may find it difficult to meet this norm. At present, there are 27 fund houses that manage less than Rs 15,000 crore.

The committee also said that this limit would be higher from the global perspective, and even more difficult to achieve for such fund houses. The regulator is understood to have taken this into consideration and, hence, may relax the criteria.

Some niche fund houses, which wish to manage only exchange-traded funds, or quant models, might not even need this kind of financial strength as they will not need large infrastructure. Even the risk in such schemes is less as fund managers need not actively churn the portfolio.

Industry sources said Sebi had received a lot of representations on this and a decision was expected soon. “Mutual funds are products where the risk of investing has to be borne by the investor. A rise in net worth will not help fund houses even during bad markets, as was observed in the October 2008 crisis,” said an industry source. In October 2008, the assets of the mutual fund industry fell slightly over 18 per cent — the steepest fall ever.

Banks had extended credit line to the industry to meet redemption pressure. “In such times, even a Rs 50-crore limit may not work,” added the source.