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Limited competition in mutual funds irks Sebi; Ajay Tyagi calls for reforms

Top 10 fund houses have 81% AUMs

Assets Under Management  |  Ajay Tyagi  |  Icici Securities

Shrimi Choudhary  |  Mumbai 

Photo: Reuters

regulator Securities and Exchange Board of India (Sebi) has expressed concerns over few mutual fund houses dominating the Rs 23-trillion, domestic asset management industry.

According to data, the top 10 fund houses account for 81 per cent of the total (AUMs). The top-five players account for almost 57 per cent of the assets.

“It is a major cause of concern that despite such tremendous growth, a majority of the market share of the industry remains concentrated with a few big players,” said Ajay Tyagi, chairman, Sebi, calling for measures to “facilitate healthy competition”.

He was speaking at the MF Summit 2018, organised by industry body, the Association of of India (Amfi). Not just assets but a few players have disproportionately high profits and revenue share.

“The share of revenue of seven large AMCs is more than 60 per cent of the total industry revenue. Profit margins of large MFs have also stood at a very healthy 40-50 per cent,” said Tyagi.

The Sebi chief asked industry players whether high total expense ratio (TER) was a reason behind this trend. The TER is a percentage of a scheme’s corpus that a mutual fund house charges towards expenses, including administration and management.

“The concept of the TER started in the late-90s, when AUM was Rs 500 billion. Today, it is Rs 23 trillion. Therefore, some elements are needed and we are examining the need for rationalisation,” he said.

Tyagi also stressed upon corporate governance lapses at the fund houses. “Some recent cases do not augur well with the public service character of the industry and have to be avoided at all costs. An arm’s-length relationship with respect to related party investments as also avoiding conflict of interest is the need of the hour,” he added.

On the issue of ICICI Prudential MF’s investment in sister concern, ICICI Securities, Tyagi said, “We expect industry to be matured enough to discourage such practices.”

The Sebi chief cautioned the MF industry over debt investments. He said fund managers need to be vigilant while holding debt instruments and should appropriately value the credit risk in their books.

“Mutual fund managers have to be cautious of credit risk even as a bulk of the money comes from institutional investors, with almost Rs 11.5 trillion coming from non-retail investors, out of Rs 12.3 trillion AUMs at debt funds,” he said.

Tyagi said AUMs in the industry are just 11 per cent of (GDP) as compared to the global average of 62 per cent. “The fund industry in India has a lot of catching up to do and there are a lot of opportunities for growth,” said Tyagi.

Industry experts said Sebi can prescribe certain measures to reduce concentration of risk.

“Greater competition is always in investors’ interest. There is obviously a big share of some fund houses, mainly aided by their group company’s banks being their main distributors. Misselling and overselling is a resultant bane,” said Prithvi Haldea, founder, Prime Database.

Tyagi also said that the regulator will soon come out with policy on close-ended funds. The market regulator is of the view that such schemes are more prone to mis-selling.

First Published: Fri, August 24 2018. 05:30 IST