When Franklin Templeton’s India unit wanted to launch a mutual fund that would switch allocation among stocks, bonds, gold and money markets, the Securities and Exchange Board of India (Sebi) baulked, deeming it too risky for domestic investors, according to the company.
The market regulator is wielding an unprecedented level of control over how mutual funds operate, delaying new launches and dictating investment strategy, frustrated insiders in the embattled industry say. Sebi’s scrutiny adds to the challenges for the mutual fund industry that has endured a steady stream of redemptions from equity funds in recent years.
Even as stocks hit record highs, most of India’s 47 asset management firms are unprofitable and have underperformed the broader index so far this year. “Sebi is trying to tell us what to do from an investment perspective, which we don’t necessarily agree with,” said Vivek Kudva, who heads India, Central Europe, the Middle East and Africa for the Franklin Templeton Investments unit of US-based Franklin Resources Inc.
After months of back and forth with the regulator early this year, the proposed fund was eventually shelved.
“If they don’t approve it, we are stuck,” Kudva said.
Equity fund assets under management have fallen from a peak of $30.8 billion in December 2007 to $24 billion last month, after net outflows in four of the last five years.
Sebi’s hands-on approach under its chairman, UK Sinha, who took the top job in 2011 after running India’s oldest mutual fund firm, government-backed UTI Asset Management, marks a break from past practice at the agency.
Sinha has publicly railed against underperforming fund houses and the asset management sector’s failure to lure more investors into stocks. Partly as a result of that, new open-ended fund launches are down sharply, to 48 from the beginning of 2012 through October 2013, from 105 during the two-year period ending in 2011. During the same periods, 129 and 140 applications, respectively, were filed.
“We end up spending time and resources coming up with strategies our investors want, only for it to be modified beyond recognition or delayed to the point of no return,” said the chief executive of a mid-sized asset management company who declined to be identified.
“(It) is killing us,” the manager said. Sebi officials acknowledged that they have become tougher on fund launches. “I think it’s a good thing that launches have come down. The regulator doesn’t want a repeat of 2008,” Sinha recently said. In 2008, many