AMCs may be able to operate with R10-cr net worth

Written by Chirag Madia | Mumbai | Updated: Nov 29 2011, 08:35am hrs
Asset management companies (AMCs) may be able to operate with a net worth of R10 crore.

The recommendation by the sub-committee set up by the capital markets regulator Sebi to increase the net worth criteria might not be accepted. While the committee had suggested that the net worth criteria be changed to accommodate a higher net worth, some members from the mutual fund industry are understood to have pointed out to the Securities and Exchange Board (Sebi) last week that such a move would raise entry barriers and hurt industry.

Sebi is believed to have reassured players that it would maintain the status quo for the time being especially since the industry is going through a rough patch.

In June 2010, a Sebi sub-group headed by Roopa Kudva had recommended that the net worth of fund houses be increased to R50 crore from R10 crore. In its report, the committee had opined that the present minimum net worth of R10 crore was too low. According to the committee, a hike in the net worth will signal the seriousness of intent in setting up the business and also help the AMCs shoulder initial losses without too much of a financial strain.

A CEO of a fund house, who was present at the meeting, said, There was no consensus on the issue but most players were not in favour of increasing the net worth criteria. Some believe it might restrict the entry of small players whereas it was important to have a competitive environment. A Balasubramanian, CEO of Birla Sun Life MF and also a member of the sub-group says, We had discussed the issue in our meeting but it will not be appropriate to divulge any details.

A look at the global market suggests that the criteria differ across regions. In the US, for instance, a new fund that is offering shares to the public has to have a seed capital of at least $1, 00,000 (or around R52 lakh). In Singapore, the base capital requirement is around of Singapore $1 million (R4 crore).

Currently, there are 44 fund houses in the country with total assets worth over R7.12 lakh crore, according to the data from the Association of Mutual Funds in India (Amfi). Most of the smaller players are struggling to survive in the current environment, in which the stock markets have been weak, and are posting fairly large losses. Of the AUM, only around Rs 1.7 lakh crore is accounted for by equity schemes.

In August 2009, Sebi had banned entry loads of 2.25%, paid to distributors. The move has resulted in a large number of distributors giving up the business; as of now only 40,000 distributors have completed their KYD (know your distributor) formalities whereas another 45,000 are yet to do so. This indicates the lack of interest on the part of distributors in selling mutual fund products.

During 27 months since August 2009, equity schemes have seen inflows in only eleven months.

In July this year, Sebi had asked fund houses to pay distributors R100 as a transaction cost for an investment of R10,000 or more and R150 for new customers.