MF industry not enthused by Sebi chiefs comment on raising minimum capital requirement

Written by Ashley Coutinho | Ashley Coutinho | Mumbai | Updated: Jun 29 2013, 08:45am hrs
Fund houses and industry experts are not on the same page as the capital market regulator on the need to increase the minimum capital requirements for mutual fund houses and setting up more physical branches in tier-II and tier-III cities.

Sebi chairman UK Sinha had on Wednesday expressed his displeasure over the meagre assets managed by the bottom 10 AMCs: I am very clear that this industry needs some very serious players...serious means you have to commit capital. The current net worth requirement for an AMC is R10 crore.

According to a senior fund official, pumping in additional capital wont be difficult for most of the smaller fund houses as they are sponsored by corporate houses that are well-capitalised. But just because they get more capital, does it make them serious players overnight he asked. Added Vicky Mehta, senior research analyst at Morningstar India: Having a bigger capital base need not have a direct correlation to the investment expertise provided by the fund house.

A couple of years ago, a Sebi panel had proposed to increase the minimum net worth for AMCs to R50 crore, but the proposal was subsequently turned down by the 14-member mutual fund advisory committee. Although the operations of AMCs are in the nature of a pass-through, a larger net worth is required to build up the minimum infrastructure that is sufficient to service investors, the panels study paper had argued.

However, experts say that while some funds are needed for basic infrastructure, the pass-through nature of the business, which means that losses incurred by a scheme have to be borne by the investor, caps the need for capital.

The assets under management of the bottom 10 fund houses stood at a paltry R5,542 crore, just 0.7% of the industrys overall AUM base (excluding domestic fund of funds) for the period ending March 31, 2013. In contrast, the top 10 fund houses contributed 79% to the total industry asset base. However, experts pointed out this was nothing new and that the Indian MF industry has always been top-heavy.

Sebi has not specified the kind of asset mix required by fund houses. Size itself does not guarantee the fund house has quality and long-term assets, said the senior fund official quoted above. For instance, he pointed out, that a small fund house may have 10,000 retail investors with R1,000 crore of AUM, which could prove to be stickier than a R1000-crore placed by a handful of corporates in a large fund. The main focus of a fund house should be to attract retail investors, and not corporates and HNIs, he said.

The need to penetrate deeper into tier-II and tier-III cities by setting up more physical branches, has also drawn flak from industry watchers.