Mutually beneficial

Written by The Financial Express | Higher capital norms for mutual funds won?t help | Updated: Jun 29 2013, 08:05am hrs
The capital market regulator wants to review the minimum capitalisation norms for asset management companies (AMCs), currently at R10 crore; Sebi chairman UK Sinha says many of the players dont seem to be serious about the business given how the smallest 10 fund houses have accounted for less than 1% of the assets under management (AUM) for nearly five years now. Accusing an AMC of not being serious is somewhat harsh; building distribution and a brand are not easy in a country where theres no equity cult to speak of as far as small investors are concerned. If the countrys market capitalisation has grown multifold, its due to the presence of FIIs. The larger MF playersmany of them domestic and several piggybacking on banking franchiseshave got where they have by primarily convincing companies to park their surplus with them to the extent that many MFs have become extensions of corporate treasuries. Otherwise, equities wouldnt account for less than 20% of the AUM, and that too of a pitiably small R8 lakh crore, two decades after the industry was thrown open. Many of the aspirants are, after all, global majors, such as Fidelity, which ultimately threw in the towel.

If the Sebi chief feels AMCs need to be better capitalised because customer acquisition costs in the mutual fund industry can be high, given they need to reach out to smaller towns and spend on advertising, that is a valid point. In fact, although the industry has been talking about stepping out beyond the tier-1 cities and spending on educating investors, not too much has happened, even though its possible plans are being rolled out. Also, while a bigger net worth does offer investors more comfort, theres not too much of a difference between R10 crore and R50 crore that a committee which revisited eligibility norms for AMCs a few years back believed it should be. For a global player or for a large Indian group, therefore, it wouldnt really make a difference. Capitalisation norms vary across the globe; the Japanese, for instance, dont ask for any minimum capital at all, while in the the US a small seed capital is all thats needed. The disadvantage of upping the entry barrier is that is keeps out boutique outfits, which can also play a meaningful role. But that then is more like running a portfolio management scheme as some have pointed out. More capital, however, is not going to help the MF space grow; that will happen only when distributors are incentivised.