Seed capital norm may hit new scheme launches

Written by fe Bureau | Mumbai | Updated: Feb 27 2014, 09:27am hrs
Market regulator Sebis new diktat asking mutual fund houses to invest seed capital of up to Rs 50 lakh in all open-ended schemes may put the brakes on new fund offerings (NFOs).

Industry observers believe that the introduction of seed capital may be one way Sebi wants to restrict the number of new fund launches.

Indirectly, that's what the market regulator seems to be hinting at, said Jimmy Patel, CEO, Quantum MF. AMCs too will think twice before launching new open-ended schemes as their own capital will be invested in the scheme. They may even think about merging a few schemes to bring down the number of such schemes.

In all, the 44 fund houses have close to 1,000 open-ended schemes, of which the top-10 fund houses alone have 480 open-ended schemes, data collated from Value Research show.

The more the number of schemes, the more capital the fund house will have to shell out. That could become a disincentive for bringing out more schemes, said Debasish Mallick, MD & CEO, IDBI MF. For instance, taking into account a seed capital of R50 lakh, a fund house having 10 open-ended schemes will need to invest R5 crore as seed capital, while a fund house having 50 schemes will need to invest R25 crore.

Elaborating on the need for raising the networth requirement and seed capital, Sebi had observed that the cost of huge redemptions has to be borne by the AMCs and failing to meet its redemption obligation could seriously damage the reputation of the entire mutual fund industry.

However, some fund officials said that the amount of R50 lakh per scheme would not be enough to continue running the scheme in times of huge redemption pressure.

Sebi has given existing schemes one year to comply with the seed capital norms.

According to the Sebi guidelines, the seed capital for the mutual fund schemes may be defined as 1% of the amount raised in the NFO, subject to a maximum of R50 lakh, which the sponsor/AMC would have to invest and keep invested during the lifetime of the scheme.

The seed capital

would form part of the networth requirement of R50 crore. The sponsor/AMC would have to maintain this seed capital in all schemes, except closed-ended schemes.