A committee that is revisiting eligibility norms for asset management companies (AMCs) believes that they need to have minimum net worth of Rs 50 crore, rather than Rs 10 crore, which is the current norm. At these levels, an AMC, with assets under management (AUM) of close to the system average of around Rs 15,000 crore, would have a fairly high coverage of 0.33%; for smaller funds it would be higher. In fact, it?s way higher. In the EU and the UK the regulations link the capital to be maintained to the AUM with a floor?UK regulations also link it with the fund?s annual expense levels. For an AUM up to 250 million euros, the base capital needed is 1,25,000 euros (Rs 75 lakh), which translates into a coverage ratio of 0.05. Also, the total initial capital and the additional amount required doesn?t need to be more than 10 million euros (Rs 60 crore). The Japanese don?t ask for any minimum capital at all. In the US, the norms are relatively easy; a new fund, which is offering shares to the public, needs to have seed capital of at least $1,00,000 (Rs 46 lakh) for each fund. Closer home in Singapore, one million Singapore dollars or even less is enough, depending on the various categories of fund managers and the capital linked to the function, rather than the AUM.
When corpuses are in thousands of crores, there really isn?t much of a difference between Rs 10 crore and Rs 50 crore. In case of equities, investors are pretty much aware that the markets can come crashing down and that they could lose money. And it?s unlikely that any fund will compensate investors for equity losses, which is fine. However, the perception is somewhat different when it comes to fixed income where, even in the US, money market funds aren?t allowed to ?break the buck?. However, post-Lehman, the NAV of one fund did slip below 100, kicking off a debate on whether the rule should apply.
One school of thought says investors should be told that money market funds need not necessarily protect their capital. In India, too, there is a perception that one can?t ever lose money on fixed income funds and that the capital is protected. This myth came close to being shattered during the liquidity crisis in late 2008, when some fund houses were strapped for cash as investors rushed to redeem their units. Some of the AMCs were bailed out by their parent firms and would otherwise have lost serious money for no fault of theirs, though it is true that some funds had invested money in FMPs of companies of poor credit quality. If the parent firms hadn?t bailed out their AMCs, either the AMC or the investor would have had to take the hit. If the loss had been passed on to the investor, the brand equity of the fund house would have taken a knocking. Few AMCs take a hit themselves, though there have been some instances in the West. There is always something to be said for size and pedigree; it could be true that investors are possibly more comfortable with stronger sponsors. A name like UTI or even Birla or Tata does inspire more confidence than an unknown name. The committee believes the Rs 50 crore number is not prohibitively high so as to deter serious players or be anti-competitive. It also says AMCs could be given three years to build the capital. For sure, Rs 50 crore is not a big amount for global majors or the bigger financial services players in India. But it will keep away smaller financial services firms that have aspirations to manage money, raise entry barriers and in a sense discourage entrepreneurship.
That might not seem fair but, perhaps, for some more time AMCs need to have strong sponsors who can provide some degree of comfort to investors and also attract talent. There?s no doubt that bigger groups do have the wherewithal to manage things better in a crisis?they can rustle up money from banks on the strength of their other businesses. Not that it means they can?t fail, look what happened to AIG! Neither is it true that the bigger funds always give investors better returns, though a glance at the performance of mutual funds in India indicates that the bigger funds?or those funds with reputed sponsors?have done well. In an industry where talent is scarce, they have managed to retain it. It?s true that we do need more mutual funds in the country; the AUM managed by mutual funds, as a percentage of total AUM in India is around 10% whereas it?s 40% for Brazil. Unfortunately, the mutual fund industry in India has been going through a rough patch and of the 36 fund houses about half are in the red, and most aren?t making too much money.
With the capital market regulator having scrapped entry loads since August last year, only two months have seen equity schemes getting inflows. In all this, it is unlikely that too many small companies will want to enter the fray; maybe
Sebi could wait a while to see how things go before increasing the net worth criteria.
?shobhana.subramanian@expressindia.com