Mutual Fund industry set for a churn

The recent decision by the Securities and Exchange Board of India (SEBI) to hike the minimum net worth requirement for asset management companies (AMCs) from Rs.10 crore to Rs.50 crore is likely to change the face of the mutual fund industry drastically.

The objective, it appears, is to ensure that mutual funds achieve a reasonable size and play an important role in achieving the objective of financial inclusion while further enhancing transparency to enable investors to take informed decisions.

To encourage merger and consolidation of equity mutual funds schemes, the SEBI said that “similar to merger/consolidation of companies, the merger/consolidation of equity mutual funds schemes also may not be treated as transfer, and, therefore, may be exempted from capital gains taxation.” “This will effectively reduce the entry of new players and thereby de-clutter multiple offerings. A mutual fund investor will have to look at lesser number of mutual funds before short-listing where to invest. This will also ensure that only big players enter the market place,” said Arun Kejriwal, a leading market analyst.

AMCs which are under-capitalised as of date, “will mean that the shareholders will have to be convinced that there is a business case to increase the capital base, consider the returns that they would expect given this infusion,” said Rajesh Krishnamoorthy, Managing Director, iFAST Financial India Pvt. Ltd., an independent mutual fund investment platform.

Moreover, these shareholders would potentially look at local partners / overseas partners, as the case may be, to expand their capital and bring in a new player. This will be a challenging task given that a third shareholder will have to be convinced about the future of the AMCs’ profitability.

Another scenario, according to Mr. Krisnamoorthy, is that the shareholders of AMCs, which are under-capitalised, would continue to see a lot of cash burn, accumulated losses, and, therefore, a natural reluctance to infuse any further money into the business. “In the worst case, it could just mean that they decide to discontinue their business.” This will lead to a larger consolidation process in the mutual fund industry.