‘Easing norms for AMCs, step in right direction’

Mutual fund experts and investment advisors have lauded SEBI’s move to ease the norms for asset management companies (AMCs) to garner funds from abroad to invest in domestic mutual funds. They have termed it a step in the right direction.

Analysts said the new proposal, if implemented, would result in higher inflows, as well as enhance returns to investors. However, some have highlighted practical difficulties in implementing the new proposal.

In a consultative paper, the Securities and Exchange Board of India is inviting comments on the proposal to do away with certain regulations on offshore pooled funds.

Currently, an AMC can appoint its domestic fund manager to handle an offshore fund only if the investment objective of the two schemes is the same and if at least 70 per cent of the portfolios of the domestic and foreign schemes match. Otherwise, the AMC is required to appoint a separate fund manager to advise the offshore scheme.

Additionally, the offshore fund has to have at least 20 investors with no single investor accounting for more than 25 per cent of the fund’s corpus — the 20-25 rule that SEBI has mandated for all mutual fund schemes in India.

Before these rules were put in place, AMCs were allowed to manage MFs, pooled assets including offshore funds, while also offering portfolio management services (PMS) and advisory services. However, to deal with conflicts of interest among these separate business arms of a single AMC, in 2011, SEBI classified services by MF houses into two buckets — i) management of funds of broad-based entities (which meet the 20-25 rules); and ii) other activities such as PMS and advisory services, while mandating separate regulatory requirements for each.

By SEBI’s own admission, easing these rules for foreign investors might increase the level of fund flows from overseas, as the paper says that “prospective FPIs prefer that the investment team or the fund manager who is managing the domestic MF scheme should manage/ advise their capital too.” According to an MF industry expert, this will cut the cost of managing the fund, as a single manager can handle both funds.

This will result in higher returns as the expense ratio will edge down, he added.

Practically, there have been other challenges as well. Jimmy Patel, CEO of Quantum Mutual Fund, says the forced 70 per cent replication of portfolios made managing the two foreign and domestic funds difficult.

“Inflows in the domestic scheme would make the fund manager buy a certain scrip. But he wouldn’t be able to sell the same scrip on the foreign scheme to meet redemption demands,” since in that case, the portfolios would no longer match.

“Setting up a separate advisory arm for the foreign scheme is an expensive duplication of resources.” The paper also points to differences in investment objectives.

For instance, most offshore funds focusing on India are benchmarked against the MSCI India Index, while schemes aimed at domestic investors are always pegged to the local indices.

The regulator has invited public comments on the recommendations till February 2. The quantitative effect that might result if and when these rules are eased is difficult to ascertain. Patel says this is because advisory assets are not publicly known figures.

However, inflows into the mutual fund industry have been going up — average AUM crossed ₹11 lakh crore in the December quarter and any sign of simpler regulations will definitely help domestic AMCs pitch their schemes to money coming in from abroad.

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