Stocks

Allowing fintechs in MF space will be a game changer

KS Badri Narayanan Chennai | Updated on December 18, 2020

Will help innovation and broaden mutual fund market

The recent proposals of the Securities and Exchange Board of India on mutual funds are praiseworthy. Among them the most important one was relaxation in rules by the regulator for fintech start-ups and related businesses to take up mutual fund business.

“To facilitate innovation and enhanced reach to more investors at a faster pace including tech-enabled solutions, sponsors that are not fulfilling profitability criteria at the time of making application, shall also be considered eligible to sponsor a mutual fund,” said SEBI.

However, such start-ups or fintechs should have a net worth of at least ₹100 crore for the purpose of contribution towards the net worth of the Asset Management Company (AMC), SEBI said and added net worth has to be maintained till the time the AMC makes profit for five consecutive years.

No experience needed

This is an important shift from the current rules that prescribe a minimum five years of experience in the financial services business and profit making for three consecutive years as well as maintenance of a net worth of ₹50 crore.

AMCs will have to maintain their minimum net worth regularly and not just towards the end of the year, SEBI further said. “To streamline the manner of computation of net worth of the AMC and make it mandatory for all AMCs to maintain the minimum networth on a continuous basis,” it added.

This will definitely open the floodgate for a lot of start-ups and fintech companies that are waiting to set up mutual fund business. As SEBI said, this will also enable innovation both on the technology side and on pricing.

A slew of Fintechs

MEDICI, a FinTech Research and Innovation Platform, said that India currently has (up to June end) 2,174 fintech start-ups. In 2015, there were only 454 fintech start-ups. “The period between 2015 and June end 2020 has seen phenomenal growth in new startups across Payments, Lending, Wealth, and others,” MEDICI, a partner to banks, tech companies and FIs, said.

Some of the famous fintech start-ups space include paisabazaar, bankbazaar, Zerodha, Robocapital.in, FundsIndia, smallcase, Tradebrains, ArthaYantra, Invezta, MarketsMojo, 5nance.com, Scripbox, tarrakki, Groww, Kuvera and AdityaBirla Money MyUniverse.

Discount brokers model

As the entry of discount broking changed the landscape of market trading, fintechs will also be a game changer in mutual fund industry.

When discount broking firms like Zerodha entered the broking space, traditional brokers failed to acknowedged their potential and ignored them completely. Discount brokers, which priced trades at ₹20 per order (irrespective of number of lots) against the per lot pricing adopted by traditional brokers, attracted clients.

According to Spark Capital, from a 4 per cent market share in total trading at the bourses, discount brokers currently have 36 per cent market share. They have not only gained market share but also expanded the market. Their strategy has forced traditional brokers too to sharply reduce their per lot pricing to remain price competitive in this segment.

IPOs from start-ups?

Another advantage will be fund raising by start-ups through initial public offering route, as the new regulations give breathing time in terms of profitability and allow them to establish their credentials.

Apart from this, SEBI could consider allowing fintechs with joint ventures (allowing more than one sponsor) to set up MFs.

Published on December 18, 2020

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