Market regulator SEBI is quite right to worry about the quality of players running mutual fund operations. The business of managing retail money requires players with high levels of commitment, skill and integrity. Mismanagement or an abrupt exit by even one sponsor can have repercussions for investor confidence across the industry.
But SEBI is barking up the wrong tree in trying to weed out non-serious players from the mutual fund business, by setting a higher bar on the capital they bring in.
Raising the minimum net worth requirements for setting up a mutual fund from ₹10 crore to ₹50 crore may keep smaller entities from entering the business. But how will it ensure that the entities which do cough up the required capital are indeed serious, well-governed and committed to their investors?
Looking back at the long list of players who have quit the Indian mutual fund industry over the last five years, it is quite clear that size or the ability to put up initial capital doesn’t equate to staying power.
Fidelity, Morgan Stanley, ABN Amro, Standard Chartered, Alliance Capital, Sun F&C, AIG, Merrill Lynch — none of these global giants would have had the least trouble putting up ₹50 crore in capital. But they have all, nevertheless, packed up and left.
In fact, after the financial crisis of 2008, it is mainly global financial giants who have indulged in periodic bouts of restructuring — merging, selling and rejigging their Indian mutual fund arms — with scant regard for the investors who have committed money on the strength of a global brand.
In contrast, smaller players — Taurus, Quantum, Principal and Canara Bank, to name a few — have stayed the course through the upheavals in the economy and the market.
Lock-inWhat mutual fund investors really need is stability and continuity of the firms who manage their money. Thus it is necessary that the sponsors have both deep pockets and the commitment to remain invested in the business irrespective of market cycles. The best way for SEBI to ensure this may be to specify a lock-in period (say, 10 years) for anyone seeking a new mutual fund licence. After all, fund houses expend a great deal of effort and money in educating the retail investor about the virtues of patience and long-term investing. It is time the sponsors practised it themselves.
As for the fear that very low capital requirements will allow firms with governance issues into the fray, that is not very rational either. Governance isn’t in any way linked to the amount of capital a sponsoring institution can put up. An individual or a tiny firm may be extra-ordinarily honest and large business groups may indulge in all kinds of dubious business practices.
If SEBI really wants to deny mutual fund licences to groups with doubtful credentials, it is better off using subjective criteria to vet prospective sponsors. It can assess whether the sponsor is ‘fit and proper’ to run a mutual fund by looking into its track record in its dealings with shareholders, lenders, the taxman and the regulators. This is what the RBI intends to do while issuing new bank licences and this is how SEBI itself decides on the grant of licences to the promoters of stock exchanges.
Finally, there is the fact that fund management, unlike banking or insurance, is a business that relies more on skill than the ability to raise vast amounts of capital. An asset management company does not really need regular infusion of funds to keep its business going. All it does is manage others’ money for a fee that is linked to the assets under management (AUM). The skill and integrity required to do a good job of managing portfolios need not necessarily come from a large corporate group.
Indeed, many of the schemes which have generated good returns for their investors in recent years, have not come from the fund houses that manage the biggest assets. Fund houses such as Quantum, Mirae and Religare do have schemes at the top of the return charts. SEBI would do well to review its minimum net worth norms and consider other criteria such as the sponsor’s governance record, commitment to the business and track record in managing public money, in its effort to attract only serious players to the mutual fund business.