MFs miffed at higher net worth proposal

M&As may take back seat as there would be no takers for small fund houses, say officials

Executives at India’s mutual fund houses are frowning over talk that the net worth requirement might be raised 10-fold to a whopping Rs 100 crore. They say this would not only be detrimental for the already squeezed fund industry; it would also prevent foreign buyers from entering the large untapped Indian market.

Though the move was being deliberated and nothing had been finalised, sources told Business Standard the Association of Mutual Funds in India was against any such proposal. Most fund houses, big and small, aren’t in favour of the move.

Securities and Exchange Board of India (Sebi) chief U K Sinha has been flagging concern on non-serious players in the sector, but many doubt whether raising the net worth criteria is the right way to weed out non-serious players. Aditya Agarwal, managing director at Morningstar India, says, “I am not sure how it would help the industry. Is it the only way to drive seriousness among fund houses?” He said the sector was already under stress and such regulatory measures would only aggravate problems.

“If this comes through, it would mean showing the door to almost half the existing asset management companies,” said a senior executive of one of the largest fund houses. Who would buy out the smaller houses, he asked.

Officials said even if a foreign entity was looking for a foothold in the Indian fund industry, an upfront requirement of Rs 100 crore would probably lead to the plan being called off. “Who would commit so much investment in a business that may end up making losses for five years or more?” asked the chief executive of a mid-sized fund. He termed such anticipated measures “forced”.

Dhirendra Kumar, chief executive of fund tracking firm Value Research, says, “I have always been opposed to any such move. I would rather prefer the net worth requirement be halved to Rs 5 crore.” Kumar, also a member of Sebi’s mutual fund advisory committee, added, “The mutual fund industry is a pass-through business and doesn’t require large capital.”

He agreed foreign companies might not find it an interesting venture if the net worth criteria was scaled up. “A sum of Rs 100 crore is too big to be committed at a time when returns are expected to be negative,” he said.

Earlier, when it was proposed the net worth requirement be raised to Rs 50 crore, it had met stiff opposition from the sector. “This time, too, I feel the sector will not let it happen, as fund houses have a unanimous call on the matter,” said the chief executive of a small fund house.