Scheme-merger rider for mutual fund M&As

Experts say this would make approvals more time-consuming

Green light to a recent mutual fund acquisition was given only after similar schemes of the acquirer and the acquiree were merged. The case relates to DHFL Pramerica Asset Managers buying Deutsche Bank's Indian asset management unit.

"This is the first time the market regulator has insisted on scheme mergers for approving a M&A (merger and acquisition) deal. This could set a precedent for all future deals," said a sector official. "It's positive for the sector as scheme mergers are not a priority for fund houses."

Scheme mergers would make approval for M&As more time-consuming, said experts. Merger is insisted by the market regulator as too many schemes spark confusion for investors. Also, in 2011, Morningstar said that scheme mergers bury below-average performance or cut the number of offerings.

PRE-CONDITION

• Green light to a recent mutual fund acquisition was given only after similar schemes of the acquirer and the acquiree were merged
• The case relates to DHFL Pramerica Asset Managers buying Deutsche Bank's Indian asset management unit
• "This is the first time the market regulator has insisted on scheme mergers for approving a M&A (merger and acquisition) deal. This could set a precedent for all future deals," said a sector official
• "It's positive for the sector," he added

"The surviving schemes in the Deustche set are the larger ones as it's a scale business. Most of Pramerica schemes were merged into Deustche ones," Glenwyn Peter Baptist, chief executive and investment chief of Pramerica International Investments, told Business Standard in a recent interview. "The product set has become larger than what DHFL had before the merger."

For some time now, the market regulator has been tightening screws on mergers of schemes and refusing to clear new schemes with similar themes. Data from Value Research shows 170 schemes have been merged since the beginning of 2011. Only 58 mergers took place between 2006 and 2010. At present, the sector has close to 400 schemes in the stock segment alone.

An email to the market regulator did not get a response.

The Budget extended capital gains tax exemption to the merger of plans within a scheme. The plans include dividend, growth, and bonus. Last year's Budget had done away with capital gains tax for merger of schemes.  Capital gains tax is levied on profit from the sale of an investment.

"Tax impact was the biggest hindrance to consolidation of schemes. Now the fund houses can go ahead with scheme mergers," said Rajiv Shastri, managing director and chief executive of Peerless Mutual Fund.

In 2010, the market regulator had asked fund houses to merge similar schemes as too many could confuse investors. Fund houses had introduced several similar schemes when the markets were on a roll during 2006 and 2007. A 2011 report by fund tracker Morningstar had said that the motive behind a host of scheme mergers was either to bury below-average performance or simply cut the number of offerings.