The Securities and Exchange Board of India (Sebi) Chairman also cautioned that collapse of even a small player could be as fatal as that of a larger peer for entire system.
Earlier this year, the capital markets regulator hiked the minimum net worth requirement for mutual funds to Rs 50 crore from Rs 10 crore. The move elicited concerns from some quarters who feared that it would adversely impact the small players present in Rs 10-lakh crore mutual fund space.
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While rejecting such apprehensions as unfounded, Sinha defended the hike in threshold limit saying, "I personally feel that the requirement should be more than Rs 50 crore."
"There is a theoretical argument that mutual fund is a pass-through (because they collect funds from investors and invest into stocks, bonds and other securities). So, why do you need such a requirement? That is their argument.
"But if you look at it, that Rs 10 crore requirement was placed in regulations in 1990s... With sheer inflation, how much Rs 10 crore would have become now? That is one argument from my side," the Sebi chief told PTI in an interview.
Citing instances from the past, Sinha said that once a mutual fund company was in such a deep financial trouble that Sebi and RBI were forced to find a buyer for it overnight. To avoid recurrence of such an incident, Sinha said, there can not be any compromise on minimum threshold limits.
"You must remember one mutual fund company was in deep trouble so overnight we (Sebi and RBI) had to play our role behind the scene to find a buyer," he said.
Expressing his displeasure at the entities setting shop without much seriousness, Sinha said, "getting registered, then failing and going away, such an approach can affect the sentiment of the entire industry and the market".
"The requirement of hiking net worth to Rs 50 crore is meant to deal with such episodes. One small mutual fund with assets of Rs 200-300 crore, if it fails, you (media) will be forced to write that a mutual fund has failed and it would not matter whether it was a small or big.
"Besides, Rs 50 crore is not a big amount. If you could pay Rs 10 crore in 1994, you better be ready for Rs 50 crore. That is my argument," Sinha said.
Sinha further said that there was a virtual run on mutual funds in July last year after RBI hiked short term rates.
All the investors, especially in money market funds, at that time were asking for quick redemptions, he said.
"Sebi took an initiative and went to RBI. And Finance Ministry also supported and a special line of credit was given by RBI. That helped save the mutual funds," Sinha added.
The Sebi chief said that it could be an extremely difficult situation if 20-30% of investors come and ask for getting back their money from mutual funds.
"Don't forget that in 2008, the Certificates of Deposits of one PSU bank were not being honoured by another public sector bank because the money market was that bad.
"What I am saying is that (Rs 50 crore level) to ensure the financial market system is okay. And if somebody says Rs 50 crore is a big number I don't agree," Sinha said.