AMCs debate taking initial expenditure on own books

Asset management companies (AMC) are debating the feasibility of becoming more investor-friendly by sparing the investor the burden of expenses incurred in making their initial public offers and taking the expenses on their own books.

What AMCs normally do is to amortise the issue expenses over a period of two to five years, usually passing it on to the investors in the form of entry loads.

This is permitted under the Securities and exchange Board of India (Sebi) regulations, which cap the initial issue expenses at six per cent of the issue size. Sebi regulations also stipulate that any expense over six per cent should be absorbed by the AMC in that year itself.

However, the industry has embarked on a new trend of absorbing the expenses.

The main advantage here is that the net asset value of the scheme does not open below the par value, and therefore, acts as a psychological booster for the investor.

But amortising the expenses means that some part of the initial expense is deducted from the investors' returns. So the investors who come in later pay for the scheme's launch expenses.

Industry sources said that while taking the expense on its own book may be an investor friendly measure, it would severely dent the profits of the AMC.

Krishnamurthy Vijayan, chief executive officer of J M Mutual Fund pointed out that even the larger funds might not find it feasible to do it, especially now at a time when funds may be launching more than one scheme in a year. Incidentally UTI has traditionally been taking the expenses on its books, but this was possible due to its sheer size.

Pru ICICI Mutual Fund is another fund house which has been absorbing the expenses.

Raj Raman, senior vice-president, sales and marketing in Pru ICICI MF said, "It has been a our philosophy for a long time to absorb the costs incurred on launching our issues."

This has also been possible because the AMC has kept its expenses low. He however pointed out that the ability to do this varied from fund to fund.

Another strategy adopted by fund houses is to absorb the expenses initially so that the initial NAV is not impacted, and then amortise it over the next five years or absorb a small portion of it and amortise the balance.