Non-finance cos’ MF foray gets tougher

CONDITIONAL ACCESS

 CAPITAL market regulator Sebi has just made it tougher for non-finance business houses to set up mutual funds, mirroring the central bank's aversion to business conglomerates handling the common man's money.
    No business house without at least five years of experience in financial services will be permitted to own stake in an asset management company, said a person close to the development who did not want to be identified.
    Anyone who owns over a 10% stake in the fund house would be deemed a sponsor, and will have to go through ``tough screening'' before getting an approval, the person said. Some subjective measures such as past customer service record will also be applied while giving out new licences.
    "Corporates who wanted to fly below the radar with less than a 40% stake can no longer do so,'' said the official. "They would be evaluated as a sponsor if they have more than 10%, use the brand name, or have a board position."
    Sebi, which has been cracking the whip on mutual funds for more than a year now, is determined to let only serious investors into the business, instead of short-term ones who lend their names in the beginning and exit later. Despite nearly two decades of existence, these asset management companies are seen as lazy intermediaries concentrating in cities, plucking the low-hanging fruit, instead of reaching out to investors in the hinterland who need them.
    Sebi chairman CB Bhave recently said, "You need to question what the rationale for the industry is... If we have not been able to convince investors even with thousands of schemes, there is some problem with the products."
    The new rule has already had its first victim in Delhi-based real estate developer DLF pulling out of a joint venture with Prudential Financial of the US, named Pramerica Asset Managers.
    "The entry norms for mutual funds had definitely resulted in DLF moving out of the joint venture business," says Vijai Mantri, MD & CEO of Pramerica Asset Managers.
CHECKS & BALANCES
What's New
No business house without a five-year financial services experience will be permitted to own stake in an asset management company. Corporates would also be evaluated as a sponsor if they have more than 10% stake, use the brand name, or have a board position
What's the rationale
Sebi wants only serious investors to get into the business, instead of short-term ones who lend their name at the beginning and exit later
What's the impact
Experts said the move is likely to boost investor confidence in a fund. Already, the new norm has prompted realty major DLF to drop plans to start an AMC in partnership with US-based Prudential Financial DLF pulls out of joint venture
"THE entry norms for mutual funds had definitely resulted in DLF moving out of the joint venture business," says Vijai Mantri, MD & CEO of Pramerica Asset Managers. ``Investors get an impression that if a brand is associated with the mutual fund, then that brand is being approved by Sebi, which is now not possible until and unless the brand goes through the due diligence process."
    About 38 mutual funds had aggregate assets under management of Rs 8 lakh crore in June 2010, up 26% from a year earlier, according to the Association of Mutual Funds in India. More than two-thirds of the assets are in income funds, mostly from companies, and just a quarter of them in equity, reflecting a modest retail participation.
    Although some business houses' mutual funds have been performing well, others have been lagging.
    In the past, business houses such as the Kotharis and the Sun group of the Khemkas have sold stake in mutual fund businesses.
    Also, there have been allegations of business houses investing their own funds in mutual funds, boosting the total asset size, a popular marketing tool.
    RBI had ordered the Anil Dhirubhai Ambani Group to pay Rs 125 crore as compounding fees for parking its foreign loan proceeds worth $300 million in its Indian mutual fund for 315 days, and then repatriating it to a joint venture company. That was treated as a violation of the foreign exchange act.
    For its part, the central bank had barred any single entity from owning more than 10% in a bank. There has also been a resistance to business houses owning banks.
    But the recent rules may not be a total stopper for companies that want to diversify. "We had applied through L&T Finance, so we got the approval," said N Sivaraman, senior vice-president-financial services, Larsen & Toubro, the nation's biggest engineering company.
    About 22 asset management companies, including Schroder Investment Management(Singapore) Ltd, Union Bank of India-KBC Asset Management, Global Investment House and Enam Asset Management are seeking regulatory approval to start mutual fund businesses.