MF business draws hordes; are SEBI’s concerns justified?

By | July 19, 2019

On one hand, we are seeing exits of partners from the domestic mutual fund industry while on the other hand, a set of players still find the Indian mutual fund industry attractive.

The industry has been grappling with credit crisis issues leading to significant outflows from the industry. Further, the debt levels of Reliance Capital and Dewan Housing Finance have prompted them to sell off their mutual fund business.

Reliance Capital sold its entire stake in the asset management business to its AMC partner Nippon Life while DHFL too sold its stake to Pramerica AMC.

The MF industry has been reeling under stress caused due to delays in interest, principal repayments and, worse, defaults by companies that schemes had lent to.

Despite these concerns, there are a slew of financial and non-financial players who are keen to enter the 43-player industry.

Among the recent one is Sachin Bansal, who is a former co-founder of Flipkart. Bansal is said to be in talks with Essel Finance for acquiring the latter’s asset management business, sources told Moneycontrol .

SREI Infra too was in talks to acquire Essel AMC, but the deal fell through on valuation concerns.

In April this year, Sudhir Valia-backed ITI Group launched its mutual fund business.

Avendus too has been trying its luck to enter the 25 lakh crore industry. KKR-backed Avendus had bid for buying out IDFC Mutual Fund.

Securities and Exchange Board of India (SEBI) is worried about the growing concentration of the MF industry’s assets under management among top few players. However, according to analysts, the sector still maintains its charm as the industry climbs the maturity curve, with AUM growing at a CAGR of 26 percent.

SEBI is concerned as from the total AUM of Rs 24.43 lakh crore of 43-players top four mutual funds account for almost 50 percent of the industry AUM and the top seven players account for around 70 percent of the money managed.

Going by June-end AUM, the top five AMCs are HDFC Mutual Fund, ICICI Prudential Mutual Fund, SBI Mutual Fund, Aditya Birla Sun Life Mutual Fund, and Reliance Mutual Fund.

Smaller asset managers have been unhappy about the domination of their larger peers and their influence over norms on the industry’s sales practices.

But the question is, will SEBI approve the entry of new players, particularly non-financial players in the industry?

SEBI’s green signal to non-financial players?

Mutual fund experts believe that new players need to mobilise assets more from retail investors than from corporate houses as the retail SIPs have grown multifold in recent years. SIPs contribution in June 2019 stood at 8,122 crore compared to Rs 8,022 crore in December 2018.

Herein lies a caveat. The MF Regulations require a MF player to have a financial services track record of minimum five years, which Sachin Bansal may find hard to establish to the standards set by SEBI. In recent years, SEBI administers a higher threshold of due diligence in terms of financial services background.

SEBI now requires five years experience in retail investor track record and customer service orientation in its site inspection for new mutual fund players.

This threshold was brought during 2010-11 which forces the then Future group of Kishore Biyani to withdraw its mutual fund application, said a former SEBI officer who worked in its MF department.

With non-financial players like Sachin Bansal evincing interest, it remains to be seen how SEBI judges their entry into mutual fund business, players which hitherto have catered to non-financial businesses.