Mutual funds heading towards consolidation

The Securities and Exchange Board of India's (SEBI) recent decision to make it mandatory for all open-end debt schemes to maintain an asset size of Rs 20 crore on a half-yearly rolling basis is likely to lead to a wave of consolidation in fund schemes, say experts.

Vijay Mantri, MD & CEO of Pramerica Mutual fund says "The regulator has been informally asking fund houses to maintain the minimum asset size for the past two years. We could see many mergers in case fund houses are not able to bring the assets under management (AUM) to the requisite level."

Out of the total 339 open-end schemes, there are 58 debt schemes which have average assets of less than Rs 20 crore as per March quarter. Of these, 14 have AUMs in the range of Rs 15-19 crore, while 11 of them have AUMs of even less than Rs 1 crore. Either these schemes will have to raise the asset size to the required level or they will have to be merged.

SEBI has given one year to the existing open-end debt oriented schemes to comply with the regulation. The fund house will have to file a confirmation of the compliance to SEBI in the half yearly trustees report.

Waqar Naqvi, CEO, Taurus Mutual Fund said the Rs 20 crore asset size was necessary for debt funds. "In debt funds, the minimum lot size is generally Rs 5 crore in case of many debt securities. So, to have at least two-three securities in the portfolio a fund needs to have at least Rs 20 crore as asset base."

In another regulation, SEBI has also set a minimum subscription limit at the time of new fund offer (NFO). Under this, a debt-oriented and balanced schemes should raise at least Rs 20 crore during the time of NFO. While in case of equity fund the minimum subscription amount to be raised is set at Rs 10 crore at the time of NFO.

Naqvi said it was already happening in case of fixed maturity plans (FMPs) over the past one year. FMPs were being launched with a clause in their offer document that it will have to raise a minimum amount of Rs 20 crore during NFO. In case, the fund is not able to raise the requisite amount of money at the time of NFO, it will not be able to declare its net asset value (NAV) and will have to repay those investors who have subscribed during the NFO, he said.

The new regulations have come soon after Sebi made it mandatory for fund houses to have a minimum capital of Rs 50 crore SEBI.