Global, domestic restructuring cause for shake-out in Indian MF industry

The year 2015 started on a high following news of consolidation in the mutual fund industry. Goldman Sachs, which had acquired Benchmark Mutual Fund in 2011, was in the news for putting the mutual fund on the block within four years of buying it from investor Dhirubhai Mehta and founders Rajan Mehta & Sanjiv Shah. Similarly, talks were doing the rounds of DWS Mutual Fund scouting for a buyer to exit the mutual fund business in India. The global players were not the only ones looking to exit and M&A; even domestic players were in the news. There was news of LIC - which has partnered with Japanese-based Nomura in India - planning to exit the mutual fund business, while there were talks of a merger between SBI Mutual Fund and UTI Mutual Fund.

One would like to call this a consolidation in the Indian mutual fund industry but it's more of a shake-out due to restructuring of businesses among the promoters of these MFs. The year 2014 also saw a couple of foreign MFs moving out of India. Be it ING MF selling its business to Birla Sunlife MF or Pinebridge MF selling off its schemes to Kotak Mutual Fund (AIG had sold its Indian MF business to Pinebridge), or Morgan Stanley after a stint of nearly 20 years selling its Indian MF business to HDFC MF.

Interestingly, even as large players are exiting the mutual fund business, smaller players like Peerless, Edelweiss or Quantum MF are trying to expand their reach in the Indian market. The reason is simple: for a global player, Indian asset in their entire portfolio is minuscule and negligible. The beast of Lehman Brothers is still haunting many globally and players are trying to restructure the entire businesses for their survival and therefore the sell-off of assets in markets like India.

Apart from the Indian asset being smaller, the widening of gap between large and smaller MFs, especially after the change in incentives model of beyond 15 cities, foreign mutual funds don't see hope of making big anytime soon. With many foreign-promoted MFs in losses, they are better off focusing on the equity market rally to mint money. Therefore it has been a global decision to exit MF businesses in India.

Another reason is the complicated structure in the Indian financial market. In many countries insurance money is managed by mutual fund players. In India insurance companies have their own asset management team. Second, incentives in India are still lucrative for insurance players compared to mutual funds. Also there were hopes of opening up of the pension market. When US-based Fidelity mutual fund left India in 2012 by selling its MF business to L&T, there were rumours that the decision was influenced by government delay in opening up the pension sector, which would allow mutual funds to manage the pension money. The pension market is currently around Rs 15-16 lakh crore. In US, Fidelity is managing close to $2 trillion worth of money, which is 10 times bigger than the entire Indian MF industry.

On the other hand, State Bank of India (SBI) is focusing on bringing all its subsidiaries including the bank under its own umbrella and under one brand SBI. In this regard it's also proposing to merge UTI MF into SBI MF. SBI holds 18.5 per cent in UTI MF. Not difficult but it wouldn't also be easy to merge because Punjab National Bank, Bank of Baroda and LIC also hold 18.5 per cent each in UTI MF. Even if the government approvals are in place the SBI MF and UTIMF merger is still a distant reality.

The mutual fund industry in India was started with an intention to mobilise retail money and help them grow their investments. However even after 50 years of the first mutual fund - Unit Trust of India - being set up, less than 3 per cent of the population is invested in equities. Rather than focusing on growth of the capital market, the government focus has been to take steps and measures to avoid any mishaps.

Mutual funds were expected to be the counter for foreign institutional investors, but they have not been able to take that place in the Indian capital market. Until the government takes serious steps to create a parallel force to counter FIIs, the Indian market will continue to remain FII-dominated. One of the alternatives is to open up the pension market, but most important is to change the mindset of investors about equity as an asset class.

Meanwhile, opening up of the pension market would first be a counter to the FIIs in the market and second, it would also increase the depth of our capital market. In 2008, the government allowed Employees Provident Fund Organisation (EPFO) to invest up to 15 per cent in equity from five per cent, but EPFO has still stayed away from equities. The mindset is that equity market is a gambler's den. That mindset can't change overnight but the efforts have to be taken by the government to advertise and encourage equity investment and make domestic investors aware that equity market is an avenue to grow one's capital. Before that the government should themselves be convinced that equity market is an engine for economic development and speculation is not necessarily a dirty word.