After finding that AMCs are not keen on merging their schemes, the market regulator is said to be planning to come out with regulations to expedite scheme mergers, said three people aware of the development.
In fact, the regulator may stop approving new schemes (except ETFs) if AMCs do not start merging schemes in the stipulated timeframe, said one of the officials aware of the development.
Sources said that the SEBI Mutual Fund Advisory Committee would meet on September 1, 2017 to discuss this regulation.
In 2015, SEBI had asked AMFI to prepare a report on schemes having similar fundamental attributes. The market regulator had also asked AMFI to persuade fund houses to merge schemes.
Currently, fund houses can merge two schemes with similar fundamental attributes. However, they need to give an exit option to their investors.
Usually, fund houses merge non-performing schemes or those, which have a small AUM with bigger funds. The shares held by the scheme which is getting merged are transferred to the surviving scheme. This results in increase in the number of units, AUM and the investor base of the surviving scheme.
SEBI has been pushing fund houses to merge schemes to reduce confusion among investors. In addition, the Budget 2015 has done away with tax liability on scheme mergers. However, the industry has not seen many scheme mergers so far.
There could be a variety of reasons for this reluctance to merge schemes. A fund house may find it difficult to retain existing assets if they merge schemes.
Secondly, fund houses have an incentive to charge higher expense ratio for small sized funds (scheme merger increases AUM). Finally, if AMCs have too many schemes, the probability of a few schemes doing well is high, which helps AMCs promote only the better performing schemes.
Currently, the industry has over 2000 schemes. In fact, a few fund houses have multiple schemes in mid & small cap category, which creates confusion among distributors and investors.
