While some fund houses laud SEBI’s intention behind introducing seed capital, others doubt whether it will instill confidence among investors.
SEBI’s new diktat in which it has asked AMCs to put in seed capital of Rs. 50 lakh in open end funds has evoked mixed response from industry stakeholders.
In its board meeting held on February 13, SEBI board approved a long term policy for mutual funds in which it proposed a host of reforms for the mutual fund industry. It has asked AMCs to invest 1% of the amount raised (subject to a maximum of Rs.50 lakh) in all open ended schemes during its life time as seed capital.
The concept of seed capital is prevalent in overseas markets. According to Investment Company Institute, an association of U.S. investment companies, US investment companies are required to have at least $100,000 of seed capital in each new fund before distributing its shares to the public; this capital is usually contributed by the sponsor or adviser in the form of an initial investment.
“It’s a move in the right direction. Even internationally, AMCs are required to put seed capital and prove their investment strategy before going to public. This will help ensure that funds are launched with conviction,” said Vinod Jain of Jain Investment.
While all new open funds would be required to put in this seed capital, it is not clear whether the rules apply to existing schemes as well. AMCs will have to put in Rs. 136 crore if SEBI were to ask AMCs to invest this seed capital in all existing open end equity funds. There are 272 equity funds in the market.
Meanwhile, fund officials are waiting for detailed guidelines on SEBI’s new set of reforms.
Nilesh Sathe, Director & Chief Executive Officer, LIC Nomura Mutual Fund is of the view that while putting seed capital is not a challenge for AMCs he feels that merely putting Rs. 50 lakh in a scheme may not instill confidence among investors. “Putting seed capital may not enhance investors’ confidence in mutual funds. Their confidence depends on the performance of stock markets and their returns. It may happen that AMCs will put seed capital and showcase their performance to investors and then open it for subscription to investors.”
“Most of the regulations introduced by SEBI are imported from overseas markets without realizing whether it will be effective in our market,’ said the CEO of a mid-sized fund house.
“It is like asking a manufacturer of a cancer drug to consume the drug themselves before giving it to patients. All funds are designed to suit different goals of investors. One may argue that it will ensure having skin in the game but AMCs will be happy as long as they earn management fee from the amount invested in a scheme,” said a CEO of a private sector fund house.
Some feel that the move will make AMCs more accountable.
“SEBI doesn’t want casual fund launches. It will deter fund houses from launching multiple schemes. SEBI’s idea is that fund houses should not be reckless while managing investors’ money. It won’t pose a big challenge if seed capital requirement is a part of net worth,” said Jimmy Patel, Chief Executive Officer, Quantum Mutual Fund.
D P Singh, Executive Director & Chief Marketing Officer,
Domestic Markets, SBI Mutual Fund believes that having skin in the game will
help investors. “The seed capital requirement is not huge. AMCs are answerable
to trustees and even board of directors. SEBI’s idea is to ensure that fund
houses manage schemes with utmost judiciousness.”
