Fund houses gear up to raise their net worth

While AMCs are preparing to raise their net worth, they are unhappy with SEBI’s decision to raise net worth to Rs. 50 crore instead of Rs. 25 crore recommended by SEBI Mutual Fund Advisory Committee.

SEBI has raised the net worth of AMCs to Rs. 50 crore in its gazette notification published on May 06.

AMCs which don’t have Rs. 50 crore net worth get three years to comply with this regulation. In the meanwhile, they can’t launch any new schemes.

While fund houses have no choice but to comply with the regulation, fund houses are questioning the rationale of raising the net worth to Rs. 50 crore instead of the Rs. 25 crore recommended by SEBI’s Mutual Fund Advisory Committee.

“What is the point in having representatives from the industry when the regulator overrides the recommendations of members?” asks the CEO of a private sector fund house on the condition of anonymity.

Fund houses which are against SEBI’s decision of hiking net worth to Rs. 50 crore are planning to take up the matter with AMFI. “Mutual fund is a pass-through vehicle. There is no rationale in hiking the net worth. Seed capital is a part of net worth. However, due to MTM losses, the net worth can depreciate,” said Jimmy Patel, Chief Executive Officer, Quantum Mutual Fund.

SEBI has given a year’s time for fund houses to put seed capital in their schemes, which forms a part of the net worth. SEBI has asked AMCs to invest not less than 1 percent of the amount raised in NFO or Rs. 50 lakh, whichever is less, in growth option of schemes. According to AMFI, there are 793 open end schemes which collectively manage Rs. 7.57 lakh crore. This means the industry has to put in Rs. 396 crore.

 AMCs won’t be allowed to redeem this investment until the scheme is wound up. SEBI has kept closed-end schemes exempt from this rule.

Further, fund officials say that the net worth capital rule of SEBI is far higher than what is required in countries like US, Japan and UK.

“I don’t have any grouse on putting in Rs. 50 crore but it is a very inefficient way of managing your money. This money can’t be used for anything. An entity can set up a mutual fund with $100,000 in US (Rs. 60 lakh at the current exchange rate). If the employees, director and promoters invest in the scheme then an AMC is serious about its business. Our promoters and employees have invested in our fund,” said Parag Parikh, Chief Executive Officer, PPFAS Mutual Fund.

“Since it’s a regulation we have no option but to increase our net worth. If money were to be the measure of seriousness in politics, it would subvert the rules of the game. Similarly, fixing unreasonable net worth limit is arbitrary and unfair,” said the CEO of another mid-sized fund house.

Net worth – Current Status