In a bid to expedite scheme mergers, SEBI has asked AMFI to prepare a report on schemes having similar fundamental attributes and persuade fund houses to merge such schemes. This decision was taken at SEBI Mutual Fund Advisory Committee (SMFAC) held recently in Mumbai.
C.V.R. Rajendran, CEO, AMFI told Cafemutual that SEBI has asked AMFI to expedite scheme mergers. He said, “AMFI is currently looking at schemes where there is a scope of merger. We will soon draft a report and persuade fund houses to consolidate schemes.”
A SMFAC member said that SEBI may stop approving new schemes (except ETFs) if AMCs don’t start merging schemes by March 2016.
SEBI norms say that two schemes can be merged if the fundamental attributes of surviving scheme is not tinkered with. Fund houses are allowed to merge schemes keeping investors’ interests in mind. They have to get an approval by the board members and trustees. Fund houses then file a proposal with SEBI seeking such a merger. After getting an approval, AMCs give an exit option to investors.
Typically, fund managers decide which schemes need to be merged. Usually, non-performing schemes or those which have a small AUM are merged 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.
Despite the Budget 2015 having done away with tax liability on scheme mergers, the industry has not seen many scheme mergers so far. Also, the government has reduced securities transaction tax (STT) from 0.25% to 0.001% in 2013.
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 schemes are merged.
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.
The CEO of a bank promoted fund house is of the view that too many schemes create confusion among distributors and investors. “The government and SEBI have already nudged fund houses to consolidate schemes. Currently, the industry has close to 1,900 schemes. In fact, a few fund houses have three schemes each in the liquid fund and mid & small cap category. This creates confusion among distributors and investors.”
In the AMFI AGM held last month, SEBI Chairman U K Sinha has urged fund houses to consolidate schemes having similar fundamental attributes. Expressing his concern over increasing number of similar schemes, Sinha reportedly said that there are hardly any AMCs who have put efforts to merge their schemes even after complete clarity on taxation.
