India’s mutual fund industry is bracing for a wave of fund consolidation following a recent rule change by the country’s stock market regulator, the Securities and Exchange Board of India.
Previously, SEBI regarded any merger of fund schemes as a change in the fundamental attributes of the respective funds. It required that money managers send relevant information to unit holders and give them an option to exit from the schemes without any exit load fee. Late last month, however, the regulator relaxed its stance. SEBI said it would not see a merger as a change in the fundamental attribute of the surviving scheme if its fundamental characteristics didn’t change. Mutual funds will be required to demonstrate only that the circumstances merit the merger, and ensure that the interests of unit holders of the surviving scheme would not be adversely affected.
“The fund industry will be able to collapse the large number of schemes into manageable numbers,” says Nilesh Shah, deputy managing director at ICICI Prudential Asset Management, the country’s second-largest fund manager, according to Institutional Investor’s India 20 ranking. “Schemes are like children – you should have only as many as you can nurture. Ultimately, this move is a win-win situation for the investor, the fund company, and the distributor.”
The regulatory change is the latest in a series of moves by SEBI that seek to rein in the proliferation of mutual funds in India. In recent years, asset managers have relied on new fund launches to attract investors, even though many of the new funds differed very little from existing offerings. A lopsided fee structure whereby distributors earned higher commissions on new funds contributed to the growth of funds. SEBI officials contended that the spread of new funds confused investors and resulted in higher fees. Officials also believe the fund industry should have fewer products that can scale better.
According to Value Research of India, a mutual fund research outfit, some two-thirds of India’s 1,538 mutual funds have assets of under $50 million, and over a third have assets of under $10 million.
In mid-October, “We need the industry to go through a consolidation phase on products,” Kavasseri Narayanan Vaidyanathan, executive director responsible for mutual funds at SEBI, told Institutional Investor in an interview in October. A few days later, SEBI announced it was changing its regulations on merger or consolidation of mutual fund schemes.
