09 July 2010

Minimum networth in mutual fund AMCs – anti-competitive?

The Times of India has an article today criticising the SEBI committee on intermediaries (CORE Committee – see the report here) – which has recommended that networth of AMCs of Mutual Funds be increased substantially. The ToI says:

“Would a minimum networth of Rs 50 crore make Asset Management Companies stronger and safer for investors? A Sebi sub-group, headed by Roopa Kudva, MD & CEO of Crisil, thinks increasing the minimum networth from the current Rs 10 crore would help fund houses to build better infrastructure and inspire confidence among investors. However, most fund houses — small and large — think the recommendation is ‘‘anti-competitive’’ as well as ‘‘illogical.”

This is what the committee says:

4.3 Recommendations
1. Minimum Net Worth requirement for an AMC
The sub-group was of the opinion that the present minimum net worth of Rs.10 crore was too low. Although the operations of AMCs are in the nature of a passthrough,
a larger net worth is required for the following reasons:
1. To build up the minimum infrastructure that is sufficient to service investors
2. To signal the company’s seriousness of intent in setting up the business and inspire confidence, given that AMCs manage people’s money in a
fiduciary capacity
3. To ensure continuity for the AMC, and therefore provide reassurance to investors, in the event of the sponsor facing problems (this is especially
relevant for foreign sponsors)
4. To bear the AMC’s initial losses without facing serious financial strain
5. To provide adequate cushion to meet the requirements of growth in operations of the AMC for a reasonable time frame
6. To enable AMCs to be better placed to obtain liquidity lines from banks, if necessary, to provide some protection to investors from market-driven

While there is some merit in a networth requirement, I do find the increase anti-competitive because inherently there is no logical connection between fiduciary duty and having a networth. Can you imagine a lawyer required to have a networth of such large numbers? They carry out a high fiduciary duty. Managing other people’s money requires the right education and skills not money. In any case, for a fund with Rs. 15,000 crores (Rs 150 billion) assets on average, how does a 500 million rupees networth provide any cushion? The regulation would promote size where size of networth is not exactly relevant. I have in the past criticised the SEBI requirement of Rs. 100 crore networth imposed on exchanges – as networth should be required not of exchanges but of the below the radar clearing corporations.

No comments: