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Waiting For A Shake-Up

New proposals promise to improve mutual fund offerings, but critics think otherwise.
Dipak Mondal/Money Today        Print Edition: March 2014
Waiting For A Shake-Up

The Securities and Exchange Board of India (Sebi) has proposed measures to make mutual funds more popular. These include tax incentives, more disclosures and high entry barriers.

Though these are just proposals and their implementation will require the government to make changes in tax laws, the mutual fund industry feels that Sebi is moving in the right direction. However, proposals for seed capital and increasing the minimum net worth have not gone down well with the smaller fund houses. High net worth: Sebi has proposed that the minimum net worth of an asset management company (AMC) be increased from Rs 10 crore to Rs 50 crore. It had initially proposed an increase to Rs 100 crore.

"If you are a serious player and want to take mutual funds to smaller cities, you need presence in those places. You cannot do this unless you have invested a certain amount in the business," says Nimesh Shah, managing director, ICICI Prudential Mutual Fund. ICICI Prudential Mutual Fund had a net worth of Rs 186 crore as on 31 March 2013.

The proposal has been opposed by the smaller fund houses.

"I don't know what is the purpose of such a high entry barrier. They probably want only the big players in the industry," says Waqar Naqvi, chief executive officer, Taurus Mutual Fund. Taurus Mutual Fund had a net worth of Rs 13 crore on 31 March 2013.

"We are very much in the business and there has to be a way out of this. We are waiting for the fine print," says Jimmy Patel, CEO, Quantum Mutual Fund. Quantum has a net worth of just Rs 25.64 crore.

INTRODUCTION OF SEED CAPITAL:

AMCs will be required to invest 1% of the amount raised or Rs 50 lakh, whichever is less, in all open-ended schemes. The idea is that if the AMC's money is at stake, it will act more responsibly, thus increasing investor confidence in its schemes.

However, Jimmy Patel of Quantum Mutual Fund says that these attempts will be short-lived unless mutual funds improve performance, lower cost and evolve alternative distribution channels.

Some experts say that keeping out close-ended funds from the ambit of seed capital requirement will serve little purpose as AMCs are now on an overdrive to launch such funds.

MORE TAX INCENTIVES:

Sebi has also proposed an additional tax exemption under Section 80C or increase in the Rs 1 lakh limit under this Section to Rs 2 lakh for investments in mutual fund-linked retirement plans, equity-linked savings schemes (ELSS) and Rajiv Gandhi Equity Savings Scheme (RGESS).

At present, investments in ELSS are eligible for income tax deduction up to Rs 1 lakh under Section 80 C, while RGESS investments get an additional deduction of up to Rs 25,000.

"Globally, it has been seen that people come to the stock market only when pension money is invested or there are tax benefits. So, in a sense, this is a right move," says Shah.

The regulator also plans to exempt merger of equity mutual funds from capital gains tax. At present, if a person has invested in a fund for less than a year and the fund is merged with another, he is liable to pay a short-term capital gains tax of 15%.

These changes are subject to government approval.

MORE DISCLOSURES:

When it comes to mutual funds, no amount of disclosures seems to be enough. Sebi now wants mutual funds to disclose assets under management, or AUM, garnered from different categories--equity schemes, debt schemes, etc. It also wants them to disclose how much they have collected from cities other than the top 15, how much their sponsors have contributed and how much associates have contributed.

EPF and PSU money: Sebi wants 15% of this to come to mutual funds. It also wants EPFO members with basic salary of more than Rs 6,500 to be given the option of investing in mutual fund schemes.

Another proposal is to allow central public sector enterprises to invest surplus funds in Sebi-registered mutual funds. At present, these units can invest only in public sector mutual funds. These measures also require government approval.


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