Redemptions by investors, alongside adverse global and domestic woes have resulted in a 16.5 per cent shrinkage in the size of the Indian mutual fund industry
. From Rs 703,669 crore in March 2011, the industry's assets under management (AUM) have come down to Rs 587,659 crore in March 2012.
A gathering of mutual fund industry insiders was delighted and cheered when Upendra Kumar Sinha, Chairman of the Securities and Exchange Board of India (SEBI) sympathised that "We at Sebi are concerned about the state of the mutual funds' industry."
Sinha was speaking at the eighth annual mutual fund summit, organised by the Confederation of Indian Industry (CII), in Mumbai. The gathering seemed even more happy when Sinha mentioned that Sebihad suggested to the government that investments under the Rajiv Gandhi Equity Savings Scheme, announced in the union budget this year, be routed through the mutual fund route.
But this happiness did not last for long. Sinha denied that Sebi regulations are the reason for the dilapidated state of the Indian mutual fund industry
. "Sebihas not been on a regulatory overdrive, if the industry feels so," Sinha insisted.
And then came the thrashing from Sinha, which is unlikely from a regulator. Although he didn't name any particular asset management company (AMC) as an offender, Sinha said that Sebi's inspection had uncovered nine AMCs whose majority of schemes (over 50 per cent or even all the schemes) have been underperforming their respective scheme benchmarks for three years in a row. Sinha further added that there are other nine AMCs where up to 50 per cent of the schemes have underperformed their benchmarks for three years.
"This cannot be allowed by regulator to go on and on and such fund houses must take corrective action," said Sinha. On its part, Sinha added that Sebiwill engage with fund house chiefs and fund managers whose schemes are consistently underperforming benchmarks. "There can be short-term vagaries but consistent underperformance is a matter of concern," Sinha said, giving the example of one scheme which has underperformed since its inception.
And underperformance was not Sinha's only critical observation. "There are conflicting situations," he said, citing a case where one single investor accounted for over 25 per cent - the maximum permissible limit - of a particular scheme's AUM. Sinha cited another case of non-compliance where portion of a particular mutual fund scheme's AUM was invested in a fixed deposit of a bank which was one of the investors in the same scheme.
"Majority of the industry is not violating," says Sinha. "This is a small group of AMCs which are not following the rules," he added. But Sinha has sent a clear signal that Sebi is intolerant. "Going forward we plan to do the inspections more intensely," said Sinha. Clearly, Sebi has switched into micro-regulating mode.