Securities and Exchange Board of India (SEBI) is playing the old tune again which was once turned down by its own panel. Recently, the market regulator has hinted at raising the minimum net worth requirement for mutual funds. In 2010, mutual fund advisory committee on "Review of Eligibility Norms" headed by Ms Roopa Kudva, MD & CEO, Crisil had recommended to increase the minimum net worth to Rs 50 crore. However, it was later rejected by the panel appointed by SEBI. At present the minimum capital requirement to set up a mutual fund in India is Rs 10 crore. The topic is again up for the discussion.

This time, reasons cited by SEBI for raising capital requirement limits have not been very different than those brought up by the committee in 2010. SEBI wants to close all doors to non-serious players. It believes more the capital invested in business better it would serve the purpose of attaining higher market penetration. Higher capital is also perceived to protect investor's interest. It is often argued that larger capital base is needed,
 

• To build minimum infrastructure required to service investors
• To ensure continuity of the asset management company
• To absorb business losses without affecting investors
• To fund future growth
• To obtain lines of credit from banks when necessary to provide protection to investors due to market driven stress
   

As observed by SEBI, there are some less-serious players in the industry. The regulator has warned that all those fund houses that have not expanded their operations beyond top 15 cities may lose out incentives which may be offered henceforth. The indicated move comes as a part of initiatives taken by the market regulator to address long term problems faced by the mutual fund industry. SEBI is also of the opinion that mutual funds, in the past, have taken advantage of low capital requirements to enter mutual fund business and make it over crowded by managing meager asset base.

PersonalFN is of the view that, mere increasing minimum capital requirement may not ensure fund houses are committed to doing serious business. Imagine a fund house promoted by a top banking company having thousands of crore worth market capitalisation. For it, running a business which has a base capital requirement of say, Rs 50 crore may be just a matter of interest and diversification. The promoter has very little to lose even if it has to close asset management business one day. On the contrary a promoter of another fund house with a relatively small asset base might have invested substantial amount (of total sum available with it) which would always keep it interested in doing competitive business. The dedication with which investors are served could also be higher in case of a fund house that is fighting with bigger fund houses for a market share. Promptness in servicing investors, quality of fund management and proportion of well-performing assets to the total asset base decides the seriousness of a fund house about its business. Furthermore, it should also be seen how the new assets are being garnered. Merely by launching aggressive ad campaigns or by banking on authentic track record it created for itself.

Moreover, going purely by numbers, PersonalFN found little merit in the argument that higher capital would help penetrate the market. The first ever guideline on minimum capital requirement was released in 1993 which made it compulsory for a fund house to have a capital base of at least 3 crore which was increased to Rs 10 crore in a phased manner. The penetration of mutual funds is still very low despite of upward revisions in minimum capital requirement.

Capital requirement, if raised, would be detrimental to competition in the sector. Ranking fund houses based on the criterion of Assets under Management (AUM) doesn't give a true picture of how large is the investor base of a fund house. PersonalFN believes that asset management is not a capital intensive business but if regulator is of such a view then wouldn't it be wise to ask for more capital as AUM grows? At present, smaller fund houses have a higher AUM-capital ratio which in other words mean, they are bringing in more capital for getting lesser rewards.

PersonalFN is of the view that merely going by macro numbers and concluding that mutual funds have been unable to penetrate beyond 15 cities would be inappropriate. It is crucial to find out why any new fund house has not tried to open an office in rural areas where there's no penetration and thus no competition. Simply because they are not sure how long would it take to recover their capital had they invest in rural operations.

Well, whether SEBI really goes ahead and raises the minimum capital requirement remains to be seen. PersonalFN believes that, faith not capital would help mutual funds grow.

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