MUMBAI (Reuters) — When
Franklin Templeton's India unit wanted to launch a mutual fund that
would switch allocation among stocks, bonds, gold and money markets,
the Indian regulator baulked, deeming it too risky for domestic
investors, according to the company.
The Securities and Exchange Board of India, or SEBI, is wielding an
unprecedented level of control over how mutual funds operate,
delaying new launches and dictating investment strategy, frustrated
insiders in the embattled industry say.
SEBI's tighter scrutiny adds to the challenges for the two-decade
old Indian mutual fund industry that has endured a steady stream of
redemptions from equity funds in recent years.
Even as Indian stocks hit record highs, most of India's 47 asset
management firms are unprofitable and have underperformed the
broader index so far this year.
"SEBI is trying to tell us what to do from an investment
perspective, which we don't necessarily agree with," said Vivek
Kudva, who heads India, Central Europe, the Middle East and Africa
for the Franklin Templeton Investments unit of U.S.-based Franklin
Resources Inc <BEN.N>.
After months of back and forth with the regulator early this year,
the proposed fund was eventually shelved.
"If they don't approve it, we are stuck," Kudva said.
Equity fund assets under management have fallen from a peak of $30.8
billion in December 2007 to $24 billion last month, after net
outflows in four of the last five years.
SEBI's hands-on approach under its chairman, U.K. Sinha, who took
the top job in 2011 after running India's oldest mutual fund firm,
government-backed UTI Asset Management, marks a break from past
practice at the agency.
Sinha has publicly railed against underperforming fund houses and
the asset management sector's failure to lure more investors into
stocks.
Partly as a result of that, new open-ended fund launches are down
sharply, to 48 from the beginning of 2012 through October 2013, from
105 during the two-year period ending in 2011, industry and
regulatory data shows.
During the same periods, 129 and 140 applications, respectively,
were filed.
"We end up spending time and resources coming up with strategies our
investors want, only for it to be modified beyond recognition or
delayed to the point of no return," said the chief executive of a
mid-sized asset management company who declined to be identified.
"(It) is killing us," the manager said.
SEBI officials acknowledged that they have become tougher on fund
launches.
"I think it's a good thing that launches have come down. The
regulator doesn't want a repeat of 2008," Sinha recently said on the
sidelines of an industry event.
In 2008, many small fund investors lost money when the market
collapsed amid the global crisis, and the industry has been accused
by the regulator of rampant mis-selling and failure to provide
adequate disclosures about market risks.
"SEBI has made it very clear we don't want new funds unless they
have a separate (different) style of investment," Sinha said.
Under Sinha, SEBI also has enacted new rules aimed at curbing
improper selling by distributors.
In 2009,it banned fund houses from sales charges or entry loads for
new investors and put curbs on how much exit load could be levied on
early redemptions.
Last year under Sinha, the agency said it would not allow asset
managers to launch new funds if their existing portfolio includes a
fund with the same or similar strategy.
Some industry insiders say there is ambiguity around what qualifies
as a similar strategy, and that the initiative stifles innovation.
"The biggest problem is that there is no case for precedent," said
the head of a big fund house, also declining to be identified.
"If SEBI has approved one investment strategy for one fund house
there is no guarantee that a similar strategy at my firm will get
the green light."
Earlier this year, SEBI turned down an HSBC <HSBA.L> Asset
Management (India) Pvt. Ltd feeder fund that would have primarily
invested in Russia, because the Russian markets had been
underperforming those in India, according to a company executive and
SEBI officials, all of whom declined to be identified.
When Axis Asset Management, part of India's Axis Bank <AXBK.NS>,
filed a draft prospectus earlier this year seeking to launch a fund
that would switch allocation between equity and equity derivatives
in an equal measure to manage risk, it was told to lower the
derivatives exposure if it wanted approval, according to a fund
manager involved in the matter.
Prudential Financial Inc's <PRU.N> Pramerica Asset Management
started the year in hopes of beefing up its funds portfolio. It has
filed applications for seven open-ended funds this year, according
to data from SEBI. Only one has thus far been approved, a Pramerica
official said.
SEBI officials say it is up to fund managers to provide complete
details in their applications, and to demonstrate that the product
is indeed unique from existing funds. The track record of a fund
house's existing products is also a factor.
"What happens in certain cases is that we literally have to
hand-hold them when it comes to disclosures in the offer documents.
They would leave out important details which only delays the process
further," said a senior official with the regulator, declining to be
identified.
Added another senior SEBI official: "It's not that we are going
beyond the rule book. We are enforcing the existing rules strongly
now and they have a problem with that."
