Finmin officials meet mutual fund houses to discuss revival plan

In the meeting attended by top officials from mutual fund houses, distributors and the capital market regulator Securities and Exchange Board of India (Sebi), the government heard the views of the stakeholders on the problems confronted by the industry
By Remya Nair & Kayezad E. Adajania, 2 Jul 2012.

New Delhi/Mumbai: As part of an effort to revive investor sentiment and encourage a bigger flow of household savings into the mutual fund industry, finance ministry officials on Monday met asset managers to discuss ways to go about the task.

In the meeting attended by top officials from mutual fund houses, distributors and the capital market regulator Securities and Exchange Board of India (Sebi), the government heard the views of the stakeholders on the problems confronted by the industry.

Mutual fund representatives demanded a relaxation of expense ratio regulations, tax breaks for investment plans and passing of the service tax directly to investors; the distributors demanded the reintroduction of incentives, or the so-called entry load that Sebi did away with in 2009 to benefit investors who had been paying the commission.

Monday’s meeting follows a call by Prime Minister Manmohan Singh to finance ministry officials to look at ways to boost the mutual fund and insurance industries.

At the meeting, the government didn’t commit itself to any specific measures, said industry officials.

The mutual fund industry has demanded that the total expense ratio—the percentage of an investor’s corpus that is deducted by an asset management company annually to meet its various expenses—be increased by 100-150 basis points from the maximum 2.5% that equity funds can charge currently. One basis point is one-hundredth of a percentage point.

Point of debate: Amfi’s H.N. Sinor says
industry does not believe in reviving the entry load
issue. Hemant Mishra/Mint.

It also lobbied for allowing so-called fungibility within the expense ratio. Mutual fund schemes are allowed to charge about 1% as asset management fees, which is the fund house’s income, and the remaining amount has to be utilized to manage its other expenses such as custodian charges, registrar and transfer agents and advertisements.

Permitting fungibility will remove internal limits and allow mutual funds to spend the way they want to, within the overall ceiling.

Mutual fund houses also asked for extra incentives for them to reach out to smaller towns. Additionally, they requested that the exit load be credited directly to the schemes of asset management companies and thereby to their net asset value.

Another suggestion was for the service tax component to be borne by consumers and kept out of the total expense ratio.

Among the long-term measures discussed were bringing the 401K structure in India wherein mutual fund houses are appointed by companies to manage the pension corpuses of their employees, allowing pension plans to be launched by funds that are not taxable at any stage, and allowing insurance companies keen to use mutual fund houses for management of assets.

“The objective of the government and Sebi is to specifically align the interests of all stakeholders and streamline the operational procedures and to achieve higher growth in the mutual fund industry,” the capital markets division of the finance ministry said in a statement. “The Mutual Fund Advisory Committee of Sebi has been meeting to consider the various steps that would need to be taken to give additional boost to the industry.”

“The medium-term plan would include the greater role for pension and insurance sectors in further augmenting the mutual fund industry,” the ministry said.

The industry also suggested that under the Rajiv Gandhi Equity Scheme announced in the budget earlier this year, funds should be routed through mutual funds instead of allowing investors to invest directly through equity.

“The meeting was aimed to discuss how to increase retail participation,” said H.N. Sinor, CEO of the Association of Mutual Funds in India, the trade body. “We have not discussed the entry load issue. Only distributors mentioned it. It is a three-year-old matter and the mutual fund industry did not believe in reviving the issue.”

Gross asset mobilization by mutual funds has declined since the entry load was banned in 2009.

“There are issues of short term and taxation nature. Those are to be fast-tracked. We need to work out a balance so that the industry grows,” said R. Gopalan, secretary of the department of economic affairs in the finance ministry.

Dhruv Mehta, chairman of the Foundation of Independent Financial Advisors, said finance ministry officials were in a “listening mode”.

“We asked for extending other tax incentives, like the equity-linked savings scheme tax deduction benefits that will not be made available once the direct taxes code kicks in,” said Mehta.

The industry has been asked by the government to submit its taxation-related proposals to the government.