Mumbai, August 28, 2017

India's capital markets regulator intends to introduce rules that will force mutual funds to merge schemes in the same investment categories, driving long-pending consolidation in an industry that has hitherto ignored informal requests for ending the surfeit of plans.

Broadly put, if a mutual fund has two equity schemes with mandates to invest in large-cap stocks, the asset manager will have to merge the investment products once the new rules proposed by the Securities and Exchange Board of India (Sebi) kick in. The step is aimed at improving transparency and reducing the clutter for investors.

The Sebi-appointed mutual fund advisory panel, scheduled to meet September 1, will discuss the matter, said three people familiar with the development.

Exact details of the proposed rules could not be ascertained, but one official said the norms will require clear categorisation of mutual fund schemes, and aim to eliminate product ambiguities.

 For about a decade, the regulator has been informally nudging mutual-fund houses to merge schemes with similar attributes. But with the industry resisting such moves, Sebi has been forced to come out with the proposed set of rules. "Mutual funds have not responded to Sebi's persuasion for years. So, now it has decided to come out with the rules," said a senior mutual fund industry official privy to the matter.

In June, Sebi chairman Ajay Tyagi stressed the need for consolidation of schemes.

In India, 42 asset managers handle more than Rs 19.5 lakh crore across 2,000 MF schemes.

Sebi has maintained that the number is high, and is causing confusion among investors who have to choose from an abundance of similar products. In an attempt to push the merger, the regulator had stopped giving several mutual funds the approval for floating new schemes.

Most funds withstood the regulato- cos expand ry pressure as a wider product basket has helped them gather more assets, boosting profitability.

"Mutual funds do not really benefit from consolidation," said Manoj Nagpal, chief executive, Outlook Asia Capital, an investment advisor. "The probability of one scheme doing better than a similar one at any point always works for the mutual fund."

Nagpal said the industry could also be worried that consolidation of schemes could impact the total expense ratio—the fee that funds charge investors every year for managing their money. "At some stage, bigger schemes will have to bring down their expense ratio. This will impact their profitability," he said.

The government, in the previous two annual Budget announcements, had paved the way for mutual-fund scheme mergers by removing tax anomalies.

Earlier, mutual fund investors were deemed new subscribers for taxation purposes if a scheme merged with another. This meant investors had to pay short-term capital gains tax of 15% for an equity scheme if they exited it within a year. The Budget this year clarified that such a merger would be considered as a continued investment, which means there would be no taxes if an investor exits within a year of the merger. A top mutual fund official said consolidation of schemes will bring a 'level-playing field' in the industry.

"Hopefully, now Sebi will give permission to mutual funds to launch schemes that they do not have," the chief executive of a mutual fund said, requesting anonymity

[The Economic Times]