MUMBAI Dec 11 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.
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
"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
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
"The biggest problem is that there is no case for
precedent," said the head of a big fund house, also declining to
"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 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
When Axis Asset Management, part of India's Axis Bank
, 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 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."