Earlier this month, market
regulator SEBI released a document titled “Consultative paper on
managing/advising of Offshore Pooled Assets by Local Mutual Fund Managers”. The
paper makes a case for removing certain restrictions existing under section 24(b)
of the SEBI (Mutual Funds) Regulations Act.
At present, if an Indian asset
management company (AMC) wants to manage or advise offshore pooled assets or
funds, and for the purpose appoint a fund manager who is currently managing its
domestic funds, the AMC can do so subject to: both domestic and offshore funds having the same investment objective
and asset allocation. Furthermore, both portfolios must have a commonality in
holdings of at least 70%; finally, the offshore fund must pass muster on the 20/25
rule applicable to domestic mutual funds. SEBI has proposed that for offshore assets classifying as
Foreign Portfolio Investors (FPI) investments these restrictions be scrapped.
It’s not difficult to
understand what’s driving SEBI. For a better part of the last five years, the domestic mutual fund
industry has struggled to clock a healthy growth in terms of assets under
management. With expectations of a strong economic revival and buoyant markets,
India has resurfaced on global investors’ radar. The opportunity to freely manage/advice global funds can prove to be a
significant opportunity for Indian AMCs.
To be fair, the present set of
regulations though well-intended (more on that later) were restrictive for
Indian AMCs. Let’s take an example to better understand this. Consider a global
fund house which wants to launch an India-dedicated fund and hand its reins to
a domestic AMC, which in turn has a skilled fund manager with a proven
long-term track record. Expectedly, the
global AMC would want it’s monies to be managed by the same fund manager. His track record and presence will be the new fund’s USP. However, the present set of restrictions (especially ones
related to 70% commonality in holdings and the 20/25 rule) made it
operationally difficult to have the Indian fund manager at the global fund’s
helm.
Conflict of interest
If the aforementioned
restrictions are done away with, life will become significantly easier for both
Indian AMCs and fund managers. However, the flipside is that it could lead to a
potential conflict of interest situation with domestic investors on one
side and investors in global funds on the other. Global funds, by virtue of their asset size can prove to be lucrative
for Indian AMCs, and the possibility of fund managers paying more attention to
these funds at the cost of domestic funds cannot be ruled out.
Even SEBI recognizes this
prospect and has provisions wherein AMCs are required to make a disclosure in the
scheme information document (SID) that there exists no material conflict of
interest across its activities and other like measures. Perhaps some of the
restrictions which are now proposed to be scrapped had their origins in
protecting domestic investors’ interests.
A quick glance at how AMCs reacted to these restrictions in the first
place reveals a lot. There were cases of AMCs withdrawing their leading fund
managers from domestic funds and instead utilising them to run/advice offshore
funds. To placate distributors and investors in India, a standard (but
off-the-record) refrain was that though the said managers no longer run domestic
funds, they do ‘influence’ the local strategy. In 2011, when SEBI came up with
the present set of regulations permitting managers to be named on both domestic
and offshore funds, while some of the 'absent' managers returned, others yet chose
not to do so. All in all, it isn’t difficult to see which piece of the pie
Indian AMCs prefer.
Skin in the game
Admittedly, there is no
foolproof method to ensure that domestic investors’ interests are not
compromised. But what SEBI can do is institute a framework which prods AMCs and
fund managers to act in a fair manner. To begin with, provisions requiring AMCs to invest its personal monies in new fund
offers must be expanded to include all its domestic funds. Furthermore, SEBI
should make it mandatory for fund managers to invest in every domestic fund
helmed by them. Ensuring that AMCs and managers have their skin in the game,
is perhaps the best way of ensuring that domestic funds aren’t neglected. Also,
these investment must be periodically disclosed.
Another disclosure which will help is that of performance and portfolios of
offshore funds being managed/advised by fund managers. This will help
domestic investors track and compare the manager’s activities on offshore
funds versus domestic funds.
At their core, these measures can go a long way
in revealing the true character of AMCs and fund managers. Using the former
as inputs, the onus of making informed choices will rest with investors.
