>REGULATIONS IMPACT INDIAN ASSET MANAGEMENT (KPMG)

Business impact of regulations in the Indian Asset Management Industry: Playing in the new market place

The asset management industry in India experienced significant turmoil in the financial year 2008-09, with assets under management (AuM) declining by approximately 17 percent compared to year-on-year growth of approximately 50 percent between FY03 and FY08. The capital markets decline and consequent preference for debt and liquid funds resulted in a significant shift in the product mix, with the proportion of debt and liquid funds increasing significantly in FY092. Understandably, industry profitability, measured as basis points of average AuM, dropped from approximately 22 bps to approximately 14 bps, putting significant pressure on asset management companies (AMCs).

In recent years, industry regulator the Securities and Exchange Board of India (SEBI) has focused more on investor protection, introducing a number of regulations to empower retail investors in mutual funds. SEBI began by disallowing initial issue expenses and mandating that mutual fund schemes recover sales and distribution expenses through entry load only. Further, investors applying to mutual funds directly were exempted from entry load. These steps aimed at creating more transparency in fees paid by investors and helping make informed investment decisions. Subsequently, in a recent move, SEBI banned the entry load as defined by AMCs and deducted from the invested amount, and instead allowed customers the right to negotiate and decide commissions directly with distributors. The objective is to bring about more transparency in commissions and encourage long-term investment. The regulation mandates that all scheme application forms carry a disclosure to the effect that investors will pay upfront commissions directly to distributors based on the investor’s assessment of various factors including service rendered. In addition, the regulation mandates that distributors disclose all commissions (whether trail commission or otherwise) of all competing mutual fund schemes.

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