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Sebi panel rejects plan to raise MF net worth cap
October, 17th 2011

A Sebi-constituted panel on mutual funds has retained the minimum capital requirement to start a fund house at Rs 10 crore, rejecting a proposal to increase the net worth criterion, officials at the stock market regulator said.

The move comes as a breather for smaller fund houses and firms planning to enter the asset management business in Asia's third-largest economy.

Last year, the mutual fund advisory committee had proposed to raise the capital base of asset management companies to Rs 50 crore from Rs 10 crore to ward off 'non-serious players' and to ensure higher safety for investors.

"Higher capital requirement will be a difficult barrier for smaller institutions wanting to start the fund management business. It will not ward off non-serious players," said a Sebi official.

Even developed nations have lower capital requirement than India. In the US, the base capital required to start an asset management business is Rs 55 lakh, if converted into Indian rupees, the official said.

The first guideline on base capital criteria, which mandated funds to have a minimum capital of Rs 3 crore, came out in 1993. Sebi increased the net worth criterion to Rs 6 crore and then to Rs 10 crore after CRB Mutual Fund collapsed in 1996-97.

The mutual fund advisory committee had also recommended a higher net worth requirement to protect investors and funds from short-term liquidity stress. Well-capitalised funds are better placed to handle unforeseen redemption and issues arising from lower market liquidity, the committee had said last year.

"Such a situation will not come as mutual funds are very well regulated in India," a member of Sebi's mutual fund committee said after the panel shot down the proposal to raise the net worth.

Fund houses that have large capital structure include Reliance Mutual, Birla Sunlife, ICICI Pru Mutual, HDFC Mutual and UTI Mutual Fund, with capital reserves of 0.5-1.5% of overall assets under management.

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