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Mutual funds gear up for mergers and acquisitions
December, 07th 2009

The mutual fund industry is set for a major shake-up with mergers and acquisitions (M&As) gathering momentum. In September, L&T Finance acquired DBS Cholamandalam for Rs 45 crore. And now, Taurus and Religare are on the lookout.

Taurus Mutual Fund, promoted by Gurgaon-based HB group, is looking to add to its fund offerings by acquiring existing schemes from other fund houses. "On an inorganic basis, we are open to buying the schemes, either equity or debt, but we are not interested in the licence as we already have one of our own," said Waqar Naqvi, CEO of Taurus Mutual Fund.

Resources to augment this equity offering through acquisition are available internally, said Naqvi. Buying of schemes and not the licence is not new in India. In 2005, Birla Sun Life had acquired the schemes of Alliance Mutual Fund and a year earlier, CanBank Mutual Fund had taken over the schemes of GIC Mutual Fund.

Religare Mutual Fund is another asset management company (AMC) looking at inorganic growth."We are looking at opportunities globally to acquire an asset management business. Locally, the industry is feeling the pinch post the no-entry load regime because of increased outflows in the last few months and paying distributors upfront from the AMC's own capital. Therefore, there will be consolidation in the AMC industry in India, too," said Saurabh Nanavati, CEO of Religare Mutual Fund.

Religare AMC recorded operational breakeven in June, as reflected in Religare Enterprises' segment-wise results for the September quarter. The AMC can thus bank on its well-capitalised position and free cash-flow for future acquisitions, Nanavati said.

Religare Enterprises is promoted by Shivinder Mohan Singh and Malvinder Mohan Singh, the erstwhile promoters of Ranbaxy Laboratories, which was sold to Daiichi Sankyo of Japan. The AMC had earlier acquired Lotus Mutual Fund in 2008.

The onset of the no-entry load regime has pushed up costs for the AMCs, which now have to fork out money from their own pocket to distributors. Earlier, they were collected from investors but the Securities and Exchange Board of India stopped the practice with effect from August 1.

Faced with rising costs, many AMCs, which are inadequately capitalised to deal with the situation, are now looking to sell out while others are looking to use the opportunity to grow their businesses.

Economy of scale is another reason for consolidation. The larger a business is, the more cost-effective it can be, say industry experts. According to them, five years ago, an AUM of Rs 3,000 crore was sufficient to achieve breakeven; today that level has gone up to Rs 10,000 crore.

"I would not be surprised if there is a fair amount of consolidation in the industry. The commitment to the business and the ability to navigate through India's shifting investing environment would be key factors in determining who would remain in the business," said Sanjay Sachdev, country manager for Shinsei Corporate Advisory Services.

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