06-10-2012, 05:18 PM
The mutual fund industry in India: growing with regulatory reform
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A brief history of mutual funds and their regulation in India
At the start of the mutual fund industry in the early 1960's, there was one government
owned rm, the Unit Trust of India (UTI). Along with several other sectors rest of the
nancial sector, this industry was liberalised in 1993, opening up to other asset management
companies (AMC), resulting in a slew of choices in mutual fund products for the Indian
investor. Today, the industry stands at 38 asset management companies that manage Rs.
7.1 trillion (USD 160 billion) of Assets under Management (AUM) raised from around 470
million accounts.
Since the economic liberalisation of the early nineties, mutual funds have been regulated
by the securities market regulator, Securities and Exchanges Board of India (SEBI), which
was itself a very new regulator in the early nineties. At the time, like all the other parts
of the nancial sector, the industry was lightly regulated with low levels of transparency
about the management of funds. It was only in 1998, after a spectacular episode of market
misconduct by the CRB group of companies that there was a sea-change in the regulation
and supervision of the mutual fund industry.
The regulator focussed on the production end of the mutual fund industry. This resulted in
very high disclosure and transparency of the assets under management and improving the
governance of the AMCs, setting it apart from the rest of the fund management industry
in India. This path towards greater transparency became the industry norm when UTI,
the only AMC that was exempt from full transparency on certain products, developed
problems in fulling obligations to customers. As part of the government bailout package
in 2001, the AMC was broken up into two funds. One had a xed mandate of winding down
upon completing the obligations of the original UTI schemes (primarily US-64) to existing
customers. The other was a company where the government was one of other shareholders,
that would follow all the regulation of the other mutual fund companies. With this, the
mutual fund industry became the only fund management industry in India with a minimal
presence of public sector ownership.1
Regulation pertaining to transparency of mutual fund products
Since the 1993 liberalisation and the entry of new AMCs, there has been a spate of product
innovation in the mutual fund product space. There has been a new age of retail focus
through SIP and ELSS, between April 2006 and January 2008. Today, 41 AMCs oer a
total of 918 schemes. This inevitably leads to fairly large overlaps between the features of
the schemes oered even by the same AMC, and fairly subtle naunces dierentiating one
scheme from the other. This would also amplify the eect of \shrouding" that Anagol and
Kim (2010) refers to: given the complexity involved in the features of the mutual fund
products, SEBI's regulation on MF costs are not readily accessible enough to be useful
indicators for investors.
Despite this, there has been little by way of regulation regarding the need for more clarity
and transparency on product denition and dierentiation.4
Going forward
The SEBI rationale for regulating such dramatic changes recently for the mutual fund
industry has been that lower costs and increased transparency ought to create lower barriers
to retail participation. Part of the SEBI rationale for explicit disclosure of distribution
commission has been in reaction to the abuse of such practices in other areas of nancial
fund management in India, at the expense of the investor. Also, SEBI's regulations (to
trade MF products on exchange, make transparent distribution costs) seem to be on track
with respect to the larger global trend is towards greater transparency. All of these is being
done to achieve an increased retail participation in mutual fund products over the medium
and long term horizons