MFs cry foul over Sebi's perform or perish norm for NFOs

Excerpts from India Business Hour on CNBC-TV18 Watch the full show »

Market regulator Sebi regulates the mutual fund industry, not just through directives and orders in black and white, but informal understandings as well. And the latest such informal understanding is that only new fund offers that get a substantial investor response will receive approved. CNBC-TV18's Mitra Joshi and Payaswini Upadhyay report.

Mutual fund houses will have think twice before launching new schemes. CNBC-TV18 learns that in September, Sebi reached an informal understanding with fund houses, one that says new equity schemes will need to rake in at least Rs 10 crore to get Sebi approval.

For debt schemes, this minimum corpus was set at Rs 20 crore. Failure to reach these informal targets was to result in a refund to investors within 15-20 days of the NFO's closing date.

Further, failure to complete refunds within six weeks was to result in an interest payment of 15%. Sources in Sebi say this move was to ensure only serious NFOs were launched. However, fund managers say this is only making it more difficult to attract investors.

Like Waqar Naqvi, CEO of Taurus Mutual Fund points out. "Getting equity money even now is difficult. It is not coming even on its own and it is not as if people are queuing outside our offices to invest money in equities and off-late, last two three months given the market conditions, equity has become a bad word even for people who want to invest in larger fund houses."

Smaller fund houses say this move will mean fewer new scheme launches...giving the large fund houses with strong distribution networks an undue advantage.

If you do not have a distribution network, chances of getting into a minimum threshold level would be very difficult, says Vikaas Sachdeva, CEO, Edelweiss Mutual Fund. 

Before the September understanding, 48 equity schemes and 175 debt schemes had corpuses below the agreed amount. But since this threshold rule came into play, only 8 new fund offers of equity schemes have seen the light of day. Experts say this rule could result in the consolidation of schemes... a situation Sebi has been keen on for sometime now.