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Is IDFC Mutual Fund up for sale?

The fund, which took over the assets of Standard Chartered Mutual Fund in May 2008, is finding the going tough after recent regulatory changes and commercial pressures

Regulatory changes and commercial compulsions are beginning to take a toll on the large number of asset management companies (AMCs) running mutual funds (MFs). Many of them are losing money and see no light at the end of the tunnel given that selling MFs has become tougher and at the same time operational costs have shot up since last year. "At least 10 AMCs are up for sale," says the CEO of a mid-size AMC. The pressures are so strong that two large fund companies are also looking for exits. One of them is IDFC Mutual Fund. The group's top management has apparently decided to get out of the mutual fund business. IDFC does not appear to have formally appointed an investment banker for this transaction. It is exploring its exit options right now and is trying to get a sense of how much it could be valued at. Moneylife contacted IDFC about the possible sale but at the time of writing this article, it did not respond to our query.

Interestingly, IDFC took over the assets of Standard Chartered Asset Management Company in May 2008 to expand into what seemed like a fast-growing business at that time. According to reports, the transaction was valued at $205 million or Rs830 crore. Since the assets it took over were around Rs14,000 crore, it paid about 5.9% of assets under management (AUM), the most popular way of valuing mutual fund takeovers. Under IDFC, the AUM has dramatically doubled to around Rs27,000 crore. It has some 38 equity schemes and 87 debt schemes.

There are 38 AMCs in India, which have received regulatory approval and are operational. Many of them suddenly now find that their business model is not very robust under the changed regulatory regime brought about by the Securities and Exchange Board of India (SEBI). In the middle of last year, SEBI had banned charging mutual fund investors entry loads, which were as high as 6%. The funds used to pay front-end commissions from entry loads, which acted as incentives for distributors to sell mutual funds. Once the entry loads and therefore, front-end commissions were removed, sales of funds fell sharply because distributors had little clear incentive to sell funds. Apart from front-end commissions, distributors also make money through what is called trail commissions of about 0.5%, which is much larger in absolute terms than the front-end commissions because the amount is based on the total assets. However, the rules as to who would get the trail commission (the new distributor or the old in case) was not clear for a long time and distributors still don't see the fact that they can build a strong business solely out of trail commission over a long period of time. In an unprecedented situation, to sell funds, AMCs have now started offering incentives out of their own income-the asset management fees of 1%. In this game, AMCs that don't have natural strength in distribution are worse off. While IDFC is one of the larger operations, it is handicapped vis-à-vis funds like ICICI Pru or HDFC, both of which get their group banking associate to sell their funds through their large and powerful branch network. It was on this strength and also some surreptitious incentives that Axis Mutual Fund managed to raise some Rs1,000 crore from its new fund offer in January this year. IDFC has a wide product portfolio but does not have a bank or an insurance company in its fold.

Parallel to the regulatory pressures, the cost of operations of the fund business has gone haywire. In 2009-10, a year of the massive bull market, the average salary hike was 20%. Lower income and higher costs have made the business unviable to all but the very large AMCs. One more major blow would be the tax changes proposed under the Direct Tax Code (DTC) that makes short-term capital gains fully taxable and long-term capital gains party taxable.

These pressures are too much for many small fund companies but it would be significant if IDFC or any other fund decides to exit the business.
 

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COMMENTS

HIREN JADAV

7 years ago

Well, i think AMC should stop paying branches for expansion and development because it is major portion of expenses of amc. this type of fake expenses and debit not payment and also restriction on relationship manager for profit centre contribution needed.

amc should curtail their office rent expenses and also recruit qualified staff who work as per sebi regulation.

distributors are real contributors in profit of amc not relationship managers.... there are obstacles to every business but AMC manages businesses and should know how to carry business with the help of distributor ifa

SRIDHAR

7 years ago

SEBI had made many rules to MF INDUSTRY in the advertising campaign also, but it was unable to control the CAMPAIGN OF ULIPS which confusing the investors and policy holders. As some ULIP SCHEMES are being advertised by CELEBRITIES with very high image in india and abroad who can influence the investor or policy holder decision. But nothing was done to stop this. great disappointment for all. Atleast, the IRDA should have taken care in giving permission to insurance companies which are launching products with huge commissions to agents around 50% to 60%. TRIPS TO FOREIGN NATIONS with policy holders money. what is going on in this country is a big question always. There was system in this country that everything is organised just to be failed or organised just to disorganise the existing good systems earlier. I think investors or policy holders have been fooled by SEBI, as they are waiting for strict measures, but SEBI is unable to show its strength in doing so.

SRIDHAR

7 years ago

I think it is big task now for SEBI to make AMC's a good business also. SEBI should take some steps to rejenuvate the industry as a whole. It should think twice that what it had able to do with IRDA & ULIP's. If anyone compare ULIP and mutual fund scheme, always ULIP is expensive what i feel, where the investor is losing much, is not able to do justice to them. But why SEBI eying especially on mutual fund industry is just it had the powers to do so or any other aspect might be. ITS A BIG QUESTION AND SENSITIVE ISSUE TO REGULATORY BODY LIKE SEBI that it has not able to question and regulate insurance industry as they are also investing in the EQUITIES MARKET. Because, SEBI has powers to regulate any one who is an investor of the EQUITIES MARKET. But it quite surprising that it was unable to control the ULIPS kind of schemes which are mobilizing thousands of crores in the name of investment rather than insurance. THIS IS INJUSTICE TO THE INVESTORS. THANK YOU

kamal

7 years ago

what all the companies are in queue for sale

SAMAR

7 years ago

Is it end of the Mutual Fund business?

Anup

7 years ago

I hope SEBI is not taking us in an era of monopoly where only powerful bankers and other financial institution who have strong network base can survive. If they had to do all this why did they created AMFI? Now by taking our examination also under their control isnt it clear that a big fish with teeth is taking over the small one? Where is investor in this and where is his interest protected? I know atleast 20 people who are left now like orphans without any knowledge of their investments just because no distributor is their to help them. They did above the counter shopping from so called professional banks and now they and their is money is in air. God Bless to SEBI and their management.

Bharat Kumar thapa

7 years ago

SEBI had taken the righ step to make strong regulations to manage the asstet of the people it is the AMC who look after the hard earned Money of an Individual it is not a bussiness only to look only AMC or Distributer Profit margin , after all all of them are here for the benefit of the client no dout it is a changing era but it will bring investor faith in Mutual fund .

Rakesh Malhotra

7 years ago

MF industry is going to Do--------------s. What is in the minds of bureaucrats spoiling the whole show? They are creating unemployment. They think that distributors are raking money like they are. Govt. is also quite on the issue. Other countries are improving laws for better work but our govt.......? God tussi great ho.

Poonam Agarwal

7 years ago

PLEASE WAIT FOR THIS TYPE OF GREAT NEWS FOR OTHER SMALL AMC,s DUE TO SEBI,s REGIDDNESS.

Vishal Agarwal

7 years ago

YEH TO HONA HI THA.

G.Somasundaram

7 years ago

My ARN No.16932
Please send 10 applications forms to my address

Abhishek

7 years ago

It is good that IDFC has taken this step. I dont think that there is any sense in running an AMC which is small or even medium size because the margins are going to shink considerably as time passes by. This consolidation is good for the industry too. Maximum 10 AMCs will survive the constant rape of AMCs and distributors by SEBI.

Dillip kumar swain

7 years ago

sebi don't hurry about idfc.it may be poltics from amc houses. u r hero. tell amc take help of bankers & nd.s.

Ujjwal Mukerji

7 years ago

The kind of situation an AMC like IDFC is facing became inevitable from the date our great policy makers at SEBI came out with the decision of scraping the entry load on investments in mutual funds & thus the mutual fund distributor was denied of an earning. God also has a doubt where these great policy makers of SEBI will ultimately lead this industry to.

Narendra Doshi

7 years ago

I wish this DOES NOT happen in a hurry with IDFC & they are able to find ways to SURVIVE. MF industry has to go miles & all concerned participants must prode over INTENSELY & discuss all pros & cons & take a UNIFIED favourable decision for the interest of massive base of longterm investors. May be Mr. Vaidyanathan - the SEBI official & his team, the New AMFI head & others would listen. Let there be aggressive free for ALL arguments & counter arguments before decisions / guidelines / rules of the game are framed up.

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