Morgan Stanley Mutual Fund’s exit says a lot about India’s regulatory regime, as much as about the fund companies

Given the fanfare that marked the Morgan Stanley India Growth Fund’s arrival in India, in January 1994, its decision to throw in the towel exactly 20 years later, by selling out to HDFC Mutual Fund, ought to have attracted far more media discussion. That it has attracted less attention than Fidelity Mutual Fund’s exit, a couple of years ago, reflects that sorry state of India’s mutual fund industry. Of course, Morgan Stanley (MS) has itself to blame. It played on the ignorance of Indian investors to launch a whisper campaign in the ‘grey market’ that its units would soar like equity shares. People stood in long, serpentine queues to submit their applications and many even paid a premium for the forms.

Far from opening at a premium, the net asset value of the close-ended scheme did not touch the issue price for over a decade. Investor anger about Morgan Stanley was so high that this fund house had little prospect of launching another scheme to increase its AUMs (assets under management), for a long time.

Morgan Stanley’s cowboy ways were not restricted only to this scheme. When the economy opened up, MS first entered India though a 50:50 collaboration with SBI Mutual Fund (SBI MF) for an offshore fund. The two parted ways a little after executives of the State Bank of India (SBI) found that they were lulled into signing an agreement that gave veto powers to MS over investment decisions. The clause had been quietly slipped into the fine-print and was only discovered much later, when the first disagreement cropped up. The giant SBI discovered, to its shock, that it was the junior partner in the equal deal that they thought they had signed. After that, it was only a matter of time before they broke up. But Morgan Stanley executives, who were treated like movie stars by India’s political establishment and had easy access to India’s top bureaucrats and businessmen, were too cocky to learn any lessons. However, angry investors taught them a hard lesson that culminated in the sale of its business, exactly 20 years later.