The 2012 India 20: Policy Changes Spur Optimism
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The 2012 India 20: Policy Changes Spur Optimism

IMF & World Bank Annual Meetings
Palaniappan Chidambaram, india's finance minister, speaks during an interview at the Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group in Tokyo, Japan, on Friday, Oct. 12, 2012. Chidambaram called for lower interest rates, saying deepening policy overhauls may boost scope to reduce borrowing costs and revive the nation's economy. Photographer: Tomohiro Ohsumi/Bloomberg *** Local Caption *** Palaniappan Chidambaram | Tomohiro Ohsumi/Bloomberg

Government revives reform efforts under Chidambaram and sees mutual funds as a vehicle for promoting growth.

India’s fund managers are a hardy breed. After all, they’ve had to persevere through tough times in recent years as a wave of regulatory changes and a significant slowdown in the economy have dented confidence and diminished assets. But lately, hints of a turnaround are in the air.

The biggest change has come from New Delhi, where a ministerial reshuffle has raised hopes that the government will renew its commitment to economic reform after a period of stasis. The Congress Party–led United Progressive Alliance government had been embroiled in corruption scandals related to the staging of the 2010 Commonwealth Games, the awarding of mobile telecom licenses and cheap land grants, among other things. The scandals stymied the coalition government’s legislation agenda just as global pressures hit the Indian economy. The country’s growth rate slowed to 6.5 percent in the fiscal year ended March 31 from 8.4 percent a year earlier; growth slowed further to 5.5 percent in the April-June quarter. 

At the end of July, Prime Minister Manmohan Singh called Palaniappan Chidambaram back as Finance minister in a bid to break the political impasse over reform and jump-start the sputtering economy. Chidambaram, who had served as Finance minister for four years before moving to the Home Affairs Ministry in 2008, has moved swiftly to bolster confidence and revive investment. Among other measures, he has pushed through an increase in diesel fuel prices, opened the country’s retail and airline sectors to foreign investment and raised the limit on foreign ownership of insurance companies to 49 percent from 26 percent. The moves have sparked an improvement in sentiment, with the Bombay Stock Exchange’s benchmark Sensex index rallying by 13 percent between late July and late October.

Singh and Chidambaram have also acknowledged the need to support the investment industry. In his first week as Finance minister, Chidambaram promised “a number of decisions” to encourage more investments in mutual funds and insurance. Industry executives welcome the newfound attention. “After a period of wilderness, the Indian mutual fund industry has been attracting the rightful policy interest this year,” says Harshendu Bindal, president of Franklin Templeton Investments India.

The regulatory environment has also improved since Upendra Kumar Sinha, who had been chairman and managing director of UTI Asset Management Co., took over as chairman of the Securities and Exchange Board of India in February 2011. The regulator had poured cold water over the industry in recent years, adopting a number of measures — including a ban on entry-load fees — to discourage fund companies from churning investors from one product to the next new thing. Under Sinha, however, SEBI has taken several steps over the past year to enhance the distribution of mutual funds, particularly to the vast pool of potential investors who live in smaller towns across the country.

“Three years back, the mutual fund industry was regulated by a stick,” says Dhirendra Kumar, founder and CEO of Value Research, a mutual fund research firm. “While new regulations continue to be introduced, they are coupled with a development agenda to expand the market.”

Efforts to grow the market will certainly be welcome. Domestic assets of the fund industry averaged 6.65 trillion rupees ($124 billion) in the January–March quarter, down 5.4 percent from the same period a year earlier, according to the Association of Mutual Funds in India, a trade association.

A few firms managed to buck the industry tide, though.

Reliance Capital Asset Management Co. maintains its position at the top of the India 20, Institutional Investor’s annual ranking of the country’s leading money managers. The company boosted its assets by 19 percent in the latest year, to $26.9 billion. (The rupee declined by 13.2 percent against the dollar during that period, making the firm’s rise in assets, in dollar terms, all the more impressive.)

Reliance offers mutual funds, pension funds, offshore funds, managed accounts, hedge funds and real estate funds, and that diversity has paid off over the past year. “In mutual funds, we grew on the retail debt side and in gold funds, while in managed accounts we saw money coming into our high-yield debt offering,” says CEO Sundeep Sikka. In addition, the firm’s pension fund assets increased by 16 percent, to $11.6 billion.

Reliance is also looking outside India for growth. In August the company sold a 26 percent stake in itself to Osaka-based Nippon Life Insurance Co. for 14.5 billion rupees. “We will be launching Indian products in Japan and vice versa,” says Sikka. “We will manage Nippon Life’s money in India.”

Elsewhere in the India 20, HDFC Asset Management Co. remains in second place with assets of $16.5 billion, down 13 percent from a year earlier. ICICI Prudential Asset Management Co. returns in third place with $13.2 billion, down 18.6 percent from a year earlier. Birla Sun Life Asset Management Co. gains one place, to fourth, with $11.7 billion in assets, down 19.4 percent from a year earlier. “We gained assets in the fixed-income space, specifically in our dynamic bond funds,” says A. Balasubramanian, the company’s CEO. UTI Asset Management slips one place, to fifth. Its assets declined by 23.6 percent, to $11.3 billion.

Some firms have adopted innovative strategies for bolstering assets. 

IDFC Asset Management Co. gains one notch in the India 20, to No. 10, after boosting its assets by 4.2 percent in the latest year, to $4.9 billion. The firm developed a mobile technology that enables investors to shift what executive vice chairman Naval Bir Kumar calls “lazy money” from bank deposit accounts to liquid bond funds, by just sending an SMS text message. Bank savings accounts typically pay interest of around 4 percent while liquid bond funds can yield nearly 10 percent. Third-party distributors, who sell the bulk of mutual funds in India, had shunned most liquid bond funds because the 10-basis-point brokerage fee barely covered their administrative costs, but with the text messaging facility, “all the distributor had to do was sign the client,” Kumar explains. “We could take care of the administrative task while the broker earned his fee, and the client sends text messages to us.”

Deutsche Asset Management (India) jumps four places, to 13th in the ranking, after boosting its assets by 29.3 percent in the latest year, to $2.3 billion. The company has found success with hybrid products that combine the yield of fixed-income instruments with some exposure to the equity market. CEO Suresh Soni says the combination appeals to investors whose risk appetite has been dampened by market volatility in the past few years. “These hybrid products are three- to five-year closed end funds, giving enough time for the equity portion to deliver capital appreciation, and we are able to allocate enough funds on the fixed-income part to achieve the capital target at the end of the tenor,” he says.

Overall, the industry has effectively been treading water for the past four years. Fund companies currently manage roughly the same amount of assets, in total, that they did in 2009. Beneath the surface, however, there have been significant changes as regulatory moves like the ban on entry fees have prompted companies to reduce the number of funds on offer and caused a shakeout among distributors. Says IDFC’s Kumar, “the mutual fund industry has consolidated tremendously — in terms of the number of products that are sold, the number of active distributors in the marketplace, and even in terms of flows.”

Now regulators appear determined to help stimulate growth. In August, SEBI came out with a new set of rules that it dubbed “steps to reenergize the mutual fund industry.” Among other things, the new rules simplify the registration process to enable more distributors to sell basic investment products such as equity funds or fixed-income funds. The changes also give fund companies greater flexibility in how they allocate expenses and allow fund managers to charge an extra 30 basis points of fees if they can get 30 percent or more of their new inflows from towns beyond the country’s 15 largest cities.

The industry shares the regulator’s desire to increase the penetration of mutual funds across India. AMFI more than doubled the number of investor awareness programs it held, to 11,000 in the year ended March 31 from 5,000 a year earlier. Those programs took place in some 405 towns, up from 280 the year before.

Tinkering with fund regulations is useful, but the industry is also calling for policy changes to increase savings. “While recent measures can help on ‘push-side’ demand, we will need ‘pull-side’ demand” to stimulate long-term savings, says Franklin Templeton’s Bindal. In August, SEBI said its advisory committee would consider additional ways to use mutual funds to mobilize domestic savings to promote investment and growth. 

Foreign firms continue to show an interest in the Indian market. In September, Schroder Singapore Holdings, an arm of the U.K. fund manager, acquired a 25 percent stake in Axis Asset Management Co., and Atlanta-based Invesco said it would buy 49 percent of Religare Asset Management Co. In December 2011, France’s Natixis Global Asset Management bought 25 percent of IDFC Asset Management. State-owned Bank of India, which had exited the fund business in 2004, made its return by buying Bharti Enterprises’ 25 percent stake in a money management venture with France’s AXA and acquiring another 26 percent from AXA. It now owns 51 percent of the renamed BOI AXA Investment Managers.

One big foreign outfit quit the Indian market, though. In March, Fidelity Worldwide Investment agreed to sell subsidiary FIL Fund Management, which stands at No. 16 in the India 20, to L&T Finance. Although Fidelity didn’t give reasons for its exit, competitors say that the Indian business wasn’t meaningful for Fidelity globally and suffered from high costs. Still, FIL was attractive to buyers because equities accounted for about two-thirds of its assets, twice the industry average. •  •

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