The Mutual Fund Show: How Asset Managers Plan To Cope With New FEMA Rules
Asset managers owned by foreign companies are confused over the recent amendment to rules under Foreign Exchange Management Act.
Asset managers owned by foreign companies are confused over the government and central bank’s recent amendment to rules under the Foreign Exchange Management Act.
That’s because, as per the amended guidelines that were notified last month, the mutual funds owned by such companies may be classified as “investment vehicles”, bringing in limits on their investments in listed Indian companies and sectors in line with foreign investment rules. Fund houses, including Mirae Asset India Mutual Fund, Franklin Templeton Mutual Fund and Invesco Mutual Fund, among others, will be affected.
Swarup Mohanty, chief executive officer of Mirae Global Investment (India), said the action has come as a surprise for the mutual fund industry in India.
“Right now, Association of Mutual Funds in India is in discussion with the regulators,” he told BloombergQuint on the latest episode of The Mutual Fund Show. “The asset management companies will put their side of the story as well and hopefully this will be rectified.”
Watch the conversation here:
Here are the edited excerpts from the interview:
Swarup, you would be one of the funds that come under the crosshairs, so to say. What do you make of this, a bolt out of the blue — as the earlier guests told us in the morning?
Swarup: It came as a surprise because as you rightly pointed out, the mutual funds in India don’t differentiate between a foreign fund and a non-foreign fund because we are all registered under the Trust Act. AMFI is discussing with the regulator to get this corrected. It is an anomaly and we do believe it should be corrected very soon because the discussion is on and as we speak, there’s a fair amount of back and forth between both sides. I think the AMCs will put out their side of the story and when you look at it at a very fundamental level, we are foreign owned but the company we manage in India is completely Indian. The underlying asset is Indian. So, this is a small rectification which needs to be done. Our inclusion in the amendment of Oct. 16 got us into the entire gamut of things. So, we are trying to talk it out. That’s the whole thing.
First the legal angle. From the conversations with the legal people, there is no way around it unless those with the power figured that there is a language misrepresentation or a wrongful putting out that has happened, that gets corrected at source. Now, you would’ve known what the AMFI or the AMCs are trying to do. Can you give us some colour here?
Swarup: See, fundamentally, a law is a law. There is no interpretation of the law, it is black and white. If that is the law, then that is the law. There are two types of people, the law maker and the law follower and we people become the law follower. That ends the whole thing there. When you look at it at the base level — and this is the discussion that AMFI is having with the regulator or the rightful regulators — in the sense that, in case of mutual funds, and if we were managing some foreign money, it could be subject to that. But the essence of schemes that are under consideration here are essentially Indian money and this is primarily regarding the money which is from abroad, right? If they come and tell us something about our own capital which has gotten from our own parents or from our sponsors, that’s the separate issue. But this being subject to the underlying Indian schemes, is the anomaly which the mutual funds are pointing out.
There are AMCs which are getting money from global funds or otherwise to be invested in India. That doesn’t come along in this conversation in any way, right?
Swarup: So that would be a separate entity. If some laws come on that, then that would be under the purview that is my opinion. But from the discussion that is happening on the segment that is being discussed, it’s completely Indian-owned assets.
What is your view out here, Nikhil? You would have spoken to, besides Swarup, to some other AMC managers as well. What is it that they have to say as well? What is your own personal view?
Nikhil: I think they’re trying to talk it out and I am sure there will be a way around it. I think from an investor’s perspective, if you are investing in a mutual fund, any way money is well diversified, they ensure that from a risk point of view, there are internal caps and limitations that they set out and I think to that extent, I think most mutual funds any way comply from a risk point of view, from an investment discipline point of view. I think in the spirit like you said, its Indian money, it’s my money which is again getting invested. So I don’t think there should be a cap. Indirectly, I am owning a particular Indian company and an Indian investor is owning an Indian company so I don’t think there should be a cap to this and this should get sorted out in some time.
What are the implications?
Swarup: The implications are in two parts. One, in the present holdings as Nikhil rightly pointed out, they are diversified in nature, most of the fund holdings, and broadly when we did dip test we were waiting for some reports from our custodians on the actual impact. We are on our universe of say 96-98 stocks underlined, we would be affected by one stock, at least that would be underlined, and even if there is a so called selloff that would happen. It would be a percentage or two of our entire portfolio, which from a selloff perspective would be pretty negligible. So, if somebody is anticipating a huge selloff and hence some major impact on the market at the current level, the answer is no. And all of us put together if we look at the broad foreign side of the holding this concept of it being diversified holds good for all of us. The other part is the new buy. There is the new fund which comes in because the cap is, there he/she would not be allowed to buy, which I don’t think is fair at the end of the day. If for the same fund if a new category or the new fund were to be launched, the overall cap is met in the financials of the bank. The new fund will not allow to buy is my interpretation of the whole thing and that’s not the level playing for you.
Let’s assume that there is a stock in a bank A wherein the foreign shareholding as of whatever time we know was already at the threshold level and now this new interpretation comes in, this change in guidelines. Let’s assume the worst-case scenario and its classification as foreign holding, therefore the holding goes above the limit was anyway established because without a Mirae or HDFC being classified foreign holders the holding was anyway 74 percent. Now with that classification happening I am guessing that the overall holding goes up above 74 percent. What happens then? Does the natural reduction come in and who reduces?
Swarup: Exactly the point. Who reduces? That is the clarification we will have to seek and that is the clarification which is a very complicated thing. Now, just mathematically if it is 74 and the holding is 80 that 6 percent over-holding has to be spread among all the holders. Who gets what? It is too early to get into that information. We will wait for this discussion to unfold and I believe this discussion is intense and it will reach an amicable solution very soon.
Nikhil: It is going to be way too complicated like Swarup said for who will reduce the allocation. Which are the fund houses who have to reduce the allocation. It will ultimately boil down to what is their allocation at the fund level and they will have to sell it off whether or not that 74 percent gets breached or not. It will be the respective AMCs lookout. To a large extend, most of the fund houses would have adhered to their risks because of their risk caps, there won’t be much of sell outs.
Swarup: Just to take this to a conclusive end. See, when a law is made, it is made uniformly for everybody. And in this case, there is a slight anomaly in the sense that within that same bucket you are differentiating two different entities. If it were on holding, I buy the point. But on the ownership, we are all registered under the same act. It is the same investor who is invested on all sides and if you look at the industry—at the progression—today we can happily say that 54 percent of our total AUM is held by individual investors which was not so 10-15 years from ago and that has changed. And the rightful penetration of the industry is happening to the right consumer. So, the same Indian individual investor is spread across all funds so keeping that spirit of uniformity of law intact I do see a logical conversion of this very soon.
So what’s the logical route? What happens? Does AMFI or do AMCs approach SEBI, does SEBI goes to Reserve Bank, does Reserve Bank goes to Finance Ministry. How does this reach a logical conclusion?
Swarup: Yes, AMFI is a representative body. AMFI is talking to SEBI. My humble request to everybody is, when the whole thing unfolds that is the right time to look at it in totality. At this moment it is just conjecturing, this can happen, or this cannot happen. The rule of the land is very strong, especially in the financial services we have seen that there is no ambiguity about the laws that are formed and when a certain law is formed it is with the certain background. It just doesn’t pop up. I am sure that when these two bodies and these are great bodies finally represent to the RBI, the logical conclusion will be made. My humble request to everybody is that wait for that day and then when the implications comes out then make your logical conclusions.
When the FinMin is trying to show that it is in sync with the market mood and trying to care for what market investors think, this comes as bolt out of blue. Retail mutual fund investors, for whatever reason have been hit with a lot of individual issues in last 12-18 months. IL&FS happened, debt schemes had issues, and then the mutual fund and then the reclassification and therefore lot of mid and small cap schemes have not given returns, retailers must be unhappy. What is that mood right now, and what should investors do in such a scenario?
Nikhil: The mood on the street is not great for sure. This is known as the recency bias. Whatever I have got in last one or two years, I assume will last forever. So, 2017 investors thought that they got damn good returns from the funds, so they thought the party will continue. Similarly, the past one or two returns haven’t been great. You just said there have multiple news that have been there. I remember investors forwarding me messages about IL&FS, some of the debt funds and then I asked them how much we have invested, and they said no we have not invested. So, the overall mood, the overall noise was so much that everybody was getting panicked. I guess these are the times, whenever the perceived risk is high, actual risk is low and whenever the perceived risk is low the actual risk is very high. We are in the situation where the perceived risk looks very high. These things like Swarup said, this is just an aberration. This has come out of nowhere but then we see people talking about will there be sell off or not. I think, these are the times when the investors should shut the doors, look inside his portfolio.
You must be telling your clients the same thing. Are they buying that right now or are they saying that let me take money off the table or something like that?
Nikhil: See, in extreme times it is very difficult to remain quiet and composed— whether it is bull run or whether it is times like these, and a sustained painful period could also lead investors to take extreme measures of getting out also. But luckily this year it has not been that bad. I mean we have seen 2008, 2013 where best of the investors, best of the long-term investors sold away everything and went out of the market but I think these are the times when the investors are not as panicked as they were in 2013.
It is just a very strange feeling that we talk about how jittery investors are when the Sensex is trading at record high. It doesn’t usually happen. Investors are jittery when everything is down, and their portfolios are bleeding and but not when the index is trading at record highs. This time, it is just different. What happened? Because I remember you and some of your peers have been, now for the last six months, saying that it might be a great idea to get into the broader of the spectrum funds— that’s the pocket which has bled and continues to bleed. What is the message that you are giving to the investors?
Swarup: Our messaging has been consistent — not to follow past returns too much. My observation of investing over the last whatever years I have been in the market is the weight given to investing based on the past returns is extremely high. We had seen that in 2016-2017 when the money chased mid-cap funds. We are seeing that now a lot of money is chasing small-cap funds. You have to change that to whether you need that fund or not and that’s where the advisers come in. The concept of asset allocation or knowing why you are investing is primary. I always said that my return expectation is 11-12 percent. With that return expectation, I don’t need a small-cap fund. They can do very well but does it meet my portfolio needs, no it does not. There is nothing wrong in not being there. It is a category but my return expectation is very clear. Once you know what you need, then allocating becomes easier. Half the time these things comes up is because you are chasing a return and even if you are chasing a return, my submission is put a return expectation.
Put like I am saying I need 11-12 percent, which is backed on certain quantum of money I want after certain time. Put some mathematics, cut out emotions. The more emotions you cut out the more you will realise that India is a fantastic country to be in and trust me the next 5-10 years globally and it is Mirae’s view also that belongs to India. Very few countries will match up to what will happen to the underlying country, that is this country. So, economy is there, there will be some slowdowns and during those slowdowns or during those volatile times rise the opportunity. We are slowly getting into a great zone of stock picking and choose your good managers, good advisers and build a plan and cut out emotions and noise. If you do that, next 10 years you will make money in India.
