The Networth requirement for an asset management company

Many of our regulators – IRDA, TRAI and now SEBI may all be having good intentions, but the way it is being expressed is rather amusing. Now SEBI is saying that an Asset Management Company should have a net-worth of Rs. 50 crores. This means pushing the small funds out of the market. One has to understand and accept that an architect, doctor, CA, lawyer, broker, fund management are all PROFESSIONS. A professional cannot be judged on his net-worth alone. Increasing the net-worth requirement from Rs. 10 crores to Rs. 50 crores is not a big deal, but will push more players to get out of the business, soon rather than later. Many stock broking companies have their A M C licenses and may not be able to justify this amount. The limits were fixed long back and a change was required any way. The asset management charges too should have been brought down.

Of course it is necessary that there be a decent net-worth for our brokers, registrar, transfer agents, etc. but by pushing the small guys out we will be increasing the total cost  in the capital market. If there is a small registrar, he will surely work on lower overheads Рbut when he becomes a part of a big organisation, his overheads go up. All this will increase the cost to the ultimate shareholder / unit holder. If it is a company the cost will be borne indirectly, if it is a mutual fund the cost will be passed on to the unit holder Рbut without asking him :).

Similarly the net-worth for the share broker is also being increased. This will be interesting. The really small broker will be soon eliminated but there will be many big brokers. The beneficiaries are the entrenched brokers – including the dumb ones who have a lot of money, but do not know the business.

Somewhere in an attempt to show that SEBI is becoming investor friendly, small brokers, small amcs, ….etc. will be crushed. This is all right and is in keeping with the international trends. In 1999 when a bunch of friends gave up our NSE membership, I remember telling them if Morgan Stanley has to set up 8000 offices in India, it will have to eat / kill 8000 brokers like us. Of course this observation was from seeing what was happening to the jobbers, sub-brokers, small banks, etc.

The beneficiaries of all these changes will be the big well organised brokers like Icici Direct,  Kotak, Hdfc securities, Indiainfoline, etc. there is not too much you can do about this. If you are a small broker, small asset management company, start packing your bags.

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2 Responses to “The Networth requirement for an asset management company”

  1. Dr Mohammed Ali Khan on May 14th, 2010 at 4:10 pm

    One more example of government bureaucrats crushing the little guy in favor of the big guy and not letting the free market work its course.. AND if some crisis comes because of such pampering the big guys and distorting the markets, they will have the audacity to blame it on free markets, instead of the real cause of the crisis- Bureaucratic meddling..

  2. The big guys have needed bail outs as much as the small guys. However the big players WILL want this to happen. Banks are big distributors WHO could not REBATE (documentation is tough) so they BANNED REBATING. You need to remember the GOLDEN RULE OF INVESTING – they guy who has the GOLD MAKES THE RULES.

    Now if this amendment (proposed by a SEBI panel consisting of 2-3 brokers and 3-4 BIG amcs!!)goes through it will further reduce the competition. Who will crib? Media – the number of advertisers will go down, some Amcs which are in the business will not find it worthwhile. Quantum has an aum of Rs. 100 crores – on a n/w of 50 crores Quantum will need 1-2k crores to make some sensible money. Cholamandalam is lucky – they got a better deal!

    Funny you will see the smaller amcs cribbing. Where were they when AMFI said what should happen to the distributors? AMFI is a manufacturer’s club (big manufacturer acc to a amc ceo). They do all those things which favor the amc!!

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