• OCTOBER 19, 2001

Doomed Forever

Talk about not learning from history. In 1992, when the guidelines for mutual funds were being set up, the Wise Men of Finance decided that a mutual fund could only be set up by an entity with a minimum capital of Rs 30 m (now Rs 100 m). At the time of this initiative I had protested this capital adequacy norm as an unnecessary obstacle for the following reasons:

  • Mutual fund managers do not manage their own money they invest other people’s money. If they have Rs 10 m, Rs 30 m, or nothing in their bank accounts it does not prove or disprove their understanding of the stock markets and their expertise in managing money. Imagine, choosing your chartered accountant or your lawyer based on his net worth and not on his understanding of accounting rules or the law! It is like the Supreme Court saying that only a lawyer with a net worth of Rs 30 m can file a case involving a large amount of money!

  • The regulators were confusing their role and responsibility in the capital markets. The role of a regulator is to set rules and make sure they are followed, not to limit the choices available to investors. By setting a Rs 30 m hurdle, the regulators had effectively created a closed club. Those with money could now launch mutual funds. Those without were barred from this business – we were guilty of our poverty before we had a mutual fund.

  • The investors were doomed by limited choice. After ten years of so-called privatisation of the mutual fund industry take a look at the list of players. And remember what they are all known for. Morgan Stanley and their 1994 saga, CanBank and their CanDouble funds which did anything but double, GIC and LIC and BoB – less said the better, Alliance and the tech days…..and last but not the least UTI, a mutual fund no matter whether under SEBI control or not, an institution that has done its fair share to break people’s faith in the system. What have all these funds done to enhance investor confidence? To further the cause of giving investors a decent choice? And believe me they have tens of crores (1 crore = 10 m) of capital behind them – more than the current SEBI guidelines for setting up an AMC. Yes, despite being rich, they have done nothing to increase confidence in mutual funds.

The fact of the matter is that this country has got it all wrong. Managing money, like arguing a law case, is about brainpower, not about the net worth criteria. Lawyers are not barred from handling cases with large monetary implications because they have low net worths and may have to make good a client’s loss if they lose a case. Auditors are not asked to show their net worth when they audit the accounts of large companies. Fund managers don’t take the investors’ money home. In the US there are over 6,000 money management companies. In India, after 11 years of reform, there are less than 20! What a joke. Except it is a costly joke that has resulted in investors paying the price for wrong regulations.

And now the employees in the country, those with Provident and Pension funds, are about to be forced into paying the price for the mistakes of our regulations. A recent news article outlined how the Association of Mutual Funds (a brotherhood of the protected club) has asked that mutual funds be allowed to manage the money lying in the pension funds to “revive the market”. Yes, now that the mutual funds have lost one pile of your money with their indisciplined investing, they are asking the IRDA to allow them to lose your other pile of savings. And, of course, they want a minimum capital criteria so they have monopoly rights over losing your money for you.

Many years ago, I had asked people involved in the drafting of the regulations for mutual funds as to why they wanted this minimum capital criteria when they knew that in USA one can start a fund management company with Rs 11 m of capital, not Rs 100 m. The answer was: “to protect the small investor from the scamsters”.

Well, Sir, you have done a wonderful job of allowing the investors to be taken advantage of by the scamsters. And your reply reminds me a bit of the argument why India should give up democracy and become a military state (“democracy is not good for us because we are not ready for it”). All I can say, people who think they are superior and think like that should be sent to Kashmir to fight at the border or, better still, ship them to the neighbouring countries where they can enjoy the benefits of military rule. Leave the pension fund money to be run by professional money managers, irrespective of their net worths. Jai Hind!

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