VR Logo

SEBI Looks to Stop India Inc

The market regulator wants corporates to reduce investments in mutual funds, for the sake of retail investors

In yet another step that the Securities and Exchange Board of India (SEBI) is taking to make mutual funds (MFs) almost an exclusive playground for retail investors, the market regulator is looking to discourage corporates from parking their money in the various schemes offered by the asset management companies (AMCs).

To ensure this happens soon, SEBI has looked to deprive corporates of the greatest reason they have for investing in MFs -- tax benefits. According to a Financial Express report, SEBI has approached the Ministry of Finance and requested the same. When and if this happens, corporates will no longer be able to take advantage of tax arbitrage that had made the mutual fund industry so attractive to them.

The foremost reason provided by the market regulator to take this step is that during the October 2008 crisis faced by the industry, when redemption pressure almost made many AMCs insolvent requiring the government to announce a Rs 20,000 crore bailout, it was the corporates that were withdrawing their money from debt funds, while retail investors were willing to wait and watch rather than start redeeming.

This step may also advance another wish of SEBI -- that of ensuring greater retail investor participation in the MF industry. If India Inc is discouraged from participation in MFs, then the industry will be forced to go into the hinterland and encourage greater participation from people residing there, mostly tier I and tier II cities. At the moment, the industry is largely concentrated in big cities.

India Inc invests in MFs simply because it pays less tax on the money that it invests in this instrument. When corporates invested in any instrument, other than mutual funds, they had to pay tax at a flat rate of 35 per cent on the income generated. On the other hand, if they parked the money in a fund, then the tax applicable falls to 20 per cent on account of the dividend distribution tax. Although, for money market and liquid schemes, the tax rate is 25 per cent.

There is also an added benefit for corporates – long-term capital gains tax advantage. If they keep holding onto their investments in debt schemes for more than a year the tax will work out to 10 per cent without indexation or 20 per cent  with indexation, whichever is lower.

This tax-based advantage was one of the biggest drivers of corporate money to the MF industry. It also ensured that the MF industry was distracted from serving the retail investors, the very people the MF industry supposed to work for the most.

At the moment, corporate India dominates the MF industry. It controls 51 per cent of the total assets of the industry in March, while retail investors hold just 21 per cent. In terms of total money invested by corporates and retail investors in the same month, it comes to Rs 2,13,240 crore and Rs 89,070 crore respectively.

Corporate presence is mostly in debt oriented schemes (so-called fixed income category), comprising Rs 1,94,170 crore of the assets. On the other hand, retail investors prefer investing in equity and have funneled some Rs 8,740 crore into the segment.
The numbers clearly show the extent to which the corporates in the country dominate the industry and as a by-product they wield a huge amount of power there causing the industry to tilt unnaturally to one side, ignoring to a large extent the needs of the retail investors. SEBI is looking to change this and give adequate representation to the small investors.