The restructuring of Principal Mutual Fund continues. In less than six months of acquiring schemes of Sun F&C Mutual Fund, Principal MF is about to take over PNB Mutual which manages a small asset base of Rs 139 crore across one debt, one hybrid and two closed end tax saving schemes. Unlike the acquisition of Sun F&C Mutual Fund, which pushed Principal one notch up in the AMC size rankings, the acquisition of PNB doesn't alter Principal MF's position on the AMC size hit parade.
So what triggered Principal to make this move? Let us first take a look at the events that were the genesis of this deal. In March this year, Principal Financial Group bought out 50 per cent stake of IDBI in the jointly promoted IDBI Principal Mutual Fund. Thus Principal Financial Group became a 100 per cent owner in the rechristened Principal Mutual Fund.
However, foreign direct investment norms make 100 per cent foreign ownership in AMCs problematic. In the financial services sector, complete foreign ownership is freely permissible only in holding companies. Companies that are the actual operating entities that do business must have a 25 per cent domestic partner, otherwise the foreign promoter has to bring in a high US$ 50 million as capital investment.
The new outfit is a joint venture between Principal Financial Group, Punjab National Bank and Vijaya Bank. This new outfit will be known as Principal PNB AMC. Principal will own 65 per cent of this JV, PNB will own 30 per cent and Vijaya Bank 5 per cent. As part of the transaction, Principal Mutual Fund as well as PNB Mutual will be part of the new fund.
PNB Mutual was floated by Punjab National Bank in 1989. As the fund industry evolved since that time, PNB Mutual was unable to keep pace with the changes that took place. Till as recently as 1999, it did not even have a single open-end fund. Today, its AUM of Rs 152 crore makes it a tiny player which is just 0.13 per cent of the industry's size. It has only four funds. Under the circumstances it makes sense for PNB to own 30 per cent of an AMC that will be run by Principal, which is a large and committed global-scale AMC.
As for investors in PNB Mutual Fund, it is not yet clear whether the schemes would be merged with the existing schemes of Principal Mutual Fund or will be run separately. Still, they can only benefit from the changes in the management of their funds.
For Principal, the retail reach of the two banks—they have a combined total of more than 5,000 locations—is obviously a far greater attraction than the assets of PNB Mutual.
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