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Rediff News  All News  » Business » Funds question Sebi move to raise cash investment limit

Funds question Sebi move to raise cash investment limit

June 02, 2014 16:07 IST

The Securities and Exchange Board of India (Sebi) recently raised the cash transaction limit for fund houses to Rs 50,000 from the earlier Rs 20,000.

There are questions on how practical it is. Further, since Sebi permitted cash transactions of Rs 20,000 in September 2012, the success rate has been poor, leading to the question why the limit has been increased.  

Sebi had on May 22 allowed asset management companies to accept cash investments of up to Rs 50,000, to boost investor participation into mutual funds from smaller centres.

Of the 45-odd entities in the sector, a few such as Peerless Mutual Fund (MF), HDFC MF, UTI MF and Birla Sun Life MF have started offering these facilities to investors through tie-ups with banks.  

The majority have stayed away from getting into cash handling.

So, how would the recent Sebi move, believed to be part of the general aim for more financial inclusion, have a meaningful impact in bringing assets to the sector?

"I do not think it would have a significant impact in terms of increased retail participation. For this to be successful, mutual funds would need to set up infrastructure for determining the authenticity of notes," says Niranjan Risbood, director (fund research) at Morningstar India.

He adds that fund houses would also need to provide security for the movement of cash from the collection points.  

"This would increase costs but give low benefits, as investment through this channel into funds is not expected to be significant."

Sector executives say fund houses might have sales offices in smaller centres but aren't equipped, as a bank is, to handle cash.  

"Even if we implement it, it will come at additional costs. The risk-reward ratio might not be favourable," says the chief executive officer (CEO) of a fund house, requesting not to be named.

The official says there was a dichotomy in Sebi's policy. On the one hand it had tightened the know-your-customer (KYC) norms and, on the other, it was raising the limit for cash transactions.

Nandkumar Surti, CEO of JPMorgan AMC, says: "We are not big in the cash transaction business. It's not a focus area for us and is not going to be a game- changer at the end of the day."

Sector executives say before tapping investors wanting to transact in cash, they would rather go after the millions of untapped clients with proper permanent account number (income tax identity) cards and bank accounts. "Rather than focusing on cash transactions, our priority should be to first enrol those who have bank accounts and other KYC requirements," suggests a national sales head of a foreign fund house.

Senior officials in the sector say while Sebi's objective could be to bring people who invest in Ponzi schemes into the MF fold, it is fraught with operational risk.

"For many years, we already have been tightly regulated and the industry has evolved a lot when it comes to accuracy and transparency.

By getting into a cash handling mode, we would only reverse the process, which we certainly do not want," says the chief marketing officer of a private bank-owned fund house.

The major glitch in this process is that at the time of investment, cash deposits are allowed but when it comes to payment of dividend (if any) by schemes or when investors want to redeem, the outgo of money has to be through banking channels.

Above all, the risk involved in carrying cash is a major difficulty. Sector executives point to incidents of attacks on vehicles carrying cash from collection points.

A sector insider says Sebi and the Reserve Bank of India should, instead, work together towards a common KYC for the financial sector, providing depositors the fungibility to invest in MFs.

"The banks' KYC will be a proof for us and in the process the investor will get his account opened, which will smoothly facilitate payment at the time of redeeming units."

According to Risbood, "Public sector banks and cooperative banks, which have a presence in most rural or semi-urban areas, would be a better source of channelising the cash into funds, as they have the necessary infrastructure for movement of cash."

Chandan Kishore Kant in Mumbai