Foreign-owned Asset Management Companies Stymied by Conflicting Minimum Capital Requirements
By Tracie Frost
In India, foreign-owned asset management companies operate under two laws with conflicting capital requirements. The first law, under the Securities and Exchange Board of India (SEBI), requires that foreign-owned asset management companies have a minimum capitalization of U.S. $7.5 million (Rs 500 million). This minimum capitalization requirement is the same for domestic asset management companies. The second law, under the Ministry of Commerce and Industry’s foreign direct investment (FDI) policy, requires foreign-owned asset management companies with more than 75 percent foreign ownership to have a minimum capitalization of U.S. $50 million, out of which U.S. $7.5 million must be brought up front, and the balance within 24 months. While the FDI rules do allow non-banking financial companies (NBFCs) with more than 75 percent FDI and a minimum capitalization of U.S. $50 million to set up down-stream subsidiaries for specific activities, without any restriction on the number of operating subsidiaries and without bringing in additional capital, the U.S. $50 million capital requirement is still a significant barrier to success.
In fact, since 2013, nearly a dozen foreign asset management companies have found the regulatory environment so difficult that they have sold their funds management units and exited the Indian market. Top asset managers such as JP Morgan, Goldman Sachs, Morgan Stanley, Deutsche Bank, KBC Asset Management, ING, and Daiwa Capital Markets have moved out of the Indian mutual fund industry citing lower than expected returns.
One significant reason is that foreign asset managers’ capital gets tied up in oppressive minimum capitalization requirements under the FDI regulations. Foreign asset management companies cannot use the capital set aside for minimum capitalization in their business operations. This lowers their return on investment and elevates the cost of acquiring other assets. The resulting high-cost business structure keeps funds trapped in maintaining minimum capitalization and, as a result, foreign asset managers have trouble funding expanded distribution channels. Further, foreign companies are not allowed to sell their international products that are regulated in other jurisdictions. Instead, they have to set up local funds, which require costly in-country fund managers and support. Consequently, foreign companies are not able to make use of their significant international resources in the Indian market.
In addition, while foreign asset managers face these barriers, their domestic counterparts play under a different set of rules. Domestic companies, already at an advantage because of their deep distribution channels, name recognition, and market dominance, only have a U.S. $7.5 million minimum capitalization requirement, freeing their funds for further investment in distribution channels, marketing, and acquisition. In India’s highly competitive asset management market, these issues combine to make the cost of doing business greater than the potential returns for foreign asset management companies.
As India slowly opens its markets and works toward parity for domestic and international companies, this is one area that requires attention sooner rather than later. Leveling the playing field for foreign companies will bring greater diversity to the Indian investor and will infuse much-needed capital into the Indian market.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
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