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September 2009 | ifr special report | 11 ” ASSET MANAGEMENT

India’s asset management industry is expected to record a compound annual growth rate of more than 20% from 2007 to 2013. While

equity-linked savings schemes and equity funds are likely to record the highest growth, other market segments also hold tremendous growth opportunities. Due to the economic crisis, assets under management in India fell to about US$83bn at the end of March 2009 from more than US$92bn a year earlier. In May 2009 there was a sharp rise and assets under management were reported at US$134bn.

Anthony Heredia, CEO of Morgan Stanley Investment Management in India, said that “the growth in assets under management over the last five years has predominantly come from the top 10-15 cities, and further penetration into the next 50-100 cities will be key to future growth”.

Assets under management as a percentage of GDP works out to only 8% in India, compared with 79% in the US. Assets under management as a percentage of bank deposits is also low at 25%, versus 140% in the US. This is why international fund managers believe that India offers so much opportunity in this segment. The business is very profitable in India, with operating profits at 32bp as a percentage of average assets under management, compared with 18bp in the US. Heredia thinks that “margins are shrinking as asset managers invest to build infrastructure to further their retail penetration, which given India’s geographic spread and diversity is costly.”

As the Indian market has a strong equity culture with a low risk factor, international fund managers feel that returns in India are high. As per the McKinsey report, most of the innovative products that are offered in developed countries are either on their way to, or already in, the Indian market. Real estate funds could give one of the biggest boosts to the Indian asset management industry. REITs and real estate mutual funds could add another US$10bn–$14bn to assets under management by 2012.

Within India, the client base for any asset manager is overwhelmingly corporate (58%), followed by retail (23%), high-net-worth individuals (17%) and trusts (2%), according to industry data. There are

more than 35 firms in the mutual fund sector, with many more awaiting approvals from the Security Exchange Board of India (Sebi).

Presently, foreign direct investment (FDI) is not allowed in the pension fund industry. The Finance Ministry is planning to introduce the PPFRDA Bill in parliament, which proposes allowing foreign players to hold stakes of up to 26% in Indian pension fund managers, similar to what is allowed in insurance companies. If the amendment to the Insurance Act allows insurance companies to bring up to 49% foreign ownership, pension funds will also benefit to that extent.

Foreign ownership of 100% is allowed under the automatic route for non- banking finance companies (NBFC) subject to compliance with the guidelines of the regulatory authorities, the Reserve Bank of India and the Security Exchange Board of India. The joint-venture route is preferred due to the following minimum capitalisation norms for fund-based NBFCs: For FDI up to 51% – US$0.5m to be brought upfront; and for FDI above 51% and up to 75% – US$5m to be brought upfront; for FDI of 75%–100% – US$50m out of which US$7.5m has to be brought upfront and the balance in 24 months. The PFRDA, which so far does not have statutory backing, recently allowed six private players in the pension funds business in India. These are IDFC Mutual Fund, Kotak Mahindra, SBI, UTI Asset Management, ICICI Prudential Life Insurance and Reliance MF. There are more than 35 asset management companies and many more are actively considering entry in this sector. Recent asset management joint ventures include BNP Paribas Asset Management and Sundaram, Standard Life

Unit and HDFC Asset Management, Prudential plc and ICICI Bank, Robeco and Canara Bank, Aditya Birla Group and Sun Life Financial Services of Canada, AEGON and Religiare Securities plus Bank of India, Union Bank of India and Dai-ichi Mutual Life Insurance

The limited participation of the rural sector also restrains the asset management industry’s growth. Mutual funds are largely out of reach to the rural population due to poor distribution, lack of investor awareness and limited banking facilities. Asset managers are generally reluctant to invest in infrastructure in smaller towns due to smaller margins from rural business.

Morgan Stanley’s Heredia summed it up well: “To see significant growth in rural markets we need improvements in banking services, more organized distribution, and the right infrastructure to enable cost efficient customer service. Once that happens, a larger number of asset managers will increase their focus on this area as a means to drive long term asset growth.”

What are the near-term prospects for the industry? HSBC Asset Management (India) CEO Vikramaaditya, is convinced that India’s asset management industry is “evolving from being a mutual fund industry to broader ‘investment management’ mandates like pension funds and (depending on regulatory changes) the insurance industry. New regulations will bring about a paradigm shift in the asset management business in India. Given the growth opportunity in the retail segment, asset management companies — as well as the distributors — will continue to focus on creating financial literacy and customer education.”

Gordon Feller

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