By Himank Sharma
MUMBAI, Dec 11 (Reuters) - When Franklin Templeton's Indiaunit wanted to launch a mutual fund that would switch allocationamong stocks, bonds, gold and money markets, the Indianregulator baulked, deeming it too risky for domestic investors,according to the company.
The Securities and Exchange Board of India, or SEBI, iswielding an unprecedented level of control over how mutual fundsoperate, delaying new launches and dictating investmentstrategy, frustrated insiders in the embattled industry say.
SEBI's tighter scrutiny adds to the challenges for thetwo-decade old Indian mutual fund industry that has endured asteady stream of redemptions from equity funds in recent years.
Even as Indian stocks hit record highs, most of India's 47asset management firms are unprofitable and have underperformedthe broader index so far this year.
"SEBI is trying to tell us what to do from an investmentperspective, which we don't necessarily agree with," said VivekKudva, who heads India, Central Europe, the Middle East andAfrica for the Franklin Templeton Investments unit of U.S.-basedFranklin Resources Inc.
After months of back and forth with the regulator early thisyear, the proposed fund was eventually shelved.
"If they don't approve it, we are stuck," Kudva said.
Equity fund assets under management have fallen from a peakof $30.8 billion in December 2007 to $24 billion last month,after net outflows in four of the last five years.
SEBI's hands-on approach under its chairman, U.K. Sinha, whotook the top job in 2011 after running India's oldest mutualfund firm, government-backed UTI Asset Management, marks a breakfrom past practice at the agency.
Sinha has publicly railed against underperforming fundhouses and the asset management sector's failure to lure moreinvestors into stocks.
Partly as a result of that, new open-ended fund launches aredown sharply, to 48 from the beginning of 2012 through October2013, from 105 during the two-year period ending in 2011,industry and regulatory data shows.
During the same periods, 129 and 140 applications,respectively, were filed.
"We end up spending time and resources coming up withstrategies our investors want, only for it to be modified beyondrecognition or delayed to the point of no return," said thechief executive of a mid-sized asset management company whodeclined to be identified.
"(It) is killing us," the manager said.
SEBI officials acknowledged that they have become tougher onfund launches.
"I think it's a good thing that launches have come down. Theregulator doesn't want a repeat of 2008," Sinha recently said onthe sidelines of an industry event.
In 2008, many small fund investors lost money when themarket collapsed amid the global crisis, and the industry hasbeen accused by the regulator of rampant mis-selling and failureto provide adequate disclosures about market risks.
"SEBI has made it very clear we don't want new funds unlessthey have a separate (different) style of investment," Sinhasaid.
To see a graphic on India's equity fund industry, click)
GETTING TOUGH
Under Sinha, SEBI also has enacted new rules aimed atcurbing improper selling by distributors.
In 2009,it banned fund houses from sales charges or entryloads for new investors and put curbs on how much exit loadcould be levied on early redemptions.
Last year under Sinha, the agency said it would not allowasset managers to launch new funds if their existing portfolioincludes a fund with the same or similar strategy.
Some industry insiders say there is ambiguity around whatqualifies as a similar strategy, and that the initiative stiflesinnovation.
"The biggest problem is that there is no case forprecedent," said the head of a big fund house, also declining tobe identified.
"If SEBI has approved one investment strategy for one fundhouse there is no guarantee that a similar strategy at my firmwill get the green light."
Earlier this year, SEBI turned down an HSBC AssetManagement (India) Pvt. Ltd feeder fund that would haveprimarily invested in Russia, because the Russian markets hadbeen underperforming those in India, according to a companyexecutive and SEBI officials, all of whom declined to beidentified.
When Axis Asset Management, part of India's Axis Bank, filed a draft prospectus earlier this year seeking tolaunch a fund that would switch allocation between equity andequity derivatives in an equal measure to manage risk, it wastold to lower the derivatives exposure if it wanted approval,according to a fund manager involved in the matter.
Prudential Financial Inc's Pramerica AssetManagement started the year in hopes of beefing up its fundsportfolio. It has filed applications for seven open-ended fundsthis year, according to data from SEBI. Only one has thus farbeen approved, a Pramerica official said.
SEBI officials say it is up to fund managers to providecomplete details in their applications, and to demonstrate thatthe product is indeed unique from existing funds. The trackrecord of a fund house's existing products is also a factor.
"What happens in certain cases is that we literally have tohand-hold them when it comes to disclosures in the offerdocuments. They would leave out important details which onlydelays the process further," said a senior official with theregulator, declining to be identified.
Added another senior SEBI official: "It's not that we aregoing beyond the rule book. We are enforcing the existing rulesstrongly now and they have a problem with that."
HSBC Holdings (HSBA)