India’s rapidly growing mutual funds industry is likely to heave a sigh of relief even as it faces a 2 July deadline for all new investors to have a permanent account number (PAN) for investing in mutual funds.
The Securities and Exchange Board of India (Sebi), which regulates capital markets, is now weighing various “options” that could offer the investing community a temporary respite.
The government had earlier directed the Indian mutual fund industry, which has a 30-million investor base and Rs3.4 trillion assets under management, to move from mutual fund identification (MIN) to PAN for any new fund investments.
The objective behind the government’s decision was to keep a tab on all investments made in mutual funds. But the mutual fund industry has opposed it, saying that providing PAN for all its investors would be a logistical nightmare.
UTI Mutual Fund: An Investor Profile (Graphic)
A senior Sebi official said options are being explored but did not elaborate. People familiar with the matter in Sebi said it is unlikely that the deadline could be extended in phases but the regulator would make sure new investors’ applications are not automatically rejected for want of a PAN card. It could allow investors to continue making investments while their PAN card applications are pending.
Sebi had earlier rejected requests by the industry to stagger the implementation of the 2 July deadline. But the changing demographic of mutual fund investors may well have encouraged the regulator to revisit its initial decision.
Meanwhile, even as the mutual funds industry cites small investors as the reason for its inability to try and comply with the government directive, independent industry analysts are not sure that the argument holds much merit.
They note that nearly half of all mutual find investors also invest in the stock market, where PAN cards are mandatory, so a majority of funds investors will be able to comply with the new requirement. “Most mutual fund investors are savvy investors and I don’t think this will affect the business of the industry in any significant way,” says Kartik Jhaveri, a Mumbai-based financial analyst.
But mutual funds representatives say that mandatory PAN will deal a blow to the expansion plans of the industry as it believes many investors, especially in smaller cities, do not have PAN cards and more than 60% of all new investors are now typically coming from tier II and tier III towns.
The fastest growing segment for the Indian mutual funds industry are new schemes, such as pension and other funds requiring investments of just Rs50 or Rs100 a month, aimed at reaching out to a much wider investor base.
“While we welcome the move to link all financial transactions (through a PAN), there is a need to strengthen infrastructure to make out PAN cards for small investors,” says Pankaj Razdan, managing director of Prudential ICICI Asset Management Co. Ltd, which recently launched a systematic investment plan (SIP) requiring an investment of just Rs50 a month. The scheme is run through a micro finance institution in Orissa and has enrolled a few thousand customers in around two months. Razdan says introducing the need for PAN cards in one stroke “will keep large segments out of the capital market. Anyone in a small town will be affected by this.”
Other funds have also joined the SIP bandwagon, including Reliance Mutual Fund and Lotus Asset Management Co., both of which have launched SIPs requiring an investment of Rs100 a month.
The Association of Mutual Funds in India (Amfi), an industry body, had written to Sebi and the finance ministry asking for a phased implementation of the PAN card requirement. “We need to create awareness of PAN numbers among investors and create facilities in smalll towns to make out PAN cards,” says A.P. Kurien, Amfi’s chairman.
The industry also believes that by making PAN mandatory for all mutual funds investors, the government is distorting the alignment in the financial sector.
“You need PAN to know your customer,” says a fund manager who did not wish to be named. “While banks and insurance firms insist on PAN for transactions of Rs50,000 and above, why should a mutual fund investor for a Rs100 premium a month need a PAN? We should have a uniform rule.”
According to industry estimates, just 12-13% of mutual fund investors currently provide PAN details. Kurien says the transition to PAN needs to be managed in a way that won’t hurt the emerging savings industry in small towns and with small investments.
Mann Deshi Mahila Sahakari Bank, a women’s bank in Maharashtra’s Satara district, for instance, launched a pension scheme requiring an investment of Rs200 a month along with UTI Asset Management Co. in March. Sushma Shendge, who works at the bank, says that probably none of its 2,500 members, most of whom are farm labourers, street vendors and shepherds, have PAN cards. “They do not even know what shares or mutual funds or PAN cards are,” says Shendge, whose members are already finding it hard to set aside Rs 200 a month.
For UTI AMC, which has been among the first movers in this space, 20% of its investors are from rural areas. Farmers, self-employed people and artisans form 23% of its investors and it has partnered with non-profit organizations including the Self Employed Women’s Association and Paradip Dock and Port Mazdoor Union, apart from Shengde’s bank.
“The logistics of managing the paper work and communicating with small investors would discourage small investors over time,” says the head of an international mutual fund, who did not want to be named citing company policy.