Mumbai: US insurer American International Group Inc., or AIG, is in talks with potential buyers to sell its mutual fund business in India, valuing the unit at 4-5% of the assets it has under management, according to three officials familiar with the development.

Bank of America Merrill-Lynch has been appointed as the investment banker to broker a sale of AIG Global Investment Group Mutual Fund, which has Rs1,019.77 crore of assets under management (AUM), said the three officials.

All three officials declined to be identified. Two of them are with companies that are in the fray to buy the mutual fund.

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“AIG is looking for a buyer who could value their assets for at least 4% of their current AUM," said one of the three officials. “The talks have started a few months back and the company should be able to get this valuation because they have a good proportion of equity assets."

At least four asset management companies are in the race to acquire AIG’s mutual fund assets in India, said a second official.

Lauren K. Day of the corporate communications division at AIG declined to comment. A Bank of America Merrill Lynch spokeswoman also declined to comment.

AIG is divesting and restructuring businesses and winding down exposure to some financial products as part of a worldwide effort to cut costs and repay the US government $182.3 billion (Rs8.15 trillion) it received in bailout funds two years ago.

AIG found itself on the verge of collapse after becoming laden with bad debts and toxic assets, requiring taxpayer funds to keep it alive at the height of the global financial crisis that felled Wall Street bank Lehman Brothers Holdings Inc. in September 2008.

On 30 September, AIG agreed to sell two Japanese life insurance units to Prudential Financial Inc. of the US for $4.8 billion. In March, AIG agreed to sell its unit American Life Insurance Co. to MetLife Inc. for $15.5 billion.

The companies that are looking to acquire AIG’s Indian mutual fund unit include a domestic firm that is yet to enter the mutual fund space and a second one has just begun operations, the people familiar with the development said.

Of the other two, one is an established foreign mutual fund house and the other has received a licence to start operations, but is yet to launch any investment plans.

Most of the assets of AIG’s Indian mutual fund are in equities. Of the eight schemes the firm manages, only three are equity schemes, but they make up Rs730 crore of assets, or at least 70% of the company’s AUM.

AIG Global Investment Group Mutual Fund has been struggling to gain a foothold in India. According to the Association of Mutual Funds in India, the industry lobby, the company’s average AUM has fallen from Rs3,304.16 crore in January 2008, when Indian stock indices peaked.

Valuations in the mutual fund industry depend on the proportion of assets under equity schemes. This is because equity schemes earn better fees and commissions compared with debt plans.

In India, most deals in this space have valued fund houses at 2-8%. The highest valuation was recorded at around 13% of AUM when US-based Eton Park Capital Management bought a 5% stake in India’s largest fund house, Reliance Mutual Fund, in 2008.

In early 2010, T Rowe Price Global Investment Services picked up a 26% stake in UTI Asset Management Co. Pvt. Ltd for nearly Rs652 crore, valuing the domestic fund house at 3.25% of its assets then.

The 7.13 trillion Indian mutual fund industry, consisting of 43 fund houses, has been grappling with negative sales, especially in equity schemes, since the capital market regulator Securities and Exchange Board of India, or Sebi, restrained fund houses from charging upfront commissions in August last year.

After the Sebi rule took effect, many mutual fund distributors switched to selling other financial products such as insurance to earn better commissions, causing mutual fund sales to dwindle and retail portfolios to decline.

Graphic by Ahmed Raza Khan/Mint