Thursday, November 20, 2008


After suffering their worst month ever, the Indian MF industry sees consolidation. Is this just a start?

It came with a bang but went out in a whimper. Barely two years after setting up shop in India Lotus MF is acquired by Religare-Aegon mutual fund. Both MFs have signed the agreement and the deal now awaits the securities and exchange board of India’s (Sebi) clearance.

Desperate times

After suffering its worst month ever, Indian MFs saw massive erosion in their assets under management (AUM). Lotus MF was no different as it lost Rs 2,479 crore or 31 per cent of its corpus in October, down from Rs 7,937 crore a month ago. 

However, sources say, its sponsor Alexandra Fund Management - a subsidiary of Singapore’s Temasek Holdings, was keen to exit Lotus on account of the mayhem caused due to the global credit crisis and also the state of Lotus MF. Sabre Capital was the other partner in this joint venture. 

In reality, the MF has been jinxed right from its start. Even before it launched its first equity scheme, its ex-star fund manager Sandip Sabharwal was shown the door when news reports of his alleged involvement in the Ketan Parikh stock market scam, when he was a fund manager at SBI MF earlier, surfaced. Soon, another of its star manager – this time its ex-head of debt funds – Nandkumar Surti also quit. There was much heartburn amongst the disgruntled staff and loyalists of these two fund managers soon followed their way out. 

The MF never recovered from its initial debacle. And though Tridib Pathak eventually came on board as Sabharwal’s replacement, he couldn’t recreate the magic. None of its schemes have yet turned three years yet but their performances till date has been sober. Meanwhile Sabharwal has since joined JM Financial MF and was a key factor in resurrecting the MF! 

New equations

What has surprised the industry is the quickness in which this deal was struck. And although Religare Aegon did not comment on the price of the deal, news reports estimate about two per cent of Lotus’s AUM. As per the MF’s October-end corpus of Rs 5,458 crore, the deal works out to be approximately Rs 109 crore, considered to be the cheapest MF deal in recent times, especially in the wake of the recent acquisition of the erstwhile Standard Chartered MF by IDFC for a price of Rs 825 crore. Further, market sources also add that this deal has a clause wherein the Lotus’s sponsor would make good the loss (sources claim it to be around Rs 100 crore), if any, that arises from any possible defaults of any of Lotus’ underlying instruments. This further sweetens the deal for Religare Aegon.  

Another reason why the deal is rumoured to be so cheap is Lotus’ huge debt assets as compared to equities. The MF has yet not disclosed its complete October-end portfolio, but as per its September-end portfolio, only seven percent of its total AUM was in equities, the rest in debt and more than half of its AUM was in FMPs. Further, 32.55 per cent of its AUM was in liquid and liquid-plus schemes. Not only are Debt, especially FMP, schemes earn much lesser income than equities, liquid schemes also see very short-term investors and no sticky money. That apart, Lotus Asset Management Company has been incurring losses; Rs 21.95 crore loss after tax as on 31 March 2008 and Rs 32.26 crore loss after tax as on 31 March 2007. 

For Religare Aegon though, it seems to be a decent catch. Even before the MF has launched its first scheme (it got Sebi approval in September and has filed draft offer documents of a total of five schemes with Sebi for approval), Religare Aegon gets an instant access to 64 cities where Lotus MF already has a sales presence and its branches across 38 cities. Religare Aegon has also acquired Lotus’s fund management team but it remains to be seen how many of the team comes on board. 

This latest acquisition may not be a one-off case. Atleast three other MFs are rumoured to be put up on sale soon. One of these MFs, say market sources, is a new entrant that has already cut salaries of its employees across board by around 30 per cent!  

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