Asset Management Companies and their growing importance in the field of investment


Asset Management is defined as a systematic process  of long term maintenance of assets, with the objective of bringing out the best results from the assets and involves the balancing of costs, opportunities and risks against the desired performance of assets, to achieve the organizational objectives.[1]Asset Management Companies(AMC) pool assets together,invest the same and provide investors with more diversification and investing options than they would have by themselves.These companies earn income by charging service fees to their clients. Mutual funds, hedge funds and pension plans are all run by asset management companies.[2]

Securities and Exchange Board of India(Mutual Funds) Regulations,1996 defines Asset Management Company to mean a company formed and registered under the Companies Act, 1956 and and approved as such by the Board[3] whose main objective is to invest its client™s pooled funds into securities that match its desired financial objectives.

The sponsor or the person who is responsible for the establishment of the mutual fund can appoint as an asset management company pursuant to the approval obtained from the Board of trustees.[4]For an AMC to carry on its business,it  needs to file an application of approval with the SEBI.[5]

1.1.Eligibility criteria to be fulfilled by the AMC for appointment:

The asset management company needs to fulfill certain criteria to be appointed by the sponsor of the mutual fund:[6]

  1. If it is an existing AMC,it should have a sound track record,general reputation and have been maintaining fairness in transactions.
  2. The directors and the key managerial personnel of the company have experience in the field of finance and economics and have not been convicted of any economic offence or violation of security laws in the past.The director should be a director in the other AMC unless he is in the post of an independent director.
  3. Atleast fifty percent of the Board of Directors should not be associated with the sponsor or the trustees.
  4. The Chaiman of the company is not a trustee of any mutual fund.
  5. The AMC has the net worth of not less than 50 crore.

The Board after considering the above criteria will grant approval for the asset reconstruction company and should be informed of any material change which takes further.

1.2.Obligations of an Asset Management Company:[7]

  1. It should take all reasonable steps and exercise due diligence to ensure that the investment of funds pertaining to any scheme is violative of the trust deed and SEBI Regulations.
  2. It will be responsible for the acts of commission or omission by its employees or the persons whose services it availed.
  3. It should submit quarterly reports of its activities and compliance of the SEBI Regulations to the trustees.
  4. The AMC or its directors and employees will not be absolved for acts done on the part of the Mutual Funds.However,the CEO of the AMC should see to the fact that the Mutual Fund is abiding by the regulations.
  5. It should not purchase or sale securities of the Mutual Fund through any broker.
  6. It shall appoint registrars and share transfer agents who are registered with the Board.
  7. It shall abide by the Code of Conduct specified by the SEBI.
  8. The AMC and the sponsor of the Mutual Fund shall be liable to compensate the affected investors for any unfair treatment to them as a result of inappropriate valuation.
  9. It shall report all transactions in debt and money market securities,as specified by the Board.

In addition to the above obligations which an AMC is bound to abide by,the management mandate entails two requirements:-[8]

a)      Treating the customers fairly:- The AMCs must work solely keeping in mind the investors™ interest.It is a huge responsibility on their shoulders as the investors put tons of money in their hands expecting a good return on them.So they are bound to follow the ethical principles and regulations of fair dealing.

b)      A best-endeavors obligation:-  The AMC must have sufficient financial resources (capital etc.), technical capabilities (accounting system,analytical resources,performance monitoring, etc.) and personnel (adequate staffing levels for the business type and volume) to provide the investment services being offered.

1.3.Restrictions on the business activities of the asset reconstruction companies[9]

Even though the SEBI regulations give the AMCs ample power to invest the pooled funds in order to get a high return on them,there are certain restrictions imposed upon them for betterment of investment as a whole and as a safeguard for any kind of money laundering with the fund,which is after all someone else™s money.

So,the restrictions include:-

  1. They cannot act as trustees of a mutual fund.
  2. They cannot undertake business activities other than those in the nature of management and advisory services without the Board™s approval and fulfilling certain specified requirements by the SEBI.These activities include services to offshore funds,pension funds,insurance funds etc.

1.4.Obligation towards the Asset Management Companies on part of the trustees

The trustees and the AMC shall enter into an investment management agreement with the approval of the Board.They will have to ensure that the companies are acting as per the SEBI Regulations and in the sole interest of the investors.The transparency of their activities is to be checked upon by the trustees who are equally accountable to the investors and thus have to evaluate the performance of the AMCs.They should see to the fact that the AMCs are not giving any unfair advantage to anyone or isn™t partial towards any investor.[10]

The Trust Deed is an instrument of trust in the form of a deed,duly registered under the provisions of the Indian Registration Act,1908 executed by the sponsor in favor of the trustees.[11]It is necessary for safeguarding the interests of the unit holders and shall not contain clauses limiting or extinguishing the liabilities of the trust and indemnification clauses for the trustees or the AMCs for their negligence.[12]



Over the last few years,proper management and disposition of nonperforming assets is one of the most critical and complex aspects of financial sector crisis management.The most important purpose of having asset management companies in the banking structure is to recover and restructure the tons of bad debts or non-performing assets which require more skills than are normally available in a bank.[13]

2.1.Challenges faced by an AMC:

Be it the banking sector or the stock market the AMC faces a lot of challenges in achieving its operational goals as well as lack of incentives or funds for it to carry forward its business.

2.1.1.Governance and Incentive Issues:

Every business organization that runs successfully does so owing to its good governance.Good governance ensures effective operation of the enterprise.Specially in case of AMCs which were government owned,they are subjected to political pressure on one side and on the other hand they are accountable to their stakeholders for the transparency of their operations. The very nature of the asset management process invites political interference.So in order to isolate it from all sorts of political pressure,it has to be ensured that the AMC is functioning as an independent unit uninfluenced by any form of interference.A holding company type of structure can be created with different layers of government and multiple AMCs focusing on distinct assets typres. This structure provides greater flexibility in managing the assets, creates competitive incentives, and provides greater political insulation.[14] Issues and Risk Management:

Asset Management Companies deal with securities by investing the pooled funds in them.A high rate of risk is always associated with it and therefore they need to profusely skilled in risk management. Essentially, risk management occurs anytime an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment and then takes the appropriate action (or inaction) given their investment objectives and risk tolerance. Inadequate risk management can result in severe consequences for companies as well as individuals.So the AMCs basically have to follow a two step process determining what risks exist in an investment and then handling those risks in a way best-suited to your investment objectives.[15]This can be very challenging because the securities™ price in a lot of cases is difficult to predict.When we talk about incentives,the AMCs need them in a very structured way while handling the Non-performing Assets(NPAs) in order to ensure effective and efficient asset management and disposition.[16]

2.1.2.Operational Issues:

The most important aspect in this regard is the funding of these companies.AMCs handle funds of investors pooled together and the benefit they achieve out of investing these funds are paid to the investors in respective proportion.Sometimes the service charge taken by them is not sufficient enough for these entities to run.They need better funding for efficient operations and often lack of funds results in creating a hurdle in their business activities.Whereas as far as managing the NPAs are concerned,the AMCs have to be extra careful in the selection of such assets because when handling all of the assets of failed banks, it is important to differentiate between the better quality loans and the impaired assets.Once selection of assets is done,it is required to be restructured and priced in a way that it appears attractive to the investors.The AMCs convert the NPAs into Performing Assets and invest them to gain profit over the price at which they had taken over them from the bank or the financial institution.[17]

Loses or litigations from the Asset Management operations are typically the result of:- [18]

a)      Errors or delays in processing trades, corporate actions, and other transactions.

b)      Improper controls over reconciliations.

c)      Fraud

d)     Inadequate integration of mergers/acquisitions

e)      Inadequate due diligence and oversight of third-party technology products.

f)       Services and  systems that do not adequately address the specific business requirements

g)       Volume of Asset Management services offered.


                                           3.ASSET MANAGEMENT IN INDIA

Off late a huge debate had come up in the Indian Asset Management sector regarding the establishment of the National Asset Management Company (NAMCO) as a new special purpose asset management company (AMC) It has been suggested by an industry body FCCI that this AMC will takeover stressed assets from the banking system for effective recovery and rehabilitation. Sidharth Birla, President, FICCI said It is imperative that the Government and RBI should help establish NAMCO to address the challenge posed by stressed assets in the banking system. A pro-active and preventive approach is much desirable if we have to ensure speedy revival of the economy. [19]

The key features of National Asset Management Company (NAMCO) as proposed by FICCI include: –[20]

a)      It should be established as a special purpose asset management company with sponsorship of the government.

b)      It will be focusing on stressed assets mainly in Infrastructure, Power, Steel and Telecom sectors to be transferred from the banking system quickly.

c)      Largely owned by the private sector,it has to have adequate number of independent directors with right skills and capabilities.

d)     It should get government and regulatory support in its functioning and it should be provided with additional working capital financing.

The top asset management companies in India have been performing fairly well of late in spite of the condition of the mutual fund investors in the present economic scenario. During the 2011-12 fiscal the leading companies in this segment have, in fact, been profitable in their business operations.The mutual fund business requires low capital and a company can keep making profits after attaining a sustainable figure. The AMCs also make greater profits with more equity assets. UTI Asset Management,HDFC Mutual Fund and ICICI Asset Management Company are some of the topmost AMCs in India.They not only single handedly control the stock market,its shareholders being large players of the market but also have gained a impetus in the banking sector reconstruction crisis.[21]

However in order to keep all this control,SEBI passed a regulation according to which the AMCs which haven™t yet made the net worth requirement are only allowed to launch two schemes annually.This is done to weed out the non serious players and to stabilize the financial system.



The Asset management is poised for significant expansion for the rest of the decade according to a recent research conducted.The global Assets under Management(AuM) will gradually rise compared to the previous years which will represent a sharp compound annual growth rate(CAGR) of 6%. The AuMs in South America, Asia, Africa and Middle East economies will grow faster than in the developed world in the years,creating new pools of assets that can potentially be tapped by the asset management (AM) industry. However, the majority of assets will still be concentrated in the US and Europe.This growth will be driven by pension funds,high net worth individuals and sovereign wealth funds.[22]

However in order to capitalize on the opportunities that the global that this changing landscape is presenting,certain important aspects have to kept in mind:-[23]

a)      Asset management has long been in the banking and insurance industries.It will now gradually move to centre stage.

b)      Distinct regional fund distribution blocks will have to be formed which will allow products to be sold pan-regionally.They will develop regulatory and trade linkages with each other, which will transform the way that asset managers view distribution channels.

c)      Regulation to better align interests to end customers should be introduced. This will increase the pressures of transparency on asset managers and will have a substantial impact on the cost structure of the industry.

d)      Highly streamlined platforms, targeted solutions and a stronger and more trusted brand need to be available to customers.

e)      Technology will have become to be developed enough to drive customer engagement, data mining for information on clients and potential clients, operational efficiency, and regulatory and tax reporting.

Thus in conclusion we can say that all over the world,a strategy is being built to develop the overall scenario of asset management in future times.


                                      3.LEGAL DISPUTES FACED BY AN AMC

  1. Under Section 65(12) of Finance Act,2007,service tax was imposed upon asset management companies or entities which provide asset management services.This was disputed in the case of  CCE  & ST v. Federal Bank Ltd, where bank was engaged in the collection of telephone bills for various telephone companies and remittance of same to them, it was held that such service were covered under cash management service and were thus liable to be taxed.It was also held that any person providing taxable service to any other person in relation to asset management services other than banking company, financial institution, NBFC, body corporate or a commercial concern. Thus, individual, firms and HUFs shall be covered.[24]
  2. Under Section 15E of SEBI Act,1992, there is penalty provision for an asset management company who has violated the SEBI Rules and Regulations.So their performance is evaluated by SEBI from time to time in order to stop any kind of irregularity.[25]This issue arose in JM Capital Management Pvt. Ltd. vs. Securities and Exchange Board of India,it was held that the trustees and asset management company shall render high standard of service, exercise due diligence, ensure proper care and exercise independent professional judgment at all times in order to prevent any disproportionate gain,loss to to investor and repetitive nature of fault.[26]




This paper attempts to show the importance of asset management in global world to run a business and how there is an unprecedented growth of asset management companies in the world economy.Investors are more and more interested in their investing their capital and handling it over entirely to the AMCs.However in order to prevent abuse of power and money in their hands,the AMCs  are being constantly regulated by SEBI.It is mandatory on part of those companies to abide by the Regulations and Guidelines in order to carry on with its business.The paper also attempts to show the development of regulations over the years and the evergrowing significance of SEBI amidst this.SEBI has achieved in not only keeping a balance in the financial sector but also zealously safeguarded the interests of the investors.




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About Aratrika Deb

Aratrika Deb | Student

Student of School of Law, KIIT University.

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