Even as the mutual fund industry is abuzz with talks of stake sales and sellouts by fund houses, poor valuations could play spoilsport to promoters’ plans to pull out of the sector, feel industry observers.

A cross-section of industry experts Financial Chronicle spoke to felt this might not be the right time for promoters to sell stake as valuations have taken a beating due to ‘unfavourable’ business conditions, largely due to the entry load ban.

A senior executive of Icra, the firm deals with mutual funds, said on the condition of anonymity that there have been rumours about promoters of many mutual fund houses looking to sell their stakes. But given the ‘hostile’ business environment and falling assets under management, valuations of AMCs have come down sharply. Unless valuations improve, there will not be any stake sales anytime soon. “Post-entry load ban, there has been wide-spread confusion and there is no clarity where the industry is moving, especially on the distribution front,” he said.

The mutual fund industry has been hit by falling assets under management, declining profit margins and a tightening policy regime. A compilation of recent deals by FC involving stake sales by fund houses shows valuations of mutual fund companies involved have come down during the past two to three years.

Eaton Park valued Reliance MF at 13 per cent of the asset under management (AUM). A March 2008 deal involving IDFC valued Standard Chartered MF at 6 per cent of AUM. Nomura has agreed to buy 35 per cent in LIC Mutual Fund at 2.6 per cent of AUM in July 2009.

Recently, UTI Mutual Fund offloaded 26 per cent stake to US firm T Rowe Price at 3.3 per cent of the AUM. L&T Finance, on the other hand, bought DBS Chola Mutual Fund at 1.5 per cent of latter’s AUM.

Dhirendra Kumar, chief executive officer of mutual fund tracker Value Research, said there has not been any real growth in equity assets of fund houses after the Securities and Exchange Board of India ban on entry load in mutual fund investment, which has further queered the pitch for the industry. “This certainly is not the right time to sell stakes as promoters will not even realise their full cost, let alone make profit from the sales,” he said.

Among the names of mutual fund players said to be interested in selling stakes is Reliance Mutual Fund, which is reported to be looking for a foreign partner to offload a 20 per cent stake. Promoters of Shinsei Mutual Fund — Shinsei Bank and Rakesh Jhunjhunwala — are also reportedly looking to sell their stakes.

Jagannadham Thunu­guntla, head of equity at SMC Capital, said the policy environment has become so hostile that many mutual fund promoters have become desperate to get out of the business and this desperation is pulling down valuations.

“Mutual fund is a long-gestation business and only serious players with strong financial support can survive in the business. There are many sellers in the market, but there are no takers for them,” he added.