Reliance Mutual Fund investors to benefit from Nippon Life onboarding

Nippon Life Insurance Company of Japan has recently signed binding agreement with Reliance Capital to increase its in stake Reliance Nippon Asset Management Limited (RNAM), the mutual fund business of Reliance Capital, to 75% by buying existing shareholding of Reliance Capital in the company.

RNAM is currently a joint venture between Nippon Life Insurance Company and Reliance Capital, with each partners owning 42.88% equity stake in the company. Once this M&A deal is executed RNAM will become a subsidiary of the Japanese company and Reliance Capital will exit the mutual fund business. This deal is one of the largest Foreign Direct Investments (FDI) in the financial services industry in India.

Nippon Life Insurance has been a strategic partner of RNAM for the last 7 years. Nippon Life made its first tranche of investment of $290 million in 2012, picking up 26% stake in RNAM. Through subsequent investment tranches in 2014 and 2015, Nippon Life Insurance increased its shareholding in RNAM to the current levels. RNAM came out with its Initial Public Offering (IPO) in October 2017. The IPO, the first in the asset management industry in India, was very successful (being oversubscribed by more than 80 times).

What is Nippon Life Insurance

• Nippon life is a financial conglomerate with interests in insurance and asset management across the globe.


• Nippon Life, a Fortune 500 company that manages over 49 Lakh Crore (double the size of Indian mutual fund industry) internationally, is considerably more resourceful than Reliance ADAG.


• Nippon Life Insurance, a 130-year old company, is one of the largest life insurance companies in Japan, managing assets of over US$ 700 Bn. Nippon Life Insurance has revenues of over US$ 70 Bn and core operating profit of US$ 6.8 Bn.


• Nippon Life Insurance has the largest market share in Japan among private life insurance companies, employing over 70,000 employees and serving nearly 14 million customers worldwide. Total assets managed by Nippon Life Insurance are twice the size of the Indian mutual funds industry.

Now that the mutual fund business is going to be sold by Reliance Group, what is the impact on investor’s investments in Reliance Mutual Fund schemes?

• If anything, it is relatively better now to invest in Reliance MF schemes, knowing that the fund managers, scheme objectives and business structure do not change.


• Mutual funds are regulated by SEBI MF regulations 1996. These stipulate a 3 tier structure, comprising sponsors (think of them as promoters of the AMC), trustee and AMC.


• Sponsor should meet eligibility criteria, such as in fin-services business for at least 5 years, with profits in at least 3 years, and positive net worth in all 5 years. They should have contributed a minimum 40% to AMC’s net worth. Sponsor should have a good track record with regards to integrity/ governance.


• Trustees protect the interest of the mutual fund unit holders in fiduciary capacity and ensure AMC compliance with SEBI regulations. Typically, there is a separate trust formed by the sponsor (which should have at least 2/3rd independent directors), which holds the assets acquired through investor’s invested-money. They report to SEBI every 6 months about AMC activities and are answerable to the regulator with regard to investor interest.
  
  AMC are investment managers of the trust.


• The 3 should have independence in carrying out their tasks; what is sometimes referred to as arms-length-relationship.
  
  As an example, ICICI bank and Prudential Plc are sponsors for ICICI Prudential MF schemes.
  
  Given the above, this is just a case of an AMC’s MF schemes assets get acquired by another AMC or rather another AMC-trust; that implies that the old scheme is still alive & that it’s investment-manager has changed (for eg: Zurich MF schemes assets’ acquisition by HDFC MF) and the investors really have nothing to worry on this front.

How does this ownership change benefit the investors into Reliance Mutual Fund Schemes?

• Nippon Life Insurance Co, a Fortune 500 conglomerate with 130 years of success behind them, will strengthen risk and credit management processes as well as corporate governance practices.


• This will add consistency and sustainability of performance to the robust market knowledge and cutting-edge research that RMF is known for


• The find will further benefit from the increased AUM based on Nippon Life’s leadership in Japan, its global relationships and best practices. This will in turn, significantly help enhance capital inflows into India.

How does this impact the shareholders of Reliance Mutual Fund?

• Nippon Life brings in pedigreed assuredness and Financial robustness as a promoter


• With its asset management operations in around 48 countries and a world-wide presence in insurance related operations as well, Nippon Life will attract investors across the globe to invest in India and also be able to leverage RMFs asset management capabilities in international markets

Conclusion

We, in Advisorkhoj think that RNAM deal between Nippon Life Insurance and Reliance Capital is beneficial for all stakeholders i.e. shareholders, the mutual fund industry and most importantly, the customers (investors). Nippon Life Insurance has expressed confidence in the current management team of RNAM led by Sundeep Sikka and expects them to lead the business in the future as well. From a management continuity viewpoint, no disruption is expected. It should be business as usual for investors.

Sundeep Sikka, CEO and Executive Director stated that, “RNAM” will continue to benefit from Nippon Life’s leading practices in risk management and leverage its global network to significantly enhance capital inflows into India. From the perspective of Reliance Mutual Fund investor, there is no impact on your investments. If you have any question, you should get in touch with your financial advisor or Reliance Mutual Fund branch in your city.