The chairman of India’s securities regulator, UK Sinha, has told fund houses to expect an acceleration in opportunities to manage institutional investor assets both domestically and internationally.

Speaking to AsianInvestor on a recent trip to Mumbai, Sinha put low investor penetration rates of mutual funds down to two chief causes.

Firstly, an episode of market misconduct in 2001 that caused the Securities and Exchange Board of India (Sebi) to be seen as not safeguarding the interests of retail investors. This, he argued, had pushed them instead into fixed deposits and real estate.

Secondly, he noted that trustees of India’s largest pension fund, the Employees Provident Fund Organisation (EPFO), had not been investing in the securities market and therefore workers were being denied these benefits.

However, he noted that as of this April EPFO had opted to invest 5% of its incremental flows – about $11 billion to $12 billion per annum – into equity securities.

In addition the trustees decided to invest more into India’s corporate bond market, with foreign bonds and foreign equities likely to come in future.

“We now have six years of performance track record for the new pension system, which shows returns 300-400 basis points above what EPFO offered,” said Sinha. “So my sense is that 5% [of incremental flows] will also go up over time.”

Asked whether EPFO might invest directly in the markets, Sinha responded that it would take time to develop such a capacity and that at least to begin with its investments would be through mutual funds.

“So 5% of incremental flow will be invested in equity funds,” he explained. “[On the fixed-income side], right now EPFO only invests in government bonds, and a small quantum into bonds issued by public sector undertakings. Now it has decided to invest in bonds issued by public sector corporations.”

He suggested the process would be for EPFO to issue a mandate, before a beauty parade takes place between competing fund managers and finally EPFO would take a decision and allocate the money.

On the question of whether this could be the start of fund firms managing institutional assets more broadly, he said: “It [EPFO] will likely have multiple managers, compare performance and examine risk management and other issues. So fund managers will get this opportunity.”

Asked what role fund managers could play in the evolution of defined contribution schemes in India, Sinha added: “In a substantial way it has already come through the new pension system. Now that EPFO is also going to make investments, the process will be accelerated.”

For the full interview with chairman U.K. Sinha, see the forthcoming September edition of AsianInvestor magazine.