Analysing SEBI’s ₹250 SIP Initiative: The Bargain For Financial Inclusion, Market Competition and Efficiency

– Gauri Bagali and Reedhav Gulati

Introduction

In furtherance of incentivising and enhancing financial inclusion, India’s securities markets regulator, Securities and Exchange Board of India (“SEBI”) sought public comments for its new ‘Small Ticket Systematic Investment Plan’ scheme. Among other changes, the scheme introduces a new ₹250 Systematic Investment Plan (“SIP”) in which an individual investor can invest in up to three such plans by different Asset Management Companies (“AMCs”) and the AMCs will be compensated for offering this SIP, restricted to only the first three plans. The scheme, however, excludes all existing investors or investors with any SIP other than the small-ticket SIP.

This proposal will have a multitude of implications on the securities markets, investors and other stakeholders. However, the scope of this blog will be limited to analysing the policy’s impact on efficiency in the market.

The Oligopolistic Landscape of Mutual Funds and Inadequacy of Safeguards

India’s mutual fund industry already exhibits oligopolistic characteristics. SEBI’s small-ticket SIP proposal, rather than diversifying competition, may reinforce the existing concentration of power among the largest players.

Firstly, the policy incentivizes the first three ₹250 SIP plans for each company, irrespective of the company’s size and standing in the market. The mutual fund industry in India is already dominated by a few large players. These AMCs have an established customer base and operational efficiency, placing them at a position that enables them to leverage their large economies of scale to cut down costs of offering low-priced SIPs. The scheme proposes no additional incentives for smaller AMCs. Owing to this, new or smaller AMCs may find it harder to compete, primarily because they lack the scale to absorb high costs. There is also a possibility that the large AMCs collude to keep new competitors out. The policy in its current form will incentivize big players to consolidate their position as they can capitalize on their reputation and marketing power.

Secondly, a part of the cost of the small-ticket SIPs will be compensated through the Investor Education & Awareness Fund (“IEAF”). Large AMCs with greater market presence can capture a larger share of these subsidies vis-à-vis the smaller players. Such a move creates barriers to entry for smaller players limiting the already restricted competition and leading to a net loss for consumers, thereby failing to fulfil the scheme’s intended objective of financial inclusion.

Game Theory in Action

The new scheme, thereby, reinforces the already existing oligopolistic market, further magnifying the market failure. In such times, the AMCs face two primary strategic choices in response to SEBI’s ₹250 SIP initiative. The first option is to aggressively compete for small-ticket investors by lowering expense ratios to attract new SIP participants, expanding marketing efforts targeting small-ticket investors, and introducing innovative micro-SIP products to capture retail demand. The potential outcome of this approach is increased competition, which benefits investors through lower fees and greater accessibility. This pressure, however, falls on the AMCs themselves, especially smaller ones, because they are bound to experience margin compression with lowered profitability per investor.

The other choice is restricting participation and going for the status quo by ensuring that expense ratios are not touched to safeguard profitability, banking on reputation instead of indulging in a price war and serving high-value clients instead of catering to mass-market SIPs. This strategy would result in a few big AMCs concentrating market share, increased fees, and less investor choice. Although this strategy would allow AMCs to maintain profits in the short run, it could squeeze competition and diminish the benefits envisaged for retail investors.

The reaction of the mutual fund industry can be follows: If everyone competes, the fees would be brought down collectively, resulting in increased retail participation, but it would also reduce industry margins. Alternatively, if a majority of the AMCs eschew competition, large AMCs will retain pricing power which solidifies their market concentration at the cost of retail investors. Each AMC is then faced with the choice of either competing aggressively by lowering costs and offering better services or maintaining higher prices and focusing on their existing clients. While the optimal outcome for investors would arise if all the AMCs choose to compete, leading to lower fees and greater accessibility, the fear of losing market share and profitability discourages AMCs from doing so. The dominant strategy for most AMCs, therefore, becomes one of non-cooperation, i.e., based on avoiding cost reductions and preserving the profit margins. This mutual decision to not compete results in a suboptimal equilibrium where market concentration increases for the existing large AMCs, innovation declines, and investor benefits are severely restricted.

Investor Outcomes and Market Consequences

If the short-term maintenance of profits is given more importance than the long-term goal of market expansion by AMCs, the outcome can be a very concentrated industry with few advantages for retail investors. Even expense ratios can be high, cutting the profits of the investors. Smaller AMCs will find it difficult to compete, leading to less innovation in SIP products. Investor options can also become limited as market leadership is dominated by a handful of strong AMCs. Therefore, SEBI’s goal of fostering financial inclusion through lower SIP thresholds could inadvertently reinforce an oligopolistic market structure, where only the largest players will thrive. This could mean that while the intent behind the regulation is to increase accessibility, the actual market outcome will favour established giants at the cost of a truly competitive investment ecosystem.

Nash Equilibrium and Market Concentration

In the new regime envisioned by SEBI, the existing oligopolistic nature of the market would be magnified where large AMCs strengthen their hold. With just three SIP Plans to invest in, the investor will end up investing in plans by mature players with credentials, and newer AMCs would struggle to mobilize funds. Thus, new entrants will be unable to gain traction since investor decisions are biased towards established brands, which presents a significant entry barrier for newer AMCs. Second, a few large AMCs can also indirectly coordinate their price and cost policies, thereby leading to tacit collusion and hence limiting competition without explicit understandings. Rather than increasing financial inclusion, SEBI policy may inadvertently support market concentration, decreasing investor flexibility and choice.

The Efficiency Conundrum

The mutual funds market, that has inadvertently settled into an oligopolistic structure, is worse off for consumers. However, in the real-world, achieving complete Pareto efficiency is highly unlikely, and therefore the effectiveness of the proposal can be better evaluated through the lens of the Marshall Efficiency model. One must then consider each of the major stakeholders to understand the overall impact.

For the new investors, the impact is mixed. While a large section benefits from the eased restrictions of entry and newly gained access to the securities markets, they are worse off due to the lack of competition and inefficiency in the market.

For the existing investors, the impact can be categorized for two classes: existing big-ticket and existing small-ticket investors. Firstly, the big-ticket investors will primarily be unaffected since the intervention accounts only for the new small-ticket investors. However, existing small-ticket investors are possibly worse off due to their exclusion from the policy. For example, the current minimum SIP amount in India is ₹500, and some investors invest just ₹500 every month, which is cumulatively lesser than the maximum investment allowed under the new plan. Despite this, these investors will be excluded from the policy due to its structure, making them worse off.

Among the participating AMCs, there are two main categories: large AMCs and smaller AMCs. The policy greatly benefits the existing large AMCs by incentivising them to participate in the scheme and consolidate their market share. For the smaller AMCs, however, the impact of the policy is twofold. While they too will benefit from the incentives to participate in the scheme, they would be collectively worse off due to possible loss of market share as a result of the cap on maximum investments by investors. It is important to note that this implication is contingent on the factor of which strategy of competition is being adopted by the market. If the market, though unlikely, chooses to compete on only non-price factors, the existing small AMCs too will be greatly well-off due to the policy.

For non-participating AMCs, the impact is neutral. While they lose out on gaining customers, they are also likely better off if they focus on maximising profit from their existing big-ticket investors.

The impact on the securities market ecosystem, with the current proposal in place, is likely to be negative. While there is a possible tangible economic growth in financial inclusion, the structure of the plan undermines the very foundation on which the market is built by promoting consolidation and concentration of power in the hands of a few large AMCs, which cannot be neutralized by mere economic growth.

Therefore, based on the analysis of individual stakeholders, the impact of the policy is largely negative considering that the foundational basis of evaluation is consumer welfare.

Conclusion

Section 11(1) of the Securities and Exchange Board of India Act, 1992 outlines that the function of the Board is “to protect the interests of the investors in securities”. Before moving forward with its “Small Ticket Systematic Investment Plan”, the Board must take a holistic view in guaranteeing investor protection. In order to achieve the same, the Board should consider providing additional incentives to small AMCs or removing the cap on total permissible SIPs for investors. Furthermore, it should also consider extending the scheme to the existing small-ticket investors. Most importantly, SEBI must devote more resources to investor education to increase awareness about the scheme and empower them to make financially sound decisions.

The authors are students of Gujarat National Law University .