A Reuters report said the Securities and Exchange Board of India or SEBI has began a crackdown on mutual funds, which has frustrated asset managers. According to industry insiders, the regulator has taken on an unprecedented level of control on the operation of mutual funds that new fund launches are delayed and investment strategy is dictated.

The report said the tighter scrutiny is an additional challenge to the embattled mutual fund industry in India, which has suffered a constant stream of redemptions from equity funds in the past few years. Despite the Indian stocks reaching record highs this year, a majority of the 47 asset management companies in India have not been profitable. They have also underperformed the index so far in 2013, the report said.

Vivek Kudya, the head of the India, Central Europe, Middle East and Africa of Franklin Templeton Investments, has told Reuters, "SEBI is trying to tell us what to do from an investment perspective, which we don't necessarily agree with." Franklin Templeton Investments is a unit of Franklin Resources Inc based in the US. According to the report, the India unit of Franklin Templeton proposed to launch a mutual fund that would switch allocation among stocks, bonds, gold and money markets. However, SEBI said it was too risky for investors that the fund was eventually shelved after a few months.

In December 2007, equity fund assets under management reached a peak of $30.8 billion. However, net outflows in four of the past five years caused the figure to fall to $24 billion last month.

The report said SEBI, under Chairman UK Sinha, had taken a hands-on approach in the job, which marked a reversal of the agency's practices in the past. Sinha has also taken his campaign against fund houses that have underperformed publicly. He has also railed against the failure of the asset management sector to attract more investors to stocks, the report said.