Monday, December 31, 2007

Fund Fulcrum (contd.)
(December 2007)

Piquant parade

Union Bank of India is to form a 51% joint venture with Belgium-based KBC group to enter the Indian mutual fund arena.

UTI Mutual Fund, which is likely to become the first public-listed fund manager in Asia, will open 53 new branches in the next three months across the country by utilising a part of the proceeds from its proposed public offer which is likely to hit the market in February 2008.

The Pension Fund Regulatory and Development Authority (PFRDA) has given its assent for investments of up to 5 per cent of the funds under the new pension system (NPS) in stock markets and another 10 per cent in equity linked mutual funds. SBI, UTI and LIC Mutual Funds have been appointed as the fund managers to manage Rs. 2000 cr under NPS for a period of three years from June 2008. The fund managers would also offer an option to employees to invest 100 per cent of their pension funds in Government securities which give assured returns.

Regulatory Rigmarole

Indian Mutual funds can invest upto $7 billion annually in the overseas markets - a good 40% jump over the present ceiling of $5 billion. The present ceiling has been raised from $4 billion about three months back.

The exposure limit of banks for loans and advances to individuals against units of mutual funds were specified by RBI so far. Capital market loans extended by banks to Mutual Funds and issue of Irrevocable Payment Commitments (IPCs)(payment commitments made to stock exchanges on behalf of mutual funds and foreign institutional investors (FIIs).), now fall under the ambit of the RBI exposure limit. However, according to SEBI regulations, mutual funds can borrow to meet temporary liquidity needs for repurchase, redemption of units or payment of interest or dividend to unit holders. However, this borrowing is limited to 20% of the net asset of the scheme and for a duration not exceeding six months.

SEBI guidelines entail that entry and exit loads should not be charged for units given as bonus or against reinvested dividends.

Every investment made into a fund will compulsorily have to be accompanied by a valid PAN card from Jan 1, 2008. Mutual fund investors will have a single-point of dissemination of all financial documentation essential to fulfil the mandatory KYC norms as prescribed by SEBI. Mutual funds association AMFI, in collaboration with CDSL Ventures, a subsidiary of Central Depository Services (India), has developed a single centralised platform, to store proof of identity, proof of address, PAN card, and a photograph while investing Rs. 50,000 and above (to be phased down to zero in the second stage) in mutual funds schemes with effect from 1 February, 2008. A unique client id will be allotted and mapped to each client’s PAN. The relevant document and information have to be provided only once by the investor, after which a copy of KYC acknowledgement slip can be furnished for future investments. The back-up documentation has to be kept for a period of 10 years.

Several forward looking measures are in the draft stage and SEBI plans to finalise them after seeking expert and public opinion.

After a gap of six years, SEBI will be allowing domestic fund houses to short sell securities (the sale of securities that an investor does not own) as well as to avail stock lending and borrowing (SLB) facilities. There is a ban on naked short-selling- all short-sellers would be required to mandatorily honour their obligation of delivering the securities at the time of settlement.They can honour the trades by borrowing the securities through the proposed SLB scheme. No institutional investors will be allowed to do day trading. This virtually prohibits squaring off of their transactions intra-day. All shares that are in the futures and options (F&O) segment will be eligible for short-selling. SEBI has asked stock exchanges to establish systems to operationalise short-selling and SLB. The exchanges were also asked to ensure all appropriate trading and settlement practices as well as surveillance and risk containment measures, before their introduction.

Real Estate Investment Trusts (REITs), which would invest directly in real estate projects after collecting funds from investors through the stock exchanges, will soon enter the Indian markets with SEBI placing draft rules for such trusts. Banks, public financial institutions, insurance companies and corporate houses can be trustees of REITs, which should be created under the Indian Trusts Act. The trust and management companies are required to be registered with SEBI and they should have a net worth of not less than Rs 5 crore. REITs will be close-ended and the schemes will be compulsorily listed on stock exchanges. Before launching, the schemes should also be valued by a principal valuer empanelled with SEBI. REITs are exempted from making investments in vacant land and none of their schemes should have 15% of funds exposure to a single property project. The schemes should invest only in income generating real estate projects. In case of uncompleted units in a building or units which are in the course of substantial development, the contract value of such real estate must not exceed 20% of the NAV, which will be disclosed on a yearly-basis.The SEBI move comes amid plans by the country’s biggest real estate players, including DLF and Unitech, to raise nearly $5 billion from Singapore Stock Exchange through REITs early next year.

SEBI has drafted a proposal to fast track the launch of mutual fund products. Till now, AMCs had to go through a long process of filing the offer document (OD) and waiting for a go-ahead from SEBI. AMCs would now only have to directly file the final offer document with an additional due diligence certificate from the compliance committee and other basic requirements. Once SEBI confirms the receipt of the standard OD to the AMC (in writing), they would be free to launch the scheme. SEBI, however, retains the power to advise amendments to the offer document in the interest of the investors. To begin with, this process would be adopted for Fixed Maturity Plans (FMPs) and close-ended income schemes. The reason being that they constitute the bulk of new ODs that are filed with SEBI. Moreover, the asset allocations are standard and most of the AMCs have existing schemes.The standard OD would require elaborate instructions on the intended disclosures. According to SEBI, these disclosures would help prospective investors make an informed decision.The final offer document will be posted on the SEBI Web site, accompanied by due diligence certificate from the trustees and additional due diligence certificate from the compliance head and fund manager. The fast-track model is framed after examining the experiences of regulators in Australia, Malaysia, the US and the UK, and customising the framework available in these countries to suit Indian needs.

Action by global majors for a piece in the precious pie - the Indian Mutual fund space … Rigourous regulatory steps in the right direction …A happy combination indeed to enter The NEW YEAR!

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