Monday, March 31, 2008


Fund Fulcrum (contd.)
(March 2008)

Piquant Parade

The Robeco Group has finally marked its presence in India’s mutual fund sector. The Robeco Bank has picked up a 49% stake in Canara Bank's Asset Management Arm. It has already allocated USD 1 billion to the Indian market and would like to increase it from an international perspective.

SBI Mutual Fund has formalised its tie up with the Kerala-based Dhanalakshmi Bank for distribution of its investment products through the bank. The tie-up would qualitatively enhance SBI Mutual Fund’s reach of mutual fund investors across the country, especially in the South.

UTI Mutual Fund has opened 4 new financial centres at various places, namely, Jabalpur, Gurgaon, Aligarh and Bareilly. The aim is to expand its wide distribution network to cover non-metros and smaller cities.

Regulatory Rigmarole

Institutional investors will now have to pay margin on their share transactions in the cash segment from April 21, in the same way as applicable to other investors. SEBI also operationalised short selling and securities lending and borrowing from the same date, April 21. It had specified the broad framework for this in December 2007 but had not operationalised it, pending clarifications from the tax authorities. It is, indeed, ironical that short-selling constraint is likely to be removed just after equity prices have tanked. Irony apart, allowing short-selling is a good move that will improve the market microstructure.

SEBI has issued a circular to waive off the entry and exit load fees on the bonus and dividend reinvestment units with effect from 1 April. The new rule is as per the recommendations of the working group on standardization of key operational areas of Association of Mutual Funds in India (AMFI). In support to the waiver of the load structure on bonus and dividend reinvestment transactions, the argument made by SEBI was that it is investor’s money that has contributed to the earnings and the investors were not entering afresh.

India's mutual funds are going to have to pause for breath….. With effect from 1 April, 2008 SEBI has asked them to more than double the time they spend on risk warnings to investors in their radio and television commercials. The funds, which now take two seconds in their commercials to tell customers "Mutual Fund investments are subject to market risks, please read the offer document carefully before investing," must do so in five seconds. This is because, the rapid-fire manner in which the standard warning is recited in the audio-visual and audio media renders it unintelligible to the viewer/listener.

Private life insurer ICICI Prudential’s launch of ‘R.I.C.H. fund’ has run into controversy with the mutual fund industry taking serious exception to the product’s advertisement campaign, which according to them gives an impression that it is a mutual fund scheme though it actually is a Unit-Linked Insurance Plan (ULIP). Based on the complaints from mutual funds, the AMFI has taken up the matter with both the Securities and Exchange Board of India and the Insurance Regulatory & Development Authority. The advertisement by ICICI Prudential Life Insurance Company says the ‘New fund opens on March 15 @ Rs 10’. The commercial mirrors advertisements by mutual fund houses for their NFOs.

Considering the long wish list of the Mutual Fund industry for the Finance Minister in Union Budget 2008, there is not much for the Mutual Fund industry to write home about. However, the increase in short term capital gains tax, service tax on ULIPs, status-quo on STT and long term capital gains tax, and TDS exemption for corporate debt is good news for the industry. The Mutual Fund industry will benefit with longer term investors being encouraged and short term churning being discouraged by the short term capital gains tax being raised to 15% from 10%. Increase in Short Term Capital Gain taxes will discourage speculative investments and, will not impact investment flows in the medium term. This would encourage investments into Equity Mutual Funds by retail investors. The imposition of service tax on ULIPs will level the playing field with mutual funds, who have been paying this for a number of years already. In addition, the fact that corporate taxes, STT (Securities TransactionTax), and long term capital gains tax were not tinkered with is a positive for investors.

Though the budget provisions related to mutual funds proved to be a damp squid with many concerns having been left unaddressed and with the market immediately plummeting, the few long-term benefits that accrue cannot but be overemphasised!

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