FUND FULCRUM (contd.)
(March 2010)

Piquant Parade

Today, 38 asset management companies operate in India. Peerless and Axis Bank were the most recent entrants in the business. Meanwhile, Bank of India, SREI Infrastructure Finance, Bajaj Allianz, and Indiabulls await SEBI approval to get started.

IDBI Asset Management, a subsidiary of IDBI Bank, has received approval from Securities and Exchange Board of India to commence its mutual fund operations. The launch of the asset management business is in line with its long term vision to emerge as a leading Universal Bank which will provide the entire gamut of financial services to its customers. This is a second beginning for IDBI Bank in the mutual fund business. IDBI was among the first few entities to launch its mutual fund business in 1994. IDBI first roped in a partner, the Principal Financial Group and eventually sold its interest (50%) in 2002 to exit the AMC. IDBI bank had exited the venture to concentrate on setting up its retail business. Now with an established retail presence, the fund felt that it is the right time to enter the mutual fund space.

Union Bank of India and Belgium-based KBC Asset Management will jointly invest € 50 million (approx Rs 300 crore) in a new asset management company, Union KBC Asset Management. Union Bank holds 51 per cent stake and KBC 49 per cent in the JV, which was inked in November 2008. The bank has received approval in principle for the asset management company. The bank expects to get the final approval in two to three months' time and to launch its first fund in the last quarter of this calendar year.

SBI Mutual Fund became the first fund house to introduce a new payment option (for investment) effective March 22, 2010, offering online investment in SBI Mutual Fund schemes through State Bank of India’s ATM cum Debit cards. This would technically enable all SBI ATM cum debit card holders to invest in SBI Mutual Fund’s schemes even if they do not have SBI Internet banking facility, thereby, adding to a whole new universe of potential investors for SBI Mutual Fund. This facility is available for all SBI Mutual Fund’s Equity and most of the Debt schemes. Investors can invest amounts, subject to a maximum limit, as periodically decided by SBI.

ICRA Online (ICRON), a subsidiary of rating firm ICRA, and Belgium-based Society for Worldwide Interbank Financial Telecommunication (SWIFT), entered into an agreement for setting up a payment gateway for transactions in mutual funds. When an investor logs onto a mutual fund trading platform, provided by various fund houses, he will be asked to either register for net banking or the ICRON-SWIFT gateway. The ICRON-SWIFT gateway will help reduce the time span for mutual fund transactions to one day as against the existing three days. This would be operational by early 2011. The platform would enable both institutions and retail investors to make payments against purchase of mutual fund units without writing cheques. The platform will effectively make use of secured mobile messaging system or the email messaging facility for fund transfer advices.

Regulatory Rigmarole

SEBI proposes to bring about far-reaching changes in the rules governing the operation of mutual funds through its circular dated March 15, 2010.

Unlike stock IPOs, mutual fund offers stay open for a long period, sometimes 30 or even 45 days. SEBI has now asked that this be shortened to 15 days (ELSS funds have been exempted). Mutual funds/asset management companies shall use the NFO proceeds only on or after the closure of the NFO period. The mutual fund shall allot units/refund money and dispatch statements of accounts within five business days from the closure of the NFO. The reasoning behind the shortening of the NFO period is that over a long period during which the issue is open, investors who apply early in the period find their money locked in unproductively. In the same spirit, SEBI has extended the ASBA (Applications Supported by Blocked Amount) system to mutual fund NFOs. In ASBA, investors apply for IPOs while the application amount stays in their own account and is just blocked from other use. The issuer is able to withdraw the amount when it allots the shares. Both these changes will be effective from July 1, 2010.

SEBI does not want mutual funds to pay dividends out of the funds deposited by investors, but only out of the returns earned by the funds. SEBI has directed mutual funds to pay dividends only from realised gains. This is how it works: For instance, if the face value of an equity diversified fund is Rs 10 per unit and its net asset value (NAV) rises to Rs 100, then Rs 90 will be part of the unit premium account (similar to accumulated reserves of companies). So, if an investor bought units at Rs 100 a unit, the dividends paid by the mutual fund would be drawn from the unit premium account, a practice which amounted to paying unit-holders their own money. As per the new rules, SEBI is asking mutual funds to pay dividends from profits booked in the event of a surge in the market. This means, if the NAV rises from Rs 100 to Rs 110, mutual funds can only use Rs 10 to distribute dividends, provided profits were booked. This step will certainly affect the quantum of dividend payouts by mutual funds, and more importantly, it will curb improper conduct of distributors while selling.

The market watchdog has said that fund houses cannot enter into revenue-sharing arrangements with underlying funds in the case of fund of funds (that is, funds in whose schemes the investment is being made). Till now, there was no mandate as to where the FoF would use the revenue earned. Hence, it was being used for marketing and paying commissions to agents. Now, it will be passed on to the scheme and, hence, to investors.

The market regulator has emphasised the need for mutual funds to play a bigger role in corporate governance matters of listed companies. AMCs shall disclose their general policies and procedures for exercising the voting rights in respect of shares held by them on the website of the respective AMC as well as in the annual report distributed to unit-holders from the financial year 2010-11.

SEBI has issued a directive regarding the fee charged by no-load funds. Earlier, when there were schemes that charged an entry load and others that were no-load, the no-load schemes were allowed to charge an additional management fee of 25 basis points. Since SEBI’s August 2009 directive, all funds have become no-load funds. SEBI has now asked no-load funds to stop charging the additional 25 basis points as fee.

Any brokerage or commission paid to the fund’s sponsor, its associates, or related people must be disclosed in the fund house’s half-yearly report.

Securities and Exchange Board of India has implicitly stated in the February 2010 circular that all mutual fund investors, irrespective of the amount invested, should comply with know-your-customer (KYC) norms w.e.f. April 1, 2010. SEBI had said on December 11, 2009 that all documents related to an investor, including KYC and power of attorney details in respect of transactions/requests made through Mutual Fund distributors, should be available with RTAs and AMCs. It had asked fund houses to confirm if they were maintaining all investor-related documents. No further payment of commissions, fees and/or payments in any other mode were made to such distributors till full compliance/completion of the steps. As a result, fund houses have not been paying commissions to distributors for two months. With commissions already shrinking after the entry loan ban, this has made things worse for distributors. SEBI’s fiat has hit foreign banks — among the large mutual fund distributors — harder than the rest. AMFI has formed a working group which has proposed KYC compliance in two phases for all current folios, with the first phase being done by the next fiscal.

As far as the capital market is concerned, the changes in tax laws which are likely to happen through the direct tax code (DTC), will be done from April 1, 2011. The direct tax proposals as they stand today seek to tax capital gain at full rate as compared to the zero tax right now. If you are a new buyer and you are buying into stocks at the current levels then your incremental tax liability will be a little less. But if you are holding investments in equities for years together at a very low acquisition cost, you have accumulated a lot of long-term capital gains which is right now not subject to any tax. The other change that the DTC seeks to do is on the change to Exempt – Exempt – Taxable (EET) from Exempt – Exempt – Exempt (EEE). If investing in bank deposits and in a capital market product attracts the same tax rates, people will be simply happy putting all their money in banks. So it has a serious implication on domestic investor’s ability to buy the market. The DTC holds the key.

The mutual fund investment landscape in the country has undergone radical changes with more changes underway…