Monday, June 27, 2011

June 2011

According to the data provided by Association of Mutual Funds in India (AMFI), AUM of the mutual fund industry declined to Rs 7.31 lakh crore in May 2011 from Rs 7.85 lakh crore in April 2011. Total AUM of the mutual fund industry dropped 7% in May 2011 from the previous month led by redemptions from income and money market schemes. Income and money market funds - which form around 70% of mutual fund assets - logged outflows worth Rs 50,744 crore during the month. Tight liquidity and firm rates prompted banks to redeem their investments from short-term debt funds in May 2011. Liquid and money market funds' AUM stood at Rs1.83 lakh crore, down from Rs2.22 lakh crore last month - scripting a 17% fall during the month. The RBI, in its policy review in May 2011, directed banks to restrict their investment in mutual funds to 10% of their net worth. The order comes to effect from October 2011. As per the new RBI guidelines, banks' exposure to the mutual fund industry should come down to around Rs 30,000 crore from the current Rs 1.3 lakh crore, by October 2011. As of May, the banks' exposure to debt mutual funds stood at Rs 1.3 lakh crore. Equity schemes' AUM fell 2% from April 2011 as weak markets eroded asset value even as the category recorded inflow worth Rs 1,546 crore during the month, thanks to rising allocations through systematic investment plans (SIPs). Equity schemes’ AUM dropped to Rs1.67 lakh crore in May from Rs1.7 lakh crore in April.

Piquant Parade

Public sector lender, Bank of India, is in talks with Bharti Axa and two asset management companies for an entry into the mutual funds business and hopes to seal the deal before the end of September 2011. Bharti, which exited life insurance business earlier this month by selling its stake in Bharti Axa Life Insurance to Reliance Industries, is also tipped to be looking at options of exiting other non-core businesses, to concentrate on telecom and retail. The Mumbai-headquartered Bank of India has appointed consultancy firm Ernst and Young for advising it on the takeover. Bank of India hopes to firm up its non interest income through an entry into the mutual fund business. It will use its network of over 3,500 branches nationally to distribute its products.

DSP BlackRock Investment Managers has signed a distribution agreement with The Shamrao Vithal Co-operative Bank as part of the strategy to increase their retail presence. The Shamrao Vithal Co-operative Bank will distribute DSP BlackRock Mutual Fund schemes through its net work of branches spread across the country.

Employees' Provident Fund Organisation (EPFO) has taken the measure to separate custodial services from the fund managers to bring further transparency in the management of its huge corpus of Rs 3.5 lakh crore. It also decided to extend the deadline for appointment of fund managers to manage its huge corpus of over Rs 3.5 lakh crore to August 31, 2011. Till then, SBI will manage its fund as an interim arrangement. EPFO has already missed the deadlines of March 31, 2011, the day on which the term of four fund managers, including ICICI Prudential, HSBC AMC, Reliance Capital and SBI expired, and June 30, 2011. Besides the four AMCs who had managed EPFO corpus, seven new firms, including Kotak Securities, Securities Trading Corporation of India, UTI Securities and ICICI Securities, have expressed interest in managing the retirement fund corpus. The EPFO had appointed the four fund managers for the first time in July, 2008, with the objective of providing a better rate of return on deposits to its 4.72 crore subscribers. Prior to this, SBI was the sole fund manager for it since its inception in 1952.

Association of Mutual Funds in India is reviving an earlier proposal to launch an online platform which will help distributors and financial advisors to transact mutual fund schemes across sales channels. The "front-end" portal will link the stock exchange fund platforms and also enable investors to buy or sell schemes directly from any of the 41 registered mutual funds. By planning to link the proposed portal with exchange platforms, the mutual fund industry body is trying to bypass stock brokers, who are not keen to sell mutual funds. The platform is expected to be functional in six months. Initially, AMFI will ask independent financial advisors (IFAs) and other AMFI registered holders to get empanelled on the online platform. The industry body is yet to work out on aspects such as portal membership fees and site ownership. It is going to be a non-profit venture. The transaction costs are expected to be kept at a lower base. The AMFI platform will help IFAs either transact through the exchanges or link up with fund houses directly. IFAs continue to contribute in a big way to mutual fund sales. According to data from registrars CAMS and Karvy, 45% of equity fund sales were done through independent financial advisors compared to 29% by banks in 2010-11. Capital market regulator SEBI, post-entry load ban in 2009, had asked AMFI to design a common fund platform which will allow retail investors to transact, switch over and compare the schemes online through a single window. While AMFI was working on the platform, Singapore-based Ifast Financial launched and registrars CAMS and Karvy jointly launched their fund platform 'Finnet'. Chennai-based Wealth India Financial Services also launched at around this time. But private online fund portals are yet to take off as expected, with most of them logging just about 200-400 transactions daily. It will take 3-6 years for any online distribution model to turn profitable. The stock exchange platforms BSE Star MF and NSE MFSS, which started in December 2010, are hardly seeing volumes because of broker apathy. For stock brokers, selling mutual funds is not profitable in the absence of volumes. The BSE on an average logs about 193 buy or sell orders worth about 1.79 crore every month while the NSE executes about half the number of trade orders worth about 70 lakh. Stock brokers get about 0.5% as commission for executing fund trades on behalf of investors. The BSE has 180 empanelled brokers, out of which, about only 50 are brokering funds.

Regulatory Rigmarole

SEBI has asked mutual funds to give it details of what they have done to improve corporate governance. This is a follow-up to a circular that SEBI issued in March 2010 that asked all fund companies to formulate guidelines for exercising voting rights that are held by them by virtue of their stock ownership. Corporate governance is a balance between opposing pressures. Just the prospect of a high profile investor asking tough questions can shift the balance a bit. Enough such questions and the balance can shift enough to make a difference to investors.

SEBI has decided to outsource its investor helpline service to a 500-seater third-party call centre. This will be in addition to handing over the processing and maintenance of investor grievances to an outside agency. Investor protection is the first objective and market development and regulation functions arise from the first objective. How does the regulator protect investors if the job of interacting and engaging investors, hearing their issues, detecting patterns in investor complaints or a systemic issue is outsourced to call centres? Before SEBI hands out any outsourcing contracts, it must have a public discussion on the process of collating daily/weekly and monthly reports from these agencies.

India is likely to allow foreign individuals to invest in mutual funds with a cumulative cap of USD 10 billion. The detailed guidelines are being worked out jointly by the finance ministry, RBI and SEBI. It was aimed at broad-basing the flow of foreign investment in the Indian stock market, so that dependence on FIIs' funds, considered as hot money, is reduced. This will increase corpus in mutual fund holdings, which means mutual funds will purchase more equity and other schemes. This will result in fighting volatility, which takes place due to FII outflows. At present, only FIIs and sub-accounts registered with the market regulator SEBI and NRIs are allowed to invest in mutual fund schemes in the country. The proposed move would not only help in attracting more foreign funds but is also expected to bring in 'more depth' to the fast-growing domestic mutual funds industry. To liberalise the portfolio investment route, it has been decided to permit SEBI-registered mutual funds to accept subscriptions from foreign investors who meet KYC requirements for equity schemes. For allowing foreigners in the segments, the government is looking to introduce a completely new class of investors, called Qualified Foreign Investors (QFIs). QFIs registered with depository participants can invest in the mutual funds directly and also through a mechanism -- Unit Confirmation Receipt (UCR) system. Under the proposed UCR approach, a foreign investor can go to depositories in his home country and place orders on custodian banks in India. The custodian banks will look into the mutual funds and issue UCRs against the underlying mutual funds.

There has been a lot of speculation as to whether entry load, banned by former chairman C B Bhave, in August 2009, would be re-introduced under a different format. But while the entry load may not come back directly, there are other models under consideration. Sinha set up a seven-member mutual fund panel to recommend steps for “organised and sustainable growth of the mutual fund industry”. The panel has already given its report, which is likely to be one of the key discussion points in the board meeting on June 30, 2011. According to reports, the panel has suggested a load of around Rs 100-150 per transaction. In addition, to ensure that distributors do not encourage investors to move from one scheme to another in a hurry, one suggestion is to raise the trail commission by 20-25 bps. That is, if the investor stays in a particular scheme for say, six months, the distributor could earn a higher commission. Similarly, there could be higher incentives for attracting new investors for long tenures. Distributors will be regulated, but in a non-disruptive manner. There must be more accountability for the actions of a distributor. SEBI will fully support the development of financial advisors across the country, which it sees as a critical last mile connectivity to ensure wider retail penetration in mutual funds and pension products.

Several other regulations have been lined up for uplifting the mutual fund industry. Fund houses have to disclose the components of their assets under management (AUM) in terms of retail and institutional money. AMCs have to disclose the record of fund managers while marketing new schemes, which would help investors take better decisions. Like the US fund industry, where a significant share of the investing community route their funds to pension funds managed by various AMCs, the Indian mutual fund industry has to offer more pension products to investors. A common KYC procedure for all capital market related activities is in the offing. De-cluttering the fine print in MF ads and making it more relevant to the investor is also something that is up there in the agenda. Providing meaningful disclosures like track record of the fund manager will certainly help investors take better informed investing decisions. Getting the mutual fund industry to implement in a time-bound manner a common application form and common operations processes will go a long way too in simplifying the investing experience for the investor.

With the domestic mutual fund industry still struggling to come to terms with the regulatory changes that happened two years ago, PricewaterhouseCoopers (PwC), in its latest report, has said that any new regulation should first be “lab tested” to analyse its possible impact on the industry. New norms should be implemented in a phased manner as the general concern expressed by industry players is that too many regulations in a short span of time has made the fund industry unstable. According to the report, as and when new regulations are introduced, there should be a formal process where these guidelines should be interpreted uniformly, so that there is ease of implementation. Effective implementation of well thought out regulations is the key to success of the Indian mutual fund industry. The industry is hopefully on the right path…