FUND FULCRUM

July 2012

Total assets under management (AUM) of the Indian mutual fund industry – comprising 44 fund houses – increased by 4%, or Rs 27,388 crore, to Rs 6,92,180 crore in the April-June quarter of 2012, over the preceding quarter, according to data released by the Association of Mutual Funds in India (AMFI). In the previous quarter ending March 31, 2012 total AUM stood at Rs 6,64,792 crore. HDFC Mutual Fund once again topped the chart, with its AUM rising 3%, or Rs 2,746 crore, to Rs 92,625 crore. Reliance Mutual Fund, which was dethroned from its numero uno position in mid-2011 by HDFC Mutual Fund, continued to maintain its second position at Rs 80,694 crore, up 3.3%, or Rs 2,582 crore, over the previous quarter. ICICI Mutual Fund also witnessed improved performance with its AUM rising 6.3%, or Rs 4,332 crore, to Rs 73,050 crore. Birla Sun Life Mutual Fund’s AUM shot up nearly 10%, or Rs 6,063 crore, to Rs 67,206 crore, compared with Rs 61,143 crore in the January-March quarter. The AUM of UTI Mutual Fund stood at Rs 60,923 crore in the quarter ending June 30, 2012.

According to SEBI data, from April to June 2012, the industry has seen a decline of more than seven lakh folios from equity funds. There were 3.76 crore equity folios (including ELSS) in March 2012 which fell to 3.69 crore folios in June 2012. The decline in equity folios is due to scheme mergers and folio de-duplication exercise carried out by R&Ts to identify unique investors. SEBI had asked fund houses to merge similar schemes in 2010. The number of equity schemes has dropped from 376 in March 2011 to 351 in June 2012. Folios in debt funds have increased because of new FMPs and bond funds launched by AMCs. Debt funds have been continuing to attract investors, reflected by 2.29 lakh folio additions during the same period. ETFs added 19372 folios, out of which Gold ETFs alone added 14471 folios while other ETFs added 4901 folios. The number of ETF schemes (Gold ETFs and other ETFs) has gone up to 34 in June 2012 from 28 schemes in March 2011.

According to latest data available for inflows till May 31, 2012 the mutual fund industry had seen a net inflow of Rs 1,19,488 crore across categories. Liquid and money market funds led with over Rs 1,00,000 crore of inflows followed by income funds, which witnessed Rs 19,454 crore as net inflows during April-May 2012. However, the equity segment continued to be ignored by investors.

FC Research Bureau ana­lysed the trend in profitability among 15 of 44 AMCs operating in the fund industry, but which collectively manage 85-90% of the entire industry’s assets und­er management. The interesting revelation was that 10 of these 15 large AMCs registered net profit in FY11, the latest year for wh­ich data was available and 12 AMCs had positive accumulation of net profits over the years till FY11. Among the 10 profitable AMCs, Reliance Capital Asset Management, the investment manager of Reliance Mutual Fund, had earned a net profit of Rs 261 crore in FY11 — the highest in that year among all the 15 AMCs analysed. It earned a total income of Rs 699 crore of which investment management fee accounted for Rs 627 crore, and it incurred a total expenditure of Rs 380 crore of which marketing and publicity expenses accounted for Rs 159 crore and employee costs accounted for Rs 127 crore. In FY11, the second-highest net profit of Rs 241 crore was made by HDFC Asset Management Company, manager of HDFC Mutual Fund. It earned a total income of Rs 681 crore, of which investment management fee accounted for Rs 645 crore, and incurred total expenses of Rs 325 crore, of which the 'administrative and other expenses' head accounted for Rs 222 crore and 'staff expenses' head accounted for Rs 86 crore. But in terms of accumulated net profit, after all appropriations such as dividend and transfer to general reserve, over the years, including FY11, it was UTI Asset Management Company which had the highest accumulated net profit of Rs 639 crore. Its net profit in FY11 was Rs 138 crore, third-highest among the 15 AMCs analysed.

Piquant Parade

At present, there are four KRA agencies registered with SEBI. CDSL Ventures, a subsidiary of BSE-promoted Central Depository Services, is currently the market leader in this segment. The three other agencies are NDML, fully owned by NSDL; DotEx, a 100 per cent subsidiary of the National Stock Exchange; and CAMS KRA, an arm of CAMS Investor Services, the latest to have got SEBI approval. SEBI grants registration certificate to KRAs for a period of five years which can be renewed. A KRA has to have a net worth of Rs 25 crore on a continuous basis. Under the new KRA system, clients of all SEBI-regulated entities, including AMCs, portfolio management schemes (PMS) and equity brokers, have common KYC. The Forward Markets Commission (FMC) has proposed to join with SEBI for common KYC norms. The common KYC process came into effect from January 1, 2012 with KRAs being appointed to facilitate the smooth flow of data across intermediaries. Meanwhile, SEBI has initiated a plan to move all existing client records to the KRA system. By March 2013, KYC information of all active clients will be moved to the new KRA system. The new KRA system benefits investors as they switch brokers or mutual funds without undergoing the KYC process repeatedly. Intermediaries also benefit as their storage and back office costs fall as clients’ KYC documents get stored centrally with the KRA.

ICICI Prudential Asset management Company has entered into a partnership with Nordea Investment Management AB, Sverige (Nordea AM) the Asset Management entity of the Nordea Group. Its asset management arm is the second fastest growing asset manager in Europe over the last six years. This exclusive partnership between ICICI Prudential AMC and Nordea AM allows both entities to capitalize on each other's respective strengths in distribution and investment expertise in the Indian and international markets. Nordea will showcase ICICI Prudential AMC exclusively as its Indian advisor/sub-advisor of choice throughout its retail, private banking and institutional segments across Europe.

The AMFI MF Utility, an online service, which will facilitate efficient and cost effective transaction processing, is expected to be launched in April 2013. Investors will be provided with a login ID and password to transact. Distributors will also be given a login ID and password so that they can directly transact. For an investor to transact in any scheme there will be a common account number (CAN) for the entire mutual fund industry. All information will be captured in a CAN as a master data. At present, investors have to give separate applications for separate folios for changes like bank details. This will not be required under the new platform.

Fundsupermart, the online mutual fund investment portal, has launched flexi SIP service, where investors can alter the monthly SIP investment without any hassle of a fresh ECS bank mandate. The Flexi SIP feature enables investors to effortlessly alter their monthly investment to suit their affordability or temporary upheaval in their finances. Investors only need to choose the funds where they want to make the alterations, the amount they want to invest in those particular funds, date of investment, and the maximum ECS limit.

Regulatory Rigmarole

The PFRDA Bill, seeking to give statutory powers to the interim regulator, has not been cleared by the Cabinet so far, as one of its key allies is opposed to it. An earlier Bill, tabled in 2011, had kept a decision on FDI in pension funds out of the purview of legislation. The scheme was opened for the private sector about three years ago, but it has not made much progress since then. The Pension Fund Regulatory and Development Authority (PFRDA) issued new set of guidelines to boost the National Pension System (NPS). The new eligibility criteria recommended by G N Bajpai Committee are: a) There will be no bidding process for appointment of fund managers. There will not be any cap to the number of pension fund managers (PFMs) managing the retirement corpus under non-government and private sector segment. At present, there are six PFMs that manage private or non-government pension funds: ICICI Prudential Pension Fund Management Co. Ltd, IDFC Pension Fund Management Co. Ltd, Kotak Mahindra Pension Fund Ltd, Reliance Capital Pension Fund Ltd, SBI Pension Funds Pvt. Ltd and UTI Retirement Solutions Ltd. b) Any eligible company can undertake the business of fund management under the NPS.c) PFMs have been given the freedom to fix their own fees subject to an overall ceiling laid down by PFRDA. Earlier, the fund managers charged a uniform fee, fixed fund management charge (FMC) of 0.0009%. d) Fund managers are also free to set up their own marketing and distribution channel in order to attract potential subscribers.

SEBI, in consent with RBI, has allowed Qualified Foreign Investors (QFIs) to invest in Indian corporate debt securities and debt schemes of Indian mutual funds without any lock-in period. The regulator has capped the investment at $1 billion. This limit shall be over and above the limit of $ 20 billion for FII investment in corporate debt and shall be monitored by the regulators. QFIs can invest without prior approval until the aggregate investment reaches 90% of $1 billion i.e. $0.9 billion. QFIs can invest in debt mutual fund schemes that hold atleast 25% of their assets (either in debt or equity or both) in the infrastructure sector under the USD 3 billion investment limit of debt mutual fund schemes which invest in infrastructure out of the total long term corporate infrastructure limits of USD 25 billion.

Investors in America might not be able to access Indian markets through the QFI route due to regulations that bar selling of financial products not approved by that country’s capital markets regulator, the Securities and Exchange Commission (SEC). Further, any entity that markets such products in the US also requires registration with the SEC. These conditions could substantially impact the amount of flows targeted to be raised through the QFI route. At present, the US accounts for the lion’s share of foreign flows into India through the foreign institutional investor (FII) route. The Indian finance ministry and SEBI are taking the matter up with USIBC (US-India Business Council).

With effect from October 01, 2012, SEBI has reduced the timeline for registration of transfer of shares and debt securities to 15 days from the existing one month. Any delay in transfer that results in an opportunity loss has to be compensated. This provision has been incorporated in the listing agreement for debt securities. SEBI has directed all registrars and transfer agents to adhere to these timelines for transfer of shares and debt securities.

SEBI has revised the norms and format of periodic reporting by registrar and transfer agents (R&T). R&T agents have to record their observations on deficiencies and non-compliances. They also have to record corrective measures initiated to avoid such instances (in the future) in their report to SEBI. Effective September 30, 2012 R&T agents are expected to file half yearly reports to SEBI in the revised format. This report has to be submitted within three months of expiry of the half year. R&T agents are also expected to report any change in their status or constitution in this report.

In the Union Budget 2012-13, the scope of services that are taxed was widened and the tax raised to 12.36% from 10.3%. These taxes, which have come into effect from July 1, 2012, have made buying and selling of mutual funds costlier. Service tax has been introduced on exit load of mutual funds. The commission paid to distributors (both upfront and trail commissions) is exempt from service tax. As of now, if a distributor got 1% commission by mobilising an application size of Rs 1 lakh, then he would get Rs 876 (Rs 1,000-Rs 123) after deducting service tax of 12.36%. Now, distributors can get Rs 1,000 on the same application.

The proposal to raise the expense ratio, if approved by SEBI, could result in unit-holders shelling out almost 55 basis points (0.55%) more than what they are paying now. The MFAC recommended raising the expense ratio to 2.5% from 2.25%. The exclusion of the service tax of 10.3% from the expense ratio will result in investors incurring costs to the tune of another 30 basis points. The 0.25% increase in expense ratio will not be charged on existing equity assets - but only on incremental equity investments. MFAC has asked Sebi to retain the slab system of calculating the expense ratio. Under the slab system, mutual funds with a lower asset base are allowed to charge a higher slab-rate while funds with a higher base are mandated to charge a lower expense ratio. Smaller mutual funds had protested against their larger peers' demand to remove the slab system.

MFAC has voted against the proposal to increase the net worth criteria for setting up mutual fund business. The committee has decided to retain minimum capital requirement for starting an asset management company at Rs 10 crore. The proposal to increase capital base of Rs 10 crore to Rs 50 crore was first introduced by SEBI committee on 'Review of Eligibility Norm' in 2010 to ward off non-serious players.

In order to remove the entry barriers for getting foreign investments, overseas mutual fund distributors are now not required to obtain NISM certification and are also not required to comply with KYD process. SEBI has stated that AMCs are required to ensure that distributors are compliant with extant laws where they operate at the time of empanelling them. The KYD norms require in-person verification of distributors and bio-metric process. Distributors had to visit India for KYD. SEBI wanted to remove entry barriers and bolster NRI and QFI flow into Indian markets.

High AMFI registration fee is preventing a number of distributors from small town to be a part of the distribution channel. The current registration fee is acting as a deterrent for attracting advisors particularly from tier II and III cities. SEBI could direct AMFI to slash the registration fee for attracting new IFAs from the hinterlands. The ARN renewal fee was hiked from Rs 250 to Rs 2500 for individuals and corporate employees from June 1, 2010. Individuals seeking new ARN license have to shell out Rs 5000. The fee was hiked across the board for all categories of distributors like banks, post offices, partnership firms, etc. AMFI had also reduced the validity period of ARN license from five years to three years.

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Regulators in developed countries are proactively taking measures to protect their investors. The American government passed the Dodd-Frank Legislation to protect retail investors and improve awareness and literacy. One of the most notable parts of the legislation is that children and consumers must possess financial education before they can take out school loans and before consumers can sign mortgages, and allow parents to establish retirement savings accounts for their children when they are born. And it is just not America that is being proactive. Even United Kingdom's watchdog, the Financial Services Authority (FSA) is being transformed in order to protect consumers. Most of the power currently held by the FSA will be taken over by the Bank of England, with a Prudential Regulatory Authority established to oversee corporates and their ethical decision making while the Financial Policy Committee will be set up for consumer.

India is not far behind. The draft “National Strategy for Financial Education” seeks to create a “financially aware and empowered India” and convert savers into investors. It pitches for a five-year action plan for financial literacy with initial focus on four sectors—banking, securities market, insurance and retirement planning. The strategy is to undertake a massive financial education campaign to help people manage money more effectively to achieve financial well being by accessing appropriate financial products and services. As a very first step towards financial literacy, a nationwide sample survey through an outside agency like NCAER, should be carried out for assessing the state of financial inclusion and financial literacy. The survey should cover the state of financial inclusion, awareness of financial products, financial competency and his/her attitude towards money and risk. On delivery channels for financial education, governments have recognised that it should start at school and that people should be educated about financial matters as early as possible in their lives. National Institute of Financial Education (NIFE) could be a specialised institute under National Institute of Securities Markets (NISM) reporting to the technical group for implementation of National Strategy for Financial Education.