FUND FULCRUM (contd.)

October 2012

 

Notwithstanding volatility in the stock market, over 60% of retail investors have stuck to their investments in equity mutual fund schemes for more than two years, according to the data released by the Association of Mutual Funds in India. According to the rating agency, CRISIL, their analysis showed that out of Rs 1.4 lakh crore of retail investment in equity-oriented mutual funds, Rs 85,000 crore investment continued for over two years. However, high net-worth individuals, who invested over Rs 5 lakh, redeemed over 60% of their portfolio in less than two years. Mutual funds lost over 16 lakh folios over the past six months ended September, 2012 to end with 4.48 crore folios. Most of this decline is in retail category, especially in the equity segment, as these were impacted by volatile market sentiments. According to the data, retail folios fell by 3.67% to 4.355 crore by the end of September 2012 from 4.52 crore reported in March 2012. Retail investors increased their presence in debt-oriented mutual funds with a rise in retail folios by 10.5% in the past six months. Corporates continued to dominate mutual fund Assets Under Management (AUM) with 46% share, which is followed by HNIs with 25%, and retail investors with 23% share.

Piquant Parade

The Board of Yes Bank has approved its entry into the mutual fund business. The private sector bank is planning to enter the mutual fund business in the next 12 months. After having received the Board approval, the bank will now apply for regulatory licence from the Securities Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). In September 2012, Yes Bank had received a retail equities broking licence from the RBI, for which it expects to launch operations during the financial year 2013-14.

Regulatory Rigmarole

Mutual funds will use part of their Assets Under Management (AUMs) to finance the operating costs of a SEBI-proposed Self Regulatory Organisation (SRO) to regulate their agents and distributors. As per the suggestions made by its Mutual Fund Advisory Committee (MFAC), SEBI has agreed to set up an SRO to regulate the mutual fund distribution business. While the seed capital for setting up of the proposed SRO would be provided by SEBI and the mutual fund industry body AMFI (Association of Mutual Funds in India), some entities have also shown interest in sponsoring such an SRO. SEBI would follow a transparent process for selection of the sponsor for the SRO. Besides, SEBI is of the view that the recurring cost for the operations of SRO may be borne out of contributions from Asset Management Companies AMCs in the form of 0.02-0.03% of the AUM. The proposed SRO could be a registered company under the Section 25 of the Companies Act, wherein all profits are ploughed back into its operations, and will regulate distributors of securities like mutual fund, portfolio management and related products.

SEBI has mandated Mutual Funds/Asset Management Companies (AMCs) to ensure that total exposure of debt schemes of mutual funds in a particular sector (excluding investments in Bank Certificate of Deposits (CDs), Collateralised Borrowing and Lending Obligation (CBLO), Government Securities, Treasury Bills and AAA rated securities issued by Public Financial Institutions (PFIs) and Public Sector Banks) should not exceed 30% of the net assets of the scheme. It is also required that existing schemes shall comply with the aforementioned requirement within a period of one year from the date of issue of the circular, during which period, total exposure of existing debt schemes of mutual funds in a particular sector should not increase from the levels existing (if above 30%). The new SEBI guidelines on sectoral investment caps for funds could impact funding costs for Housing Finance Corporations (HFCs) and Non Banking Financial Companies (NBFCs) adversely. Long Term FMPs have been a route for the NBFC sector to raise medium to long-term funds at attractive rates from the bond markets. Consequent to current guidelines on sectoral cap, the portfolio construction and consequently funding to the NBFCs would witness a moderate change.

The Ministry of Finance may lift the restrictions on central public sector undertakings to invest in mutual funds floated by privately-held asset management companies. A committee appointed by the finance ministry, which is looking into investment of surplus cash by state-owned companies, may reverse an earlier order by the Department of Public Enterprise (DPE), which said such funds should be invested only in funds managed by public sector companies. The DPE, in a circular in 2007, had given permission to Navratnas and Miniratna CPSEs to invest in SEBI-regulated public sector mutual funds. The department, which functions under the Ministry of Heavy Industries, in subsequent orders clarified that large PSUs may only invest in SEBI-registered mutual funds, in which government or public sector banks hold more than 50% equity stake. AMFI has been negotiating with the finance ministry and DPE on behalf of privately-held fund houses, which are eager to manage the PSU surpluses. AMFI has written to both the ministry and DPE to open up PSU investment surpluses to privately-held fund houses as well.

SEBI has issued a general order with rejection criteria for draft offer documents for the protection of interest of investors. According to SEBI, companies that have circular transactions to build up capital (issue of warrants with a buyback clause upon conversion to equity), unidentifiable ultimate promoters and non-compliance with regulations on promoter contribution would be rejected. In case of rejection of draft offer document, the communication in writing shall contain the reasons. Among the reasons to reject an offer document include vague issues which do not disclose the purpose of use of proceeds, create no tangible asset, entail set up of fixed assets pending requisite approvals and where the time lag between fund-raising and deployment is unreasonably long. Those issues would also get rejected where business model of an issuer is exaggerated, complex or misleading and the investors may not be able to assess the risks associated with such business models. Those offer documents would also get refused where scrutiny of Financial Statements shows; (i) Sudden spurt in the business just before filing the draft offer document and reply to clarifications sought is not satisfactory. This will include spurt in line items such as Income, Debtors/Creditors, intangible assets, etc. (ii) Qualified audit reports or the reports where auditors have raised doubts / concerns over the accounting policies. This would also be applicable for the subsidiaries, joint ventures and associate companies of the issuer, which significantly contributes to the business of the issuer. This would also be applicable for the entities where the issue proceeds are proposed to be utilized. (iv) Change in accounting policy with a view to showing enhanced prospects for the issuer in contradiction with accounting norms. (iii) Majority of the business is with related parties or where circular transactions with connected / group entities exist with a view to show enhanced prospects of the issuer.  SEBI will put a list of rejected documents on its Website, along with details of the issuers, merchant bankers, and reasons for rejection. The order comes into effect immediately. 

AMCs get time till October 31, 2012 to inform all their investors who will get affected due to SEBI regulation on implementing single plan structure. SEBI has acceded to AMFI’s request to allow fund houses to implement discontinuance of existing SIPs, STPs, and dividend reinvestments under schemes, which run separate plans for retail and institutional clients from November 1, 2012 instead of October 1, 2012.

A large number of employees and relationship managers of banks advising mutual funds to clients will now get a unique identity number. SEBI has allowed AMFI to assign a unique identity number to employees of distributors advising investors till October 31 2012, instead of its original deadline of October 1, 2012. It has also allowed AMFI to implement the new change in transaction charges from November 1, 2012.

A unified regulator will cover mutual funds, insurance, pension, and the commodities markets. The Financial Sector Legislative Reforms Commission (FSLRC), chaired by S N Srikishna in its approach paper has proposed setting up a Unified Financial Agency (UFA).  Banking will not be under the purview of this unified proposed regulator. The financial sector is regulated by eight sector specific regulators like RBI, SEBI, FMC, IRDA, PFRDA, SAT, DICGC, and FSDC. The proposed regulator will cover mutual funds, insurance, pension, and commodities. The committee has recommended setting up the following structures:

• An independent debt management office
• A unified financial regulatory agency, which enforces the consumer protection law and micro-prudential law in all finance other than banking and payments
• The Financial Stability and Development Council (FSDC)
• The Financial Redressal Agency (FRA), which addresses consumer complaints across the entire financial system
• The Financial Sector Appellate Tribunal (FSAT), which hears appeals against all financial regulatory agencies
• A resolution agency which implements the proposed law on resolution of financial reforms
• The Financial Stability and Development Council (FSDC) 

FSLRC was formed to review the legal and institutional structures of the financial sector to make them in tune with the contemporary requirements of the sector.

SEBI recently decided to frame guidelines for investment advisors, after consulting other regulators like RBI, IRDA and PFRDA. To provide advice to investors in financial products, investment advisors need to have a good credit history. The move is aimed to protect the interest of investors in stocks and other capital market segments. The SEBI board recommended a number of measures in its draft regulations, including the requirement of a credit report or score from CIBIL (Credit Information Bureau (India) Ltd), and details of the research facility to be submitted by the entities seeking to become investment advisors. The draft regulations required the entities seeking to get registered as investment advisors to submit details of their data processing capacity. Instead, they would now be required to submit details of their in-house and other research capabilities. The investment advisors in their applications would be required to submit a credit report / score from the CIBIL. In the original draft regulations, the advisors were required to submit references from senior two bank officers. The draft regulations were presented in August 2012; the final regulations would be notified soon after adding the proposed changes. The new regulations would now come into force three months after the regulator’s notification. These regulations make it mandatory for investment advisors to get registered with SEBI subject to certain exceptions. 

Reliance Capital Asset Management (RCAM) expects the mutual fund industry in India to grow to Rs 20 lakh crore by 2020 on the back of regulatory changes and shift in investors' savings pattern. RCAM has about 12% market share in the mutual fund industry, which is pegged at Rs 7.53 lakh crore at present, making it the second largest fund house in the country. At present, bank deposits account for 56% of the total financial household savings and RCAM expects about 5-10% of bank investors to shift to mutual funds during the period. The shift from physical assets (like gold) to financial assets (like gold ETF and funds) would contribute about Rs 60,000-Rs 90,000 crore to the mutual fund industry. Due to the change in regulatory environment to manage pension and insurance assets, the mutual fund industry expects an increase of 2-7% in the overall growth of the sector. This could add additional Rs 5 lakh crore to Rs 7 lakh crore in the next 5-7 years for the industry.