FUND FULCRUM (Contd.)

April 2013

Domestic mutual fund houses are back in the game. After losing to their foreign counterparts (having presence in India) for two years, local mutual funds did better in terms of a rise in their assets under management in 2012-13. The year gone by, which proved to be one of the toughest periods for the sector, saw local players gain 23.5% in their assets, to Rs 7.24 lakh crore. This has surpassed the AUM growth of foreign entities, which could manage a rise of 17.6% during FY13. The sector’s average growth was 22.8%.

With a higher incentive to sell schemes in smaller towns and a sizeable corpus to spend on investor awareness, fund houses are making efforts to expand their reach beyond the top 15 cities. According to the latest AMFI data, Mumbai continues to be the largest source of the mutual fund industry’s assets at 43%, followed by Delhi at 15%, Bangalore at 6%, and Chennai and Kolkata both accounting for 5% market share each. However, the market share of Mumbai dropped from 49% in September 2011 to 43% as on March 2013. Currently, the top 15 cities account for nearly 87% of the industry’s AUM. Nearly 5% of industry’s assets are concentrated in the next top 20 cities (those beyond top 15). Out of the Rs 7 lakh crore assets managed by the industry, roughly 43% or Rs 3.01 lakh crore of assets come from Mumbai. 70% of the Rs 7 lakh crore industry’s AUM consists of income and liquid fund assets. Some top AMCs are planning to set up shop in B-15 towns while others are exploring a combination of branch expansion and roping in business representatives.

Regulatory Rigmarole

Market regulator SEBI has done away with filing physical documents to KYC Registration Agencies (KRAs) by amending its KRA regulations. Mutual fund distributors can now upload the KYC details on the systems of KRAs and furnish the scanned images of the KYC documents to the KRA and retain the physical documents with them. However, mutual fund distributors will have to submit the physical KYC documents as and when demanded by KRAs. The move is likely to bring operational ease to all intermediaries. Investors can check their KYC status on the websites of KRAs. SEBI has granted registrations to five KRAs so far. The KRAs are supposed to maintain and share client data among themselves. Mutual Fund distributors are still waiting for all the KRAs to establish interconnectivity among themselves, as KYC done with one KRA is not reflected in the systems of another KRA.

Nominees of mutual fund distributors can now get commissions on ongoing SIP transactions and they need not hold ARN license. In a circular issued on March 28, 2013, AMFI has said that the nominees will also be entitled to get trail commissions on ongoing SIP installments even after the death of the ARN holder. AMFI has clarified that no new systematic transactions or changes to existing systematic transactions can be registered under the ARN code of the deceased distributor. In cases where an ARN holder has procured business before the demise and has yet not received commission from an AMC, commissions will be paid to the legal heir or the nominee till the time the ARN code of the deceased distributor is not changed by the investor.

AMFI has extended the deadline for completing the process of issuing employee unique identity number (EUIN) to June 1, 2013. However, the deadline for transactions originating from SMS, stock exchange platform, ATM, call center has been extended to August 1, 2013. AMCs shall highlight in the KIM the importance of providing EUIN, particularly in advisory transactions, and state that EUIN will assist in tackling the problem of mis-selling even if the employee/relationship manager/sales person leaves the employment of the ARN holder/sub broker.

Capital market regulator SEBI could issue guidelines to companies on use of Twitter, Facebook, and other social media for disseminating information to clients and shareholders, following the lead of its American counterpart, the Securities Exchange Commission (SEC). Further, the Indian regulator will soon hire staff to sift through social media sites and blogs to unearth tips that could impact stock price before they have been disclosed through official channels. On April 2, 2013 SEC issued rules on use of social media by companies for disseminating non-public material information. The provisions for the same regulations (similar to SEC) are contained in SEBI's Prohibition of Insider Trading Regulations, under Schedule II, which spells a Code of Corporate Disclosure Practice. The broad rules set by SEC could be adopted by SEBI.

According to SEBI, private placement to less than 50 investors has been permitted as an alternative to new fund offer to the public, in case of infrastructure debt funds (IDF). IDFs, which can be set up like mutual funds, can invest funds collected for their schemes in bonds of public financial institutions and infrastructure finance companies. In case of private placement, the mutual funds would have to file a placement memorandum with SEBI instead of a scheme information document and a key information memorandum. However, all the other conditions applicable to IDFs offered through the NFO route like kind of investments, investment restrictions, etc. would be applicable to IDFs offered through private placement. The asset management companies should ensure that the placement memorandum is uploaded on their websites after allotment of units, and on the website of a recognized Stock Exchange, where it is proposed to be listed, at the time of listing of the scheme. Further, the strategic investors in the IDF has been expanded to include FIIs registered with SEBI which are long term investors subject to their existing investment limits. The categories of FIIs designated as long-term investors only for the purpose of IDF include foreign central banks, governmental agencies, sovereign wealth funds, international organisations, insurance funds and pension funds.

Distributors of Indian mutual funds abroad are currently exempted from registration, certification, and the Know Your Distributor (KYD) process. While AMFI registration is not necessary as per SEBI guidelines, the ARN committee has suggested that overseas distributors may be requested to register with AMFI for tracking and industry MIS (Management Information System) purposes. ARN Committee is in the process of finalising suitable guidelines in this regard. An earlier letter from AMFI had recorded a relaxation in guidelines for overseas distributors. Overseas distributors did not need a certification from the National Institute of Securities Markets (NISM) or AMFI registration. The exemption had originally been given on account of logistical difficulties involved in registration of overseas distributors.

The Financial Sector Legislative Reforms Commission (FSLRC) has recommended what can be called a changeover from an area-based division of regulators to a task-based division. Today, each agency like the SEBI or the IRDA or the FMC looks after one type of financial service or one area. In the FSLRC’s recommendations, this would be replaced by a horizontal structure whereby the basic regulatory and monitoring functions of all areas would be done by a Unified Financial Agency (UFA). All consumer complaints, regardless of the area, will be handled by a Financial Redressal Agency (FRA). There will be a single tribunal, the Financial Sector Appellate Tribunal (FSAT), which will hear appeals regarding the entire sector. There are also three other agencies in the recommendations, along with the Reserve Bank of India, which will continue to oversee banking. This new horizontal structure serves the interests of the consumers of financial services (be they individuals or businesses) much better. For one, it should eliminate regulatory arbitrage. SEBI, IRDA, FMC, and PFRDA etc could easily continue operating as isolated departments of a nominally unified financial regulator. An external agency that responds to consumer complaints could do little else but respond on a case-by-case basis. Still, if these recommendations are implemented, it would be a huge step forward. Of course, that is a big ‘if’. Building a new structure involves tearing down many old ones and that never comes easy in the government.