FUND FULCRUM (contd.)

May 2016

Piquant Parade

Allianz decided to walk away from the alliance with Bajaj because Bajaj did not honour a contract that allowed the German firm to buy more stake in the joint ventures at a price decided upon about a decade and half ago. Bajaj cited a central bank rule that prescribes transfer of stake at market-determined price to reject Allianz's demand. According to local rules, a foreign insurer that exited India will have to wait for two years to form a new joint venture in the country. However, there is no bar on buying a stake in an existing company. Bajaj owns 74% of their two JVs, Bajaj Allianz Life Insurance and Bajaj Allianz General Insurance. Bajaj Life is valued around Rs 11,500 crore and the general insurance venture about Rs 9,200 crore. At this valuation, Bajaj may have to pay around Rs 5,500 crore to buy Allianz's 26% stake in the two joint ventures. As per a 2001 agreement, the German company has a call option to increase its stake in the life insurance joint venture to 74% from 26% at a pre-determined price if allowed under laws and subject to regulatory approvals. If the option is exercised by July 30, 2016, the pre-determined price will be Rs 5.42 per share, plus interest at 16 per cent per annum from July 31, 2001, to the date of payment. After 2016, Allianz would have to pay the market price. 

Regulatory Rigmarole 

Market regulator Securities and Exchange Board of India (SEBI) is considering doing away with the yearly investment limit of Rs 50,000 per fund house through the online route. In addition, KYC registration agencies (KRAs) are developing a system to accept applications online without the need of a PAN card. According to SEBI guidelines released two months ago, investors can fulfil KYC norms online by using their Aadhaar card only. But, the online KYC process at mutual fundhouses is still based on PAN card details. Five KRAs are registered with SEBI at present. Aadhaar as a proof of residence fulfils all KYC requirements that we normally have. Doing away with the limit for investment will ease entry of new investors to the sector and benefit all stakeholders. The issue assumes significance since the lower House (or Lok Sabha) of parliament had passed the Aadhaar (targeted delivery of financial and other subsidies, benefits, and services) Bill two months ago. The Bill is aimed at better targeting of subsidies and identifying a person receiving a subsidy or service. For online KYC through Aadhaar, the verification process is completed by entering a one-time password (OTP) received on the investor's mobile or e-mail address registered with UIDAI. There are two conditions for online KYC which is based on Aadhaar. One, the amount invested should not exceed Rs 50,000 per financial year per mutual fund. Two, the payment has to be through an electronic transfer from the investor's bank account. Those using the offline route for investments in mutual funds are required to submit documents other than Aadhaar, such as PAN card, for KYC. Investors have to submit their documents at a point of service, or KRA, and do an in-person verification as well. However, PAN is not required for systematic investment plans, or SIPs that do not exceed Rs 50,000 in a financial year (called micro-SIPs). In this case, a copy of Aadhaar card, voter ID or driving licence needs to be submitted and cross-checked with the originals. KYC procedures for the capital market have already been streamlined and a single KYC can be used by all financial intermediaries including brokers and mutual funds.

Amid growing concerns around high frequency trading (HFT) or algorithmic (algo) trading, SEBI said that new regulations to ensure level-playing field and fair access will take shape before the end of the year. HFT refers to the use of electronic systems that can potentially execute thousands of orders on the stock exchange in less than a second, which gives them an advantage over conventional traders. To create a level-playing field and to tackle market-wide concerns emerging from the algo-trading segment, SEBI has been in talks with external advisers before finalizing regulations. Internally, the market regulator is debating options such as introducing speed bumps, order randomization, order bunching of trades and limiting access to co-location facilities. In addition, regulatory penalties on dubious algo trades may also be revised upwards to deter market players from placing orders that are manipulative in nature. Firms that have a high order-to-trade ratio would also be penalised to deter players from canceling orders. A number of algo traders are market makers and therefore have a high order-to-trade ratio. An estimated 20-30% of HFT players are providing market making and tend to have high order-to-trade ratio. Penalizing them may not serve an adequate purpose. One way of ensuring a level-playing field would be to make co-location facilities accessible to all brokers. Co-location gives considerable advantage to brokers. Due to high costs involved, the small brokers are not able to access it. Co-location involves setting up servers on the exchange premises. This reduces the time it takes for an order to travel to the exchange, giving them a speed advantage over those who are located farther away. The share of HFT trading as a percentage of overall trading has been growing consistently. In 2011-12, HFT orders as a percentage of overall orders in the cash equity segment were at 65%. This has gone up to 94% in 2015-16. HFT turnover as a percentage of overall turnover in the cash equity segment has gone up from 25% to 42% over the same period. In the equity derivatives segment, the percentage of HFT orders has gone up from 78% to 98% between fiscal 2012 and fiscal 2016.

SEBI has extended the implementation date for providing additional information in scheme information document (SID)/key information memorandum (KIM) till June 30, 2016. According to SEBI’s March 18 circular, fund houses were supposed to disclose this additional information from May 1, 2016.  Besides, they are to have a dashboard on their website which provides information on the performance, scheme AUM, investment objective, expense ratio, portfolio details, and the scheme’s past performance. Here is the additional information which AMCs will start providing from June 30, 2016 which will be a part of SID/KIM: The tenure for which the fund manager has been managing the scheme, along with the name of the scheme’s fund manager, scheme’s portfolio holdings (top 10 holdings by issuer and fund allocation towards various sectors), along with a website link to obtain the scheme’s latest monthly portfolio holding. In case of FoF schemes, expense ratio of underlying scheme, scheme’s portfolio turnover ratio, the aggregate investment made by AMC’s board of directors, concerned scheme’s fund manager and other key managerial personnel, illustration of impact of expense ratio on scheme’s returns. In addition, the regulator has clarified that this information has to be provided for all open-ended and close- ended schemes.

After SEBI asked fund houses to disclose the commissions of distributors in absolute terms in account statements, Securities and Exchange Commission (SEC) has introduced a similar rule in USA. The SEC has approved the recommendations of its Investor Advisory Committee in which it has asked US AMCs to disclose fees in dollar terms while issuing account statements to investors. SEC has moved a step further of SEBI by asking US AMCs to disclose the complete break up expenses charged to investors in absolute terms. All types of investment costs, including costs for advice and services as well as costs for investment products, affect the total amount accumulated by an investor in a long term investment. Because of the important role mutual funds play as long-term investments for individual investors, however, and because costs can vary greatly from fund to fund, providing clear disclosure of mutual fund costs has long been a priority.The Investor Advisory Committee recommends that the commission explore ways to improve mutual fund cost disclosures. The goal should be to enhance investors’ understanding of the actual costs they bear when investing in mutual funds and the impact of those costs on total accumulations over the life of their investment. In the short term, the Committee believes the best way to make investors more conscious of costs is through standardized disclosure of actual dollar amount costs on customer account statements. In addition, as part of a longer term effort to improve disclosures, we encourage the Commission to explore ways to provide context for cost information in order to improve investor understanding of the impact of those costs.