Monday, May 29, 2017

May 2017

The fourth largest fund house in terms of AUM, Birla Sun Life has received highest net inflows of close to Rs.40,000 crore in April-December 2016, according to the latest SEBI data. The inflows increased by 202% or by Rs.26,609 crore compared to the corresponding period last year. HDFC Mutual Fund closely followed Birla Sun Life Mutual Fund with inflows of Rs.37,619 crore in April-December 2016, an increase of Rs.23,256 crore or 162% in a year. In terms of percentage, DHFL Pramerica Mutual Fund witnessed the highest growth. The net inflows of the fund house grew from just Rs.19 crore to Rs.1500 crore in April-December 2016. Last year has been a year of transformation. During this time, DHFL Pramerica AMC acquired Deutsche’s Indian asset management business after which they have started building their business. SEBI data shows that top ten fund houses in terms of AUM witnessed inflows during April-December 2016. Other than that, Invesco Mutual Fund and BOI AXA Mutual Fund also witnessed a substantial rise in inflows. Emerging fund houses witnessed net outflows in April-December 2016 with Edelweiss Mutual Fund and Taurus Mutual Fund recording the highest net outflows among emerging fund houses. Edelweiss Mutual Fund saw an outflow of Rs.1,049 crore during Apr-Dec, which led to a 227.46% decline in the net inflows from the previous year. Edelweiss Mutual Fund acquired JP Morgan Mutual Fund last year. Taurus Mutual Fund saw outflow of Rs.985 crore. PPFAS Mutual Fund, IIFL Mutual Fund, HSBC Mutual Fund, Shriram Mutual Fund and Sahara Mutual Fund were the other emerging fund houses that witnessed outflows during the same period.

Regulatory Rigmarole

Investors will be permitted to purchase mutual funds worth up to Rs 50,000 through digital wallets. Investments up to Rs 50,000 per mutual fund per financial year can be made using e-wallets, while redemptions of such investments can be made only to the bank account of a unit holder. E-wallet issuers would not be permitted to offer any incentive such as cash back, directly or indirectly, for investing in mutual fund scheme through them. Besides, the e-wallet's balance loaded through cash or debit card or net banking can only be used for subscription to mutual funds schemes. Balance loaded through credit card, cash back, promotional schemes would not be allowed for subscription to mutual funds. The limit of Rs 50,000 would be an umbrella limit for investment by an investor through e-wallet and/or cash, per mutual fund. Besides, mutual funds and asset management companies have been allowed to provide instant online access facility to resident individual investors in liquid schemes. In this case, the limit would be up to Rs 50,000 or 90 percent of folio value, whichever is lower. For providing such facility AMCs would not be allowed to borrow. Liquidity is to be provided out of the available funds from the scheme and AMCs to put in place a mechanism to meet the liquidity demands. This facility can also be used for investment in mutual funds through tie-ups with payments banks provided necessary approvals are taken from the RBI. Currently, any scheme providing the facility would reduce the limit to Rs 50,000 immediately.

With an aim to bring in greater transparency in dealings of mutual funds, markets regulator SEBI asked mutual fund houses to disclose to investors the remuneration of employees earning Rs 1 crore in a financial year. Like listed companies, mutual fund houses will also have to disclose the annual salary of chief executive officer (CEO), chief investment officer (CIO), chief operating officer (COO) and any other top official and also the ratio of CEO's remuneration to median employee salary. Besides, mutual fund's total Average Assets Under Management (AAUM), as well as debt and equity AAUM and rate of growth over last three years would have to be disclosed. The fund houses will have to disclose these information within one month from the end of a financial year starting with 2016-17. To promote transparency in remuneration policies so that top executive remuneration is aligned with the interest of investors, fund houses will have to make the disclosures pertaining to a financial year on its website under a separate head 'remuneration'. Under this, mutual fund houses will have to disclose name, designation and remuneration of CEO, CIO and COO as well as salaries drawn by top ten employees in terms of remuneration for that financial year. Besides, name, designation and remuneration of every employee whose total pay package is equal to or more than Rs 1.02 crore for that financial year need to be disclosed. Salary details of part-time employees, who received at least Rs 8.5 lakh per month during their stint with the company should also be disclosed.

Complying with the latest Finance Ministry circular on FATCA, AMFI has asked fund houses to freeze non-FATCA compliant accounts with immediate effect. This means, non-FATCA compliant investors cannot execute fresh mutual fund transactions. Earlier, the ministry had directed fund houses to comply with FATCA regulations before April 30, 2017. Foreign Account Tax Compliance Act (FATCA) is an anti-tax evasion law under which fund houses are required to report information on US investors to US IRS (Internal Revenue Service) through CBDT. India agreed ‘in substance’ to FATCA by signing an Intergovernmental Agreement Model 1 (IGA-1) with the US, in effect from July 9, 2015. Simply put, the legislation is meant to prevent wealthy US individuals from parking money overseas to avoid paying taxes. In a communication sent to fund houses, AMFI has asked them not to entertain any financial service request such as redemption, lump-sum investment, etc. from non-FATCA compliant investors. AMFI has, however, directed fund houses to allow such investors to continue with their SIP/SWP/STP until expiry. Such investors cannot redeem their mutual fund investments. Similarly, fund houses can process payments arising out of dividend or maturity of close-end funds, AMFI added. In addition, AMFI clarified that fund houses can process non-financial service requests such as registration or change in nomination, bank account, mobile number and email address of non-FATCA compliant investors. Non-FATCA compliant investors can still update their FATCA information through all registrar and transfer agents by submitting a self-declaration form. Investors who have invested in mutual funds after August 31, 2015 are FATCA compliant since fund houses insist investors submit a self-declaration form before initiating any transaction. The problem is with the accounts opened between July 1, 2014 and August 31, 2015. The move is therefore likely to affect large fund houses (top 15 AMCs in terms of AUM) as they have old assets.

The Securities and Exchange Board of India has requested the Finance Ministry to allow bank KYC as proof for making mutual fund investments. A slew of fund houses had requested SEBI Chief to simplify onboarding of investors by allowing bank KYC and Aadhaar as valid identification to invest in mutual funds. Currently, a PAN card is required, along with an address proof and a cancelled cheque to be KYC-compliant. Similarly, for opening a bank account, PAN card and address proof is required. But, Aadhar card holders have already undergone In Person Verification (IPV). So, there is no need to do KYC and IPV again. At present, a new investor has to wait for nearly a week after submitting the above documents to invest more than Rs 50,000 in mutual funds. The ones who invest in mutual funds have a bank account so allowing bank KYC and Aadhaar as valid proof of KYC and IPV would make KYC procedure smoother and easier, which will reduce turnaround time to onboard a new client. Although the government had launched Central KYC last year to do away with the requirement of doing multiple KYC, it will take time to get operational.

SEBI has allowed mutual funds, AIFs and PMS to invest in securities of International Financial Services Centres (IFSCs). An IFSC does not follow domestic economic law; instead, they follow international practices. IFSCs deal with flows of finance, financial products and services across borders. Companies setting up offices in IFSCs cannot deal in local currency. In addition, IFSCs can provide fund raising services for individuals, corporations and governments and wealth management services to foreign investors. In India, Gandhinagar has one IFSC called Gujarat International Finance Tec-City (GIFT). Fund houses can now invest in securities, which are listed in IFSCs, securities issued by them and securities issued by the companies incorporated in India. Experts say that the move may help AMCs. Only established companies set up offices in FPSCs. In future, stock exchanges having presence in IFSCs may list companies having businesses in IFSCs helping AMCs to invest in such companies to diversify the scope of investments. Currently, fund houses can accept investments from foreign investors through FPI route. In addition, they can invest in securities of foreign companies but such scrips are treated as debt securities for taxation purpose. 

There is good news for the mutual fund industry. The participation of retail investors in the mutual fund industry has increased by 50% to reach Rs.9.28 lakh crore. Retail AUM now constituted almost half of the overall AUM of Rs.19.28 lakh crore. Rising retail AUM is a healthy sign for the industry as retail investors stay put for long term compared to institutional investors. Of the Rs.9.28 lakh crore retail AUM, Rs.2.33 lakh crore or 25% came from B15 cities as on April 2017. Another good sign for the industry is increasing participation of retail investors in equity funds. The AUM in retail investors in equity funds increased by 50% year-on-year to Rs.6.62 lakh crore in April 2017 shows AMFI data. With this, retail equity AUM now constitutes 94% of the overall equity AUM of the mutual fund industry. Equity funds have done well over the years. In addition, people are confident because of GST and other economic reforms.  The confidence of the retail investors can be seen from the fact that a lot of investments is coming through SIPs in equity funds. The investor appetite for equities can also be derived from the fact that the number of folios under equity schemes increased by 17% from 3.87 crore folios in April 2016 to 4.51 crore in April 2017. Overall, the retail folios for the month stood at 5.46 crore.

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