FUND FULCRUM (contd.)

June 2020

Mutual Fund industry’s top 20 fund houses have Rs 9.70 lakh crore in equities, according to a report by Motilal Oswal Financial Services. The total equity value of the top 20 fund houses decreased 1.6% (month on month) in May 2020, as against the Nifty’s decline of 2.8%. Among all the fund houses, SBI MF has the highest exposure to equities at Rs 1.70 lakh crore in May 2020. Next in the list is HDFC MF with Rs 1.19 lakh crore, closely followed by ICICI Prudential MF at Rs 1.17 lakh crore, Nippon India MF at Rs 80,500 crore and UTI MF at Rs 66,900 crore. Apart from the top 5 fund houses, 3 other fund houses - Aditya Birla Sun Life, Axis and Kotak - have more than Rs 50,000 crore assets in equities. ABSL MF’s holding in equities stood at Rs 66,400 crore, Axis MF’s at Rs 58,300 crore and Kotak MF’s at 58,200 crore. Among the top 10 funds, the highest decrease was seen in HDFC MF at -3.6%, Nippon India MF at -3.6%, Franklin Templeton MF at -2.4%, SBI MF at -2.2% and Axis MF at -1.9%.

The latest AMFI data shows that the industry has added over 8 lakh new folios in B30 cities during lockdown i.e. April 2020 and May 2020. The total folio count in B30 went up to 3.77 crore in May 2020 from 3.69 crore in March 2020. Similarly, the mutual fund industry has added 5 lakh new folios during lockdown in T30 cities i.e. from 5.28 crore to 5.33 crore. This indicates that new folio addition in B30 cities is higher than T30 cities. This can be attributed to significant contribution from banks and national distributors in B30 cities. Lockdown norms were not so strict in most B30 cities. In addition, banks and national distributors were allowed to remain operational with less capacity. Also, many distributors continued their office in less affected cities. Many distributors in B30 cities relying on physical transactions have started using online platforms to execute mutual fund transactions during the lockdown. To top it all, the recent market correction has also encouraged many investors to invest in equity funds.

Piquant Parade

UTI AMC has received approval from SEBI to launch an initial public offer (IPO). The public offer is expected to raise over Rs 3,000 crore. UTI AMC will be the third fund house to get listed on BSE and NSE after HDFC AMC and Nippon India MF. The AMC’s IPO comprises sale of 3.90 crore equity shares by existing shareholders, which includes SBI, LIC, Bank of Baroda (BoB), Punjab National Bank (PNB) and T Rowe Price International. SBI, LIC, PNB and BoB hold 18.5% stake each in UTI AMC. The US-based T Rowe Price holds 26% stake in the AMC. SBI, LIC and BoB are planning to sell 1.04 crore shares each. PNB and T Rowe Price International are planning to offload 38.03 lakh shares each. In December 2019, SEBI had asked SBI, LIC and PNB to reduce their stakes to below 10% in UTI AMC by December 2020. According to SEBI's regulations, a shareholder or a sponsor owning at least 10% in an AMC is not allowed to have 10% or more stake in another mutual fund house in India.

Regulatory Rigmarole

In a move to provide exit option to investors of wound up schemes, SEBI has asked fund houses to list units of wound up schemes on stock exchange platforms in line with units of close end schemes and segregated portfolio. With this, Franklin Templeton will have to list units of wound up schemes on stock exchanges. In a circular, SEBI said, “As per MF regulations, there are several steps envisaged with respect to winding up of mutual fund schemes before the scheme ceases to exist. During this process, such units can be listed and traded on a recognized stock exchange, which may provide an exit to investors. Accordingly, the units of mutual fund schemes which are in the process of winding-up in terms of Regulation 39(2) (a) of MF Regulations shall be listed on recognized stock exchange, subject to compliance with listing formalities as stipulated by the stock exchange. However, pursuant to listing, trading on stock exchange mechanism will not be mandatory for investors, rather, if they so desire, may avail an optional channel to exit provided to them.” SEBI has asked fund houses, RTAs and exchange platforms to put in place mechanism for order placement, execution, payment and settlement. In addition, the market regulator has clarified that AMC sponsors, trustees and employees cannot transact in the units of wound up schemes. This exit option would not make any difference as investors may not find buyers for units of wound up schemes in stock exchange platforms. There is hardly any transaction on stock exchanges for MF units. Even units of close ended schemes are available at a discount due to demand and supply gap. In addition, the requirement of having demat account to buy such units makes it even more unattractive.

SEBI has said mutual funds can invest additional 15 percent of AUM in G-Secs & T-Bills in corporate bond, banking & PSU and credit risk funds. G-Secs & T-Bills are considered to be safer and most liquid form of instrument. The regulator has said that such additional investment in G-secs or T-Bills is optional for asset management companies. SEBI aims to make the portfolio of these three categories of funds liquid given that the fund houses witnessed tremendous redemption pressure particularly after Franklin Templeton Mutual Fund shut its six schemes creating panic. Fund managers said the credit risk funds and corporate funds categories was reeling under the stress of redemptions as most of the fund houses had their underlying assets deployed in highly illiquid corporate bonds. SEBI has also revised the scheme characteristic for all three schemes. For Corporate Bond Funds, SEBI said minimum 65 percent of total assets must be in AA+ rated papers and above rated papers. Earlier, the minimum limit was 80 percent. Similarly, for credit Risk funds minimum 50 percent of total assets should be in AA & below rated corporate bonds. Earlier, credit risk funds were allowed minimum investment of 65 percent in AA-rated and below-rated papers. The objective of the credit risk fund is to generate income investing predominantly in AA and below rated corporate bonds while maintaining the optimum balance of, safety and liquidity. In case of Banking & PSU debt funds, the minimum investment in debt instruments of banks, public sector undertakings, public financial institutions, and municipal bonds has been reduced to 65 percent, from 80 percent, earlier. Mutual funds are only allowed these changes for a period of three months starting from May 18, 2020. However, fund houses want these changes to be allowed permanently. It is difficult to sell corporate bonds and create cash in case of large redemptions even in normal times. And in situations like this it becomes even more challenging to find liquidity in corporate bonds. Thus it makes sense to have larger exposure to government securities. Liquidity problem with lower rated corporate debt has been ignored for very long time. This is now haunting the entire debt mutual fund space. SEBI should re look the categorisation of debt funds. In the current structure funds are categorised based on duration and credit risk separately. There should be more holistic approach towards both the risk factors along with their liquidity profile.

Market regulator SEBI said mutual funds cannot invest in physical goods barring gold through gold exchange traded funds (ETFs). Exchange traded commodity derivatives (ETCDs) having gold as the underlying asset would be considered as 'gold-related instrument' for gold ETFs. "No mutual fund schemes shall invest in physical goods except in 'gold' through Gold ETFs," the Securities and Exchange Board of India (SEBI) said in a circular. However, as mutual fund schemes participating in ETCDs may hold the underlying goods in case of physical settlement of contracts, in that case the mutual funds will have to dispose of such goods from the books of the scheme at the earliest. With regard to physical gold and silver, SEBI said such goods will have to be disposed of not exceeding 180 days from the date of holding of such physical goods. For other goods, funds need to dispose them by the immediate next expiry day of the same contract series of the commodity. "However, if final expiry date of the goods falls before the immediate next expiry day of the same contract series of the said commodity, then within 30 days from the date of holding of physical goods," the regulator noted.

SEBI has asked fund houses and mutual fund distributors to get registered with KYC user agencies (KUAs) to do Aadhaar based eKYC of their clients. With this, AMCs and distributors will be required to become sub-KUA with any of the eight KUAs – BSE, NSE, CDSL India, CDSL Ventures, NSDL Database, NSE Data and Analytics, CAMS Investor Services and Computer Age Management Services. SEBI said, “The SEBI registered intermediaries / mutual fund distributors, who want to undertake Aadhaar authentication services through KUAs, shall enter into an agreement with KUA and get themselves registered with UIDAI as sub-KUAs. The agreement in this regard shall be as prescribed by UIDAI. Further, the KUAs and their Sub-KuAs shall follow the process as detailed in SEBI circular dated Nov 05, 2019 and as may be prescribed by UIDAI from time to time.” Earlier, many fund houses used to offer Aadhaar based eKYC. However, most of them have discontinued Aadhaar based eKYC due to stringent norms by UIDAI to become KUA and sub-KUA. Currently, many fund houses offer virtual IPV based video KYC to on board new clients due to two primary reasons – no limit on investments and easy norms prescribed by SEBI. In fact, two weeks back, SEBI has asked fund houses to ensure that they are ready with necessary infrastructure to verify KYC documents online and facilitate video in person verification. Distributors should rely on virtual IPV through video KYC service offered by AMCs to do KYC of their clients instead of Aadhar based eKYC. Almost all large AMCs offer these services to distributors. In fact, you can tie up with CAMS or Karvy Fintech directly to offer video KYC services. In a video KYC, you need to upload KYC documents of your clients such as photograph, PAN card, address proof and a cancelled cheque on AMC/RTA website. After uploading these documents, investors need to start real-time video recording using the front camera on their smartphone or the computer’s webcam and display the hard copies of all the required documents. Now, to complete the process, investors have to say ‘Hi’ and in some cases their date of birth during the video recording. If this verification fails, most video KYC facilitators will call your clients to do it manually through skype.

In a move to encourage ‘skin in the game’, SEBI has directed fund houses to invest 1% of the total funds raised or Rs.50 lakh, whichever is lesser in growth option of their NFOs. Interestingly, fund houses cannot withdraw this corpus till the closure of their scheme. In a press release, SEBI said, “The sponsor or asset management company is required to invest not less than one percent of the amount which would be raised in the new fund offer or fifty lakh rupees, whichever is less in such option of the scheme as may be specified by the board.” SEBI further said, “In this regard, it has been decided that the referred investment shall be made in growth option of the scheme.  For such schemes where growth option is not available the  investment  shall  be  made  in  the  dividend  reinvestment  option  of  the  scheme.  Further, for such schemes where growth option as well as dividend reinvestment option is not available the investment shall be made in the dividend option of the scheme.” This has come into effect immediately.

Fund houses have discontinued accepting purchase transactions in mutual funds through debit cards. This has come after SEBI has pointed out the issues regarding verification of such transactions. While many fund houses have discontinued facilitating such transactions, a few fund houses which are currently offering this facility will soon stop it. The key reason for discontinuation of this facility is difficulty in verification of third party transactions. We do not have mechanism to find out if the debit card transaction is done by the investor by himself. On the other hand, transaction through net banking requires authentication to execute transaction and hence, all AMCs facilitate transaction through it. As per regulation, mutual fund purchases have to be done through own account of an investor and third party payments are strictly not allowed.

With relaxation in lockdown norms, RTA agents – CAMS and KFinTech have resumed offices in most locations including large cities like Mumbai, New Delhi, Chennai, Kolkata, Ahmedabad, Bangalore and Hyderabad with safety precautions and minimal staff. In addition, many fund houses have reopened their offices in green and orange zones. With this, distributors relying on physical transactions have resumed their business. However, RTA agents have been witnessing huge surge in footfall by distributors closer to the cut-off time, which increases the risk for distributors and employees of RTA agents. Keeping this in mind, CAMS has requested distributors to submit MF application ahead of cut off time to avoid last minute overcrowding and maintain social distancing norms. Currently, the cut off timing for MF transactions is 1 pm for subscription of all mutual fund schemes.

People associated with mutual funds should not worry about their future growth as this business would emerge much stronger in a post covid-19 era. The mutual fund business is most resilient compared to other businesses like travel, hospitality, manufacturing and automobile industry. For instance, hotels and airlines have seen little or no earnings due to the lockdown. However, the MF industry would continue to get new business as many people have realized importance of financial savings and investments. In its quarterly estimates of household financial assets and liabilities, RBI has found that Indian households have been shifting their financial savings to mutual funds and insurance in the recent quarters. RBI said that while both financial assets and liabilities of household remain bank-centric, there was some shift in favour of mutual funds and insurance in recent quarters. RBI further said that this information on movement in financial assets and liabilities of household can provide a better understanding of the dynamics of growth in the Indian economy.