All you need to know about Sebi's market reforms

In a move to boost the capital market and the mutual fund industry, the Securities and Exchange Board of India (Sebi) has come up with a slew of measures to increase retail participation, give more flexibility to mutual funds and companies issuing initial public offers and encourage distributors.

After days of speculation, the regulator finally announced steps to get the mutual fund industry out of the woods by allowing higher charges towards expenses and better cost management. Some of these steps may, however, result in higher cost for mutual fund investors.

Fund houses can now charge a 0.20 percentage point higher fee (also called expense ratio) towards different expenses. This is to compensate them for forgoing the exit load, which was earlier used to pay for distribution and other costs.

The entire exit load will now be ploughed back into the scheme. Exit load is usually charged for redemptions within a year of investment. But some funds charge it for a longer period.

Mutual funds can also charge an additional 0.30 percentage point expense ratio for new inflows from Tier II and Tier III cities (other than top 15 cities) if 30 per cent new inflows come from these cities.  This is aimed at promoting mutual fund penetration in smaller towns and cities.

At present, mutual funds can charge up to 2.5 per cent expense ratio.

Sebi has also removed the sub-limits on expenses under different heads. At present, mutual funds can allocate a maximum of 1.25 per cent as fund management charge, 0.5 per cent as distribution charge, etc. However, with no sub-limits, they will be free to allocate the 2.5 per cent expense ratio the way they want to.

This is a pragmatic move, says Waqar Naqvi, chief executive officer, Taurus Mutual Fund.

The regulator has also exempted mutual funds from paying service tax. Now, the service tax (12.36 per cent) will be borne by investors.

However, to encourage direct investments, a lower expense ratio is proposed for direct investors.

In another important move, Sebi has proposed that units will be allotted at the net asset value of the day on which the payment is realised. This is for investments above Rs 2 lakh.

"Corporate investors usually make pay through cheques, which take at least a day to be encashed. However, they are allotted units at the NAV of the day on which the request is made, thus allowing them an extra day's benefit, at the cost of existing investors," explains Surjit Mishra, executive vice-president and national head, mutual funds, Bajaj Capital.

RETAIL PARTICIPATION IN IPOs
The capital market regulator has also announced measures to increase retail participation in the primary/IPO market.

Now, investors can apply for initial public offers (IPOs) through electronic mode as well. Stock exchanges have been asked to make application forms available on their websites. Brokers uploading the electronic applications form will be compensated by the companies.

To ensure allotment to more investors , it has been proposed that retail investors get a minimum number of shares irrespective of their application size. The minimum application size for all investors has also been increased to Rs 10,000-15,000 from the existing Rs 5,000-Rs 7,000.

"After the IPO application, retail investors were unsure of the allotment. As the minimum application size has been increased along with assurance that allotment will happen to the extent possible for all investors, interest in the primary market may be rekindled as many investors had turned cynical towards applying for good issues," says P Phani Sekhar, fund manager, PMS, Angel Broking.

To allow investors take more informed decisions, the regulator has said that the company issuing IPOs must announce the price band of the issue at least five working days before the issue opens as against two working days at present.

Easing the norms for follow-on public offers (FPO), Sebi has reduced the requirement of average free-float market capitalisation from Rs 5,000 crore to Rs 3,000 crore. Besides, to help companies comply with the 25 per cent minimum public shareholding norm, Sebi has allowed companies to do so through rights and bonus issues.

Change in issue size to the extent of 20 per cent of the original issue can be made without the need for re-filing with Sebi. This will save a lot of time and resources in mobilising IPO proceeds.

Source: http://businesstoday.intoday.in/story/sebis-mutual-fund-ipo-reforms-all-you-need-to-know/1/187300.html

Garnering 30% assets from smaller cities a tough task, say MFs

The permission to charge an additional 30 basis points (bps) as total expense ratio (TER) on sales beyond the top 15 cities may look attractive, but mutual fund industry executives have taken it with a pinch of salt.

“It’s an uphill task which demands concerted and sustained efforts,” say officials.

In its statement, the Securities and Exchange Board of India (Sebi) had said: “AMCs (asset management companies) will be able to charge 30 bps if the new inflows from these cities/ towns are minimum 30 per cent of the total inflows. In case of lesser inflows the proportionate amount will be allowed as additional TER.”

Barring a few top fund houses, most others do not enjoy widespread presence outside the top 10 cities. Moreover, according to the latest statistics, close to three-fourths of the overall industry’s assets pour in from the top five cities—Mumbai, Delhi, Bangalore, Kolkata and Chennai. And after including the next top 10 cities, the industry gets a whopping 87 per cent of its assets. (see table)

A day after Sebi made its announcements, industry executives said this was no big relief for the industry. Rather, they term measures “half-baked”.

According to Akshay Gupta, chief executive officer, Peerless MF: “Arguably, they (Sebi) could have done better. Present situation warrants well-defined steps to revive the sagging fortunes of the industry.”

Executives told Business Standard it was unlikely that fund houses immediately start opening branches or point of sales across the country to “push” mutual fund products. Potential investors in small towns are still interested in real estate and gold, they say. “What we can do is leverage on our tie-ups with national distributors, mainly banks. Fund houses may go ahead for tie-ups with banks to strengthen their distribution channels,” explained the chief marketing officer of a mid-sized fund house.

Jaideep Bhattacharya, managing director, Baroda Pioneer MF, says: “It’s not going to be easy going beyond the top 15 cities. It will take time as the industry needs to build up infrastructure and distribution networks, which require concerted efforts and continuous investor awareness. To start with, one may not have volumes, but the important factor is money inflow from the hinterland is stickier.”

Source: http://www.business-standard.com/india/news/garnering-30-assetssmaller-citiestough-task-say-mfs/483578/

UTI AMC shortlists 3 names for Chairman and MD position

UTI AMC, India's oldest asset management company with assets of around Rs 61,000 crore, could finally have a permanent boss after being headless for the last 18 months.

The AMC's board has recommended to its shareholders names of three candidates for the position of chairman and managing director, two persons familiar with the development told ET. The shortlisted candidates are AIG India chief executive and country head Sunil Mehta, senior advisor at McKinsey & Co in India Leo Puri, and Punita Kumar Sinha, former senior managing director of Blackstone Group's India-focused mutual fund.

A final decision will be taken by the five shareholders of UTI AMC - LIC, State Bank of India, Punjab National Bank, Bank of Baroda and T Rowe Price. The four Indian shareholders hold 18.5% each while the US-based T Rowe Price owns a 26% stake.

The board has also recommended the name of an internal UTI AMC executive as a fallback option if the shareholders do not agree on the three external candidates.

UTI Mutual Fund director Sachit Jain, who is part of the three-member search committee constituted by the board, said the board had sent the names of shortlisted candidates to the shareholders but declined to disclose their names. The UTI board chairman, PR Khanna, refused to comment and the three candidates, Puri, Mehta and Sinha, too, declined to comment.

Puri, the former head of McKinsey India, rejoined the consulting firm in December 2011 as senior advisor after serving a four-and-a-half-year stint as managing director of private equity major Warburg Pincus. He serves on the boards of Max India and Max Healthcare.

Mehta has been the country head and chief executive of AIG India and is responsible for all of its Indian businesses, including life and general insurance, financial services and investments. Prior to joining AIG, he was with Citibank for over 18 years.

Sinha, the daughter-in-law of former finance minister Yashwant Sinha, was in-charge of Oppenheimer's India-focused fund which was subsequently taken over by Blackstone. The fund with asset under management of about $1.22 billion was sold to Aberdeen Asset Management in December 2011.

UTI AMC, which runs India's fifth largest mutual fund, has not had a full-fledged chairman since UK Sinha left UTI to become the head of market regulator, Securities and Exchange Board of India in February 2011.

Sinha's departure was followed by an unseemly row between the finance ministry and T Rowe Price over the choice of his successor. While the finance ministry pushed for the appointment of Jitesh Khosla, a 1979 batch IAS officer and brother of Omita Paul, the powerful advisor of former finance minister Pranab Mukherjee, as the UTI AMC chairman, T Rowe Price insisted that a professional should be appointed.

Several permutations and combinations, including splitting the CMD's post into two, were discussed, but the deadlock could not be broken. A few board members also quit as UTI AMC slipped from fourth to fifth position in the mutual fund league table. Finally, earlier this year, Imtaiyazur Rahman was appointed interim CEO.

Once shareholders select and approve the name of the CMD, it will be ratified by the trustees of UTI.

Source: http://timesofindia.indiatimes.com/business/india-business/UTI-AMC-shortlists-3-names-for-Chairman-and-MD-position/articleshow/15400783.cms

Shriram Ramanathan to head L&T MF's Investment, Fixed Income

L&T Mutual Fund, offering services across the corporate, retail and infrastructure finance sectors, today said it has appointed Shriram Ramanathan as Head, Investment - Fixed Income. "I am pleased to welcome Ramanathan as the Head - Investment - Fixed Income at L&T Mutual Fund. He brings rich experience of over a decade in fixed income across both domestic and international markets. His appointment positions us well for future growth," L&T Finance Holdings Chairman and Managing Director Y M Deosthalee said. 

Prior to joining L&T Mutual Fund, Ramanathan was Portfolio Manager Fixed Income with Fidelity Worldwide Investment's India business. "Fixed income is a key asset class in India, and one of the central planks of L&T Mutual Fund's growth strategy. Current investment interest is high given the global macro environment, and the structural story seems to be excellent one given low penetration rates of fixed income investment products in India. I am delighted at the opportunity to be able to contribute to the expansion of the business here," Ramanathan said.

Source: http://ibnlive.in.com/generalnewsfeed/news/shriram-ramanathan-to-head-lt-mfs-investment-fixed-income/1037342.html

Steps to attract retail investors to MFs soon: FM

The government will unveil a slew of measures in the next few weeks to attract more people to invest in mutual funds, insurance policies and others, Finance Minister P Chidambaram said today.

"In the next few weeks, we will announce a number of decisions to attract more people to invest in mutual funds, insurance policies and other well-designed instruments," Chidambaram, who took over the reins of Finance Ministry last week for the second time in UPA government, said in a statement.

The Finance Minister has come out with a broad roadmap aimed at regaining the confidence of investors in the Indian economy.

The average asset under management (AUM) of the mutual fund industry has been falling in the last two years. The average AUM slumped to Rs 6,64,824 crore at the end of March 2012 and fall of five% last fiscal followed a decline of 11% in 2010-11 financial year.

Further, mutual fund industry's plans to launch pension products to attract retirement money is getting delayed due to taxation and other regulatory hurdles.

As part of efforts to woo investors into the capital market, the government in the 2012-13 Budget had announced Rajiv Gandhi equity scheme.

The scheme would provide 50% tax deduction to retail investors with annual income less than Rs 10 lakh, for investment up to Rs 50,000, with a lock-in period of three years.

Source: http://www.business-standard.com/india/news/steps-to-attract-retail-investors-to-mfs-soon-fm/181701/on

Do expense ratios matter?

If a fund performs well, marginally higher costs are well worth it. If it doesn’t, you must not invest in it in any case.

This question will seem almost blasphemous to anyone who has been reading up about mutual funds on the Internet.

In the US and most other developed markets, advisors and columnists make strenuous arguments to convince investors that costs are a critical factor to consider while choosing mutual funds.

They will also offer you calculations to show how even a small blip in costs affects your returns.

Different markets

But costs are certainly not one of the top factors that Indian investors should worry about while choosing funds. This particularly applies to equity funds. There are many reasons for this. For one, the absolute level of returns that Indian equity markets usually deliver is much higher than in the US. For instance, equity funds in India are expected to deliver at least 15 per cent a year to justify their risks.

Funds that have been around for 10 years or more have in fact delivered an average return of about 22 per cent a year.

As against this, the annual expenses of equity funds range between 1.5 per cent and 2.5 per cent. A difference of 1 percentage point in expense ratio between two funds makes little difference to overall investor returns.

Two, fund houses in India, unlike in the US, cannot charge vastly different expenses or costs for similar products.

The Securities and Exchange Board of India limits the annual expense ratio that any scheme may charge to unit-holders at 2.5 per cent of assets. The charges reduce progressively as fund size increases. Entry loads, or upfront charges on buying units, are completely banned.

Manager matters

In contrast, in the US, there is no regulatory cap on annual expenses. Entry loads on funds can go up to 8 per cent of the NAV. This allows room for fund houses in the US to differentiate their products on costs, which Indian funds can’t.

Three, in the US the case for buying low-cost funds is often made on the premise that the majority of active equity funds don’t outperform the market.

Why pay a manager any extra fee for active management, when you can get the same return through an index fund or exchange-traded fund?

But in India, active management does make a big difference to equity returns. The top-performing equity fund over the last five years, for instance, delivered a 13 per cent annualised return. The Sensex delivered less than 2 per cent.

If an active fund manager beat the Sensex by 11 percentage points, would you mind paying an extra 1 per cent in fees to the manager?

The vast difference between the best and worst performing funds in India also suggests that the manager can make a big difference to returns. The worst equity fund has lost about 7 per cent a year in value over the last five years.

To top it off, passive index products in India are far from perfect. The indices themselves are narrow and concentrated.

Funds that track them have significant tracking errors which reduce returns. Advocates of low-cost investing may still offer two counterpoints.

One, equity-fund returns in India over the last five years have declined to single digits. So shouldn’t costs matter now? And two, costs may badly dent returns from a poorly performing fund.

Well, the honest response to this is that if you believe that equity funds will deliver only single-digit returns over the long term, which they did in the last five years, there is no point in investing in them at all.

Why take on equity risk if the returns are to be so measly? Costs don’t enter into the picture here.

The same logic goes for poorly performing funds, too. If an equity fund delivers only a 6 per cent return, but sports an economical expense ratio of, say, 1 per cent, why go for it at all? You invest in funds to multiply your money, not to save a few paise here and there. The only situation in which costs may matter is if you are choosing between two funds with identical track records and prospects. If faced with such a choice, go for the one with lower costs, by all means!

Sorce: http://www.thehindubusinessline.com/features/investment-world/mutual-funds/article3696721.ece

IDBI Mutual Fund launches gold fund

Asset management company (AMC) IDBI Mutual Fund today launched a gold fund targeted mainly at retail investors and people without demat accounts. 

The scheme opens for subscription from July 25 and closes on August 8. The investment objective is to generate returns that correspond closely to the returns generated by IDBI Gold Exchange Traded Fund (IDBI Gold ETF) that was launched last October.

Under the scheme, investors would not hold gold physically and the asset management company (AMC) would keep the equivalent amount of imported gold in its vault with Bank of Nova Scotia.

"Gold is a great investment asset. We see investment in gold as a component of prudent diversification to hedge against uncertainties, inflation and for long-term benefits," IDBI AMC Managing Director and Chief Executive Debasish Mallick told reporters here.

On the amount AMC expects to garner from the new scheme, Mallick said, "We are expecting at least Rs 100 crore during the NFO period."

The fund house further said investment in gold provides better inflation-adjusted returns.

"In the last 10 years, gold has beaten the headline inflation 8 out of 10 times. It has outperformed and given positive inflation adjusted returns," he said.

The product will be available across most of IDBI Bank's branches, Federal Bank, Indian Overseas Bank and Corporation Bank, he added.

Source: http://www.indianexpress.com/news/idbi-mutual-fund-launches-gold-fund/978825/

Allow AMCs to retain a decent return: Sridhar Chandrasekharan

Q&A with Chief Executive Officer, HSBC Global Asset Management

Mutual fund is a much-talked about financial product currently in India. Despite several measures the industry continues to find it difficult to grow. Sridhar Chandrasekharan, CEO of HSBC Global Asset Management says Indian market is significant in terms of its potential in domestic as well as cross-border business. HSBC AMC has a local presence in several of the markets it invests and India is one of them. In conversation with Chandan Kishore Kant, he shares his views on the challenges Indian fund market faces and what needs to be done to curb it. Edited excerpts:

Is Indian fund management business a challenge?
There has been quite a lot of discussion about the distribution model in India where you have got no front-end loads for retail clients for distributors and on the other hand you have got the same distributors charging the AMCs for the front-end load. And clearly, at arms length, it is fair that AMCs are able to recover the costs of infrastructure they provide which enables them to have research and analytical capabilities. In retail distribution, this is a concern since due to this dynamic, AMCs are in the short-term not able to recover anything to offset these costs. Then I will be concerned if it led to perverse dynamics whereby somehow the level of infrastructure was diminished.

The industry framework should allow the asset manager to retain a decent return, in order to offset the costs of the infrastructure AMCs create. I am confident that the industry will evolve and so there is no way that we will diminish the quality of infrastructure that we have. But it will be useful to recognise that these things do not come out of thin air. It does incur a cost and it will be useful and healthy to see that there is something to support that.

How different is India's asset management industry compared with the world's?
It is at a nascent stage. Stability of the regulatory framework is going to be very important.  If we look the developments taking place in the Indian industry, taking the ratio of proportion of investments that are managed within the asset management industry in the developed markets is above 25 per cent whereas in India and in the emerging markets, in general, the equivalent ratio stands below 10 per cent. It means that India is still in that upward journey where people are realising that asset management industry can add value to them. I see the mutual fund industry continue to grow in India and along the way it will look different in terms of conduct of business, revenue and distribution dynamics.

Last year Indian government allowed foreign retail investors to invest in Indian mutual funds. But it has not been successful. What went wrong?
There are discussions relating to tax related developments both domestically and for cross-border investments. I would be concerned more about the uncertainty it creates. Whatever it is that is intended to be the rules, as long as it is transparent and clear then investors can reasonably make a decision. You have a situation now that investors are prepared to hold money at negative interest rates when there are strong attractions over here. And we have to ask ourselves the question

why does that persist?
If we talk about reliability in terms of the rule, it is a significant focus. So the attractiveness of India, in many ways, as a destination is beyond doubt. If that is the observation, all of us need to ask the question ‘what is it which is inhibiting investors’? And, based on the feedback that I had in terms of conversation with some of the clients, the uncertainty factor is a result not so much on the underlying risk but the frequently changing rules.

Post crisis, it is difficult to sell MF products in India. What measures should be taken?
The penetration level is low and it is, from our experience of the emerging markets, bound to increase. One of the challenges is in terms of building the trust. There should be more measures to enable investors to access professional managers. Fundamentally, the way I look at this business is by understanding the value that industry adds to investors. By the mutualization of assets you have the scale to deliver. Because of the scale asset managers can more efficiently access the markets. MFs have infrastructure advantage and because of the scale one has a greater investment in the infrastructure around research and analytics. That is the core value addition which industry can provide to the investors and this is true anywhere in the world. Now within that what we need to be conscious of the fiduciary responsibility because at the end of the day people are trusting you to manage their money on their behalf. What that means is to articulate clearly what the investment process is by focusing on what it is we are seeking to do with client's money. And the more successful we are in articulating that, the more successful we will be in terms of building the client's confidence.

Do you feel that somehow Indian fund industry has been unable to generate that trust among investors and that, probably, has played a vital factor in decline of inflows and assets?
Absolutely. There are a variety of factors which go into this perception and hence this industry is not seeing inflows. Transparency is becoming a very key consideration. And it is fair to see when I look back at several of the regulations in India. But trust is something which is earned, you cannot regulate. One can, obviously, put in safeguards but it is a firm which earns the trust of its investors.

The quality or the value which an asset manager adds to an investor is very often described by the industry in terms of "look at my comparative performance" or "look at my quartile performance" etc. If you are discharging a position of trust then I would argue that your primary focus needs to be in terms of managing risk on behalf of your clients and it's a bit strange and unusual for me that the quality of that risk management is then measured in terms of return. There is nothing to be defensive about the performance, what I would say unequivocally is that performance is a consequence of managing risk well and frankly I would rather manage risk on behalf of our clients than necessarily focus uni-dimensionally on beating a peer group because at the end of the day I would be concerned if some of that meant that we were taking undue risk in client portfolio.

What role does your India presence play in overall asset management business?
We have a local presence in several of the markets we invest. And this does make a significance difference. If we take a market like India, our focus is both being relevant to the domestic market and also being able to play a meaningful role in the connection between foreign investors and Indian domestic markets. So the inter-connectivity is something that as an institution we are very strong on and this will continue to grow. In that context, the Indian market is very significant both in terms of the potential it has in the domestic business and also in terms of the cross-border business.

Source: http://business-standard.com/india/news/allow-amcs-to-retaindecent-return-sridhar-chandrasekharan/179747/on