MUTUAL FUND

Fresh inflows into equity MFs fall 37%

Suresh Parthasarathy
BL Research Bureau Fresh inflows into equity mutual funds have taken a beating in the first month after the abolition of entry load.
Fresh inflows (gross) into existing equity schemes for the month of August dropped by 37 per cent compared with July, according to data published by the Association of Mutual Fund India. Existing funds, which collected Rs 6,343 crore in July, saw collections plunge to Rs 3,954 crore in August.
Higher redemptions
Funds also saw higher redemptions even as fresh inflows dropped, as investors booked profit on their investment. Outflows for the month of August were higher than inflows, resulting in a net outflow for equity funds. However, one positive aspect is that collections seem to have improved between the first and fourth weeks of August.
Industry sources feel that inflows may continue to suffer until distributors evolve a method to begin charging fees from their customers. With the cap on exit load fixed at one per cent, mutual funds’ flexibility to pay higher upfront fee has already been discounted.
The fund houses have also been informally asked not to increase the upfront commission paid to distributors. According to Mr Jaideep Bhattacharya, CMO, UTI Mutual Fund, the reason for a drop in collection is that distributors are yet to plan their strategy as to which model is best to them. “Once that’s decided they will resume marketing and it is likely to push up the volumes. As there is no push from the distributors, investors are not willing to commit any fresh inflows. I foresee that in a couple of months the situation is likely to improve.”

http://www.thehindubusinessline.com/2009/09/11/stories/2009091151351200.htm

Entry load ban to benefit MFs in long run, say fund managers

After the initial hue and cry following market regulator Securities and Exchange Board of India’s (Sebi’s) ban on entry load from August 1, the mutual fund (MF) industry is gradually coming to terms with the negatives of the move and looking at the positive side of it.
Fund managers admit that in the initial few months, the industry may not escape the adverse impact, but in the long run, the ban will prove beneficial for fund houses as it brings in more clarity for investors.
Making noises over the ban will not serve any purpose, they say, adding that things will settle down in the next six-eight months as fund houses, distributors and investors adapt to the new norms.
Jaideep Bhattacharya, chief marketing officer of UTI Mutual Fund, says, “The Sebi move will help demystify customers regarding investments in mutual funds.”
In Thursday’s scenario, the investor is clear that there is no entry load and only 1 per cent exit load on investments in mutual funds, say industry sources. This will help the industry have good inflows in the long run, if not now, they add.
“Simplicity and transparency are the virtues of the mutual fund industry which will only be enhanced after the regulator’s latest move. Unless investment norms are simplified, it’s not an easy task to attract more retail customers,” says the chief executive officer (CEO) of a fund house on condition of anonymity.
Industry experts say that the customer is now more clear about how much he has to pay to the distributor or the advisor. Investors are now empowered and have choices to decide which type of channel they should transact through, they add.
Agreeing to this, another CEO says: “If the industry gets more retail customers as a positive consequence of this ban, hopefully we will see stickier money flowing in, thereby improving profitability.”
AP Kurian, chairman of the Association of Mutual Funds in India (Amfi), had earlier told Business Standard that the “new norms will hit the mutual fund industry initially. But it will be a short-term phenomenon... But once the reality dawns on all the participants that this is the way business is to be done, the industry will pick up.”
At a time when the Swarup committee, fund managers say, has advocated similar regulatory moves for other financial products competing with mutual fund products, a discipline will follow and the MF industry will get a level-playing field.
“I don’t think mutual fund investors have had it so good ever before. His entire investment will now be invested. He will not have to pay any entry load. It’s a great norm from the investors’ perspective,” says Saurabh Nanavati, CEO of Religare Mutual Fund.
As expected, the volume of transactions in equity schemes has declined in spite of an increase in the average assets under management in the month of August.
Fund houses are now paying an upfront fee of 50-100 basis points to the distributors to compensate them for the loss of entry load.

http://www.business-standard.com/india/news/entry-load-ban-to-benefit-mfs-in-long-run-say-fund-managers/369711/

Banks park more funds in MFs

Banks have stepped up investment in mutual funds as they offer better yields. The yield on the one-year government securities is barely 4.5 per cent, while mutual fund investments offer 8 per cent.
C. Shivkumar
Bangalore, Sept. 10 With loan growth yet to pick up, banks have begun parking their surplus resources with mutual funds (MF).
Till August 14, the mutual fund investments of both public and private sector banks stood at Rs 1.56 lakh crore, or an increase of Rs 1.36 lakh crore over the corresponding period of the last financial year.
Bankers said that there were few alternative venues of investments. Since the beginning of this year, credit offtake amounted to just Rs 26,421 crore or a third of the previous year’s figure. The incremental credit-deposit ratio for the year was barely 11 per cent against the previous year’s figure of 57 per cent.
Bankers said that correspondingly banks were faced with large accumulation of deposits. Deposits since the beginning of this year have grown 22 per cent over the last year. Credit offtake grew only a measly one per cent over the last year.
A part of the deposit accretions is also on account of non-drawal of government borrowings during the year. Government borrowings are still parked with the public sector banks since expenditure is slated to be incurred only in the peak season.
G-sec saturation
The shift to mutual fund investments is also because banks are not interested in parking their entire funds in government securities. Banks already have a surfeit of Statutory Liquidity Ratio (SLR) securities. Currently, investments in government securities are about 34 per cent, way above the mandated SLR ratio of 24 per cent.
Besides, banks’ interest in long-term securities also appears to have reduced, in view of the large portfolio with them. Consequently, there is a shift to other short-term instruments, including mutual funds.
(The loss of interest in long-term securities is evident from the low investments in instruments issued by public financial institutions. Outstanding investments in such instruments were barely Rs 27,279 crore or an increase of just Rs 2,300 crore over the corresponding period of the last financial year.)
Better yields
Banks have also stepped up investment in mutual funds since MFs offered better yields. The yield on the one-year government securities, for instance, is barely 4.5 per cent. Mutual funds, however, are able to offer yields of 8 per cent, bankers said.
Despite high risk weights in the case of investment in mutual funds (at 125 per cent), bankers are not worried because investments are mostly in public sector bank sponsored funds. Besides, the preferred funds are mostly in gilt funds where investment risks are low. Since some of the government borrowings and bulk funds are raised through Certificate of Deposit resources, banks preferred to park in money market MF so as to allow for a quick exit, when credit offtake picks up.

http://www.thehindubusinessline.com/2009/09/11/stories/2009091150950600.htm

INSURANCE

Ulips to have five-year lock-in from October

Existing products to come under the new rule from Jan 1, 2010.
Unit-linked insurance products (Ulips) filed after September 30 will have a lock-in of five years.
The Insurance Regulatory and Development Authority (Irda) is planning to increase the period from three years at present to check mis-selling. The decision will be applicable on products filed after September 30, 2009.“We have communicated the decision to insurers,” said Irda Member Actuary R Kannan.
“According to normal practice, we have to come up with a circular, but we have informally communicated the decision to insurers. We will come out with a notification in a couple of days,” he said.
In a meeting with the appointed actuaries yesterday, the regulator discussed the recent cap on the overall charges on Ulips and the way ahead. Insurers are expected to re-file almost all existing products by December 2009. On streamlining the file-and-use procedure, Kannan said 30 days was academic and that Irda took less time than this to approve the products.
At present, the minimum tenure for Ulips is five years. But partial withdrawals are allowed after three years.
With the new regulations coming into force from October 1 for new products and from January 1, 2010, for existing products, there will be no surrender charge from the fifth year of the policy.
Said Sanjeev Pujari of SBI Life, “In a recent meeting, the regulator indicated that the lock-in had to go up to five years. This reinforces the point that insurance is a long-term product. The longer the lock-in, the higher will be the returns.”
He added that mutual funds with three years of lock-in offered higher returns than liquid funds or products with a shorter tenure. Insurers, however, are waiting for a notification from the regulator.
“Irda has outlined the principle but we need to see how it is implemented. The lock-in should not take away flexibility and the policyholder should be able to access his funds when required,” said HDFC Standard Life Principal Officer & Executive Director Paresh Parasnis.

http://www.business-standard.com/india/news/ulips-to-have-five-year-lock-inoctober/369710/

Reliance General bags Air India insurance mandate

A consortium led by Reliance General Insurance Company on Wednesday bagged the mandate for providing insurance to Air India for $24.3 million. The cover will be provided for one year, starting September.
After Reliance General got the mandate to cover the state-owned airlines, New India Assurance has written to the chief vigilance officer questioning the securities placed by Reliance General.
The private sector consortium was led by Reliance General Insurance with HDFC Ergo, Bajaj Allianz and Iffco Tokio General Insurance Company as partners, whereas the public sector consortium was led by New India Assurance. ICICI Lombard General Insurance was the third bidder. New India Assurance came close with a bid of $24.9 million.
The cover size has gone up to $8.59 billion as against $6.39 billion in 2008-09. The state-owned airlines has paid $24.3 million premium to insure 134 aircraft. The public sector bidder has lost this mega cover after seven years. Last year, the airline had paid $19.5 million to insure 140 aircrafts.
New India Assurance had, in an earlier representation, said that the securities placed by Reliance did not fit the criteria.
Reliance will retain 10 per cent of the risk while it will place the rest 90 per cent in the international market.

http://www.business-standard.com/india/news/reliance-general-bags-air-india-insurance-mandate/369607/

BANK

Banks continue to refinance CDs as rates remain low

Banks continued to issue six-month certificates of deposit (CDs) as March maturity papers were offered 70-80 basis points below compared with April maturity CDs, dealers said.
“Banks are only keen on issuing six-month CDs due to the lower rates it offers,” said a dealer with a state-owned bank.
Banks were also mainly refinancing their existing CDs at lower rates on views that the rates could inch up by September end, dealers said.
Banks and companies will make payments towards the second instalment of corporate advance taxes by Tuesday.
According to dealers, around Rs 35,000-40,000 crore will go out of the system for corporate advance payments.
Mutual funds were also keen on investing in papers maturing below six-months as they received inflows in their liquid plus schemes, dealers said.
“Demand from mutual funds is only in shorter tenure papers, so banks don’t have much choice but to issue such papers,” said a dealer with a mutual fund.
Today, 3-month CDs were quoted at 3.60-3.90 per cent, unchanged from Wednesday’s levels, while 3-month commercial papers (CPs) were quoted at 4.00-4.25 per cent.
According to dealers, Steel Authority of India placed Rs 1,500 crore worth of CPs. The company offers 4.60 per cent on 168- day CPs, 4.49 per cent on 178 and 183-day CPs each, and 4.59 per cent on 184-day CPs.
Secondary market
Mutual funds refrained from any major investment in this segment as the redemption from banks and companies was limited, dealers said.
“A few mutual funds are trading in the secondary market for a long time mainly to book profits,” said a dealer with a mutual fund.
Call ends steady
Call money rate ended steady today because liquidity in the banking system was ample for banks to meet their daily reserve needs, dealers said.
Today, the one-day call rate ended at 3.25-3.30 per cent, compared with 3.20-3.30 per cent on Wednesday.
CBLOs ended at a weighted average rate of 2.72 per cent, compared with Wednesday’s close of 2.79 per cent.
CBLOs had risen to a high of 3.29 per cent intraday due to a sudden rise in demand for funds in late trade.
“In late trade, demand rose suddenly and supply was less because mutual funds cannot lend in the CBLOs market after 2:30 PM (1430 IST), so the rate also rose,” said a dealer at a private bank.
Demand in the call money market was moderate today because banks have already met most of their reserve needs for the current reporting fortnight.
Today, Reserve Bank of India absorbed Rs 1.32 lakh crore through its reverse repo tender, compared with Rs 1.20 lakh crore on Wednesday.

http://www.business-standard.com/india/news/banks-continue-to-refinance-cds-as-rates-remain-low/369708/

IT projects to cut costs for banks: KPMG

Many of the banks in the country are planning to deploy technology related projects over the next one year, with an aim to reduce costs and ensure business growth, a study by global consultancy KPMG says.
According to the IT current status survey, which focused on identifying key technology trends in Indian banks, about 40 per cent of the respondents have a technology-related project lined up over the next one year to address cost reduction issues.
“Technology is now being considered for deriving strategic advantage for effective business growth and cost reduction projects within the bank,” the report said.
Around 50 per cent of the banks surveyed consider e-commerce, mobile banking and financial inclusion initiatives as key areas for strategic growth, the survey revealed.
Meanwhile, capital and operational expenditure in IT by majority of the banks currently hovers around one to three per cent of their annual revenues, it added.
“Appropriate investment in technology is today considered key. This has various ramifications— ensuring profitability, enhancing value to the end customer and addressing overall societal development,” KPMG India (IT Advisory Head) Kumar Parakala said.
“Over the past year, various banking institutions have been introspecting on efficacy of their system implementation through programmes such as constitution of reviews of core banking systems, conducting IT security efficacy studies and evaluation of value-added systems,” Kumar added.
Besides, close to 60 per cent of the banks surveyed feel the top technology challenges are in keeping up with changes to regulatory guidelines and implementing Basel II.
It was also noticed that important channels of customer outreach such as automated teller machine (ATM) and card service management have been outsourced, showcasing increasing levels of comfort with respect to technology outsourcing, the survey said.
Application consolidation and process/ workflow automation along with virtualization were the top cost reduction initiatives, the survey added. The information in this survey is based on data received from the top management and technology leaders of 15 leading banks in India.
The survey probed key trends in technology that enables banking processes and feedback received on factors such as cost, proposed technology initiatives and technology strategy, have also been collated.

http://www.business-standard.com/india/news/it-projects-to-cut-costs-for-banks-kpmg/369705/

Banks to make systems UID-ready in 18 months, says Nilekani

Banks will tweak their information technology systems, especially for authenticating customer identity, over the next 18 months to make them compatible with the unique identification number (UIN) regime.

The UID Authority of India, headed by Nandan Nilekani, would publish UID standards for interoperability in six months and banks would get another year to modify their systems, Indian Bank Association Chief Executive K Ramakrishna said on the sidelines of the Ficci-IBA banking summit. IBA will set up group to co-ordinate work for the project.
Nilekani, speaking at the three-day summit, said UID would enable financial institutions to reach out to unbanked areas, facilitating financial inclusion. It would also reduce the overall transaction cost for all intermediaries, he added.
“The authority will collect two sets of data — one will be the demographic profile, which will include a person's name, address and date of birth, while the other will be biometric information such as fingerprints and face,” Nilekani said.
The data would be fed into a centralised database that would be accessible to authenticate the person's identity. Once enrolled, the person will be registered for life.
The authority aims to have “a few hundred million” names in its database in four-five years. Towards this, it plans to rope in all service providers such as banks, passport offices, insurance agencies and LPG connection providers. 

http://www.business-standard.com/india/news/banks-to-make-systems-uid-ready-in-18-months-says-nilekani/369610/

SEBI

Sebi cracks down on non-compliant client accounts

The Securities and Exchange Board of India (Sebi) on Thursday asked portfolio managers at wealth management companies to freeze the portfolios of client accounts who had not co-operated for opening separate client accounts after at least three notices. The market regulator said the portfolio managers should return the securities of the funds to such clients.
According to the circular, fresh purchases on behalf of such clients cannot be made. However, selling of securities from such frozen portfolios may be undertaken and transfer of securities from such portfolios to respective clients’ accounts may also be effected.
http://www.business-standard.com/india/news/sebi-cracks-downnon-compliant-client-accounts/369712/

IPO application: Sebi committee wants 1-day window for QIBs

Qualified Institutional Buyers (QIBs) may get only one day for applying when an initial public offering opens for subscription. According to discussions at the market regulator’s Primary Market Advisory Committee meeting today, there was a consensus on reducing the period for QIB applications from five days at present.
The Securities and Exchange Board of India board will take a final decision on the issue when it meets towards the end of the month, but generally the board goes along with the recommendations of the committee.
The logic behind such a move is to ensure better price discovery in initial public offerings. Currently, IPOs are open for subscription for five days for all classes of investors and bids are accepted till the last hour.
QIBs now apply for IPOs by paying just 10 per cent of the application money and hence their applications are many times more than the actual appetite. They get nearly a fortnight to make payment for the balance amount on allotment. In case of the issue being oversubscribed, they get lesser allotment and the application money takes care of the full payment. Since retail and high net worth investors don’t get the facility of paying just 10 per cent, market players have been calling for a level playing field.
"Subscription commitments in IPOs are generally pre-arranged, so there is no point in keeping it open for five days. If the time period for QIP application is implemented, it will be a step in the right direction by Sebi", said the head of a mutual fund who did not wish to be quoted.
QIBs, which include foreign institutional investors and domestic institutions generally set the tone for retail subscription in IPOs, as they are considered to be a more informed class of investors. The QIB subscription is vital for the success of any public issue as a major portion is reserved for them. Currently, 60 per cent of IPOs are reserved for QIBs, out of which 5 per cent is for mutual funds on a proportionate basis. A total of 30 per cent is reserved for retail investors and 10 per cent for non-institutional investors.
If this is implemented, this would mean allotment for the QIB portion can be made in two days after their part of the issue closes and they can be asked to make the balance payment soon after allotment. Sebi has been contemplating asking 100 per cent application money for QIBs.
Anchor investors will have to make 25 per cent payment on day one and the rest within two days of issue closure. The same will now be applied for QIBs as well.
The regulator is also looking to further reduce the time period for allotment in public issues from 15 days to five days. "There were discussions on reducing the time lag and making the process more efficient. Today, a lot of companies are tapping ADRs and GDRs for fund-raising, so the discussion was also on making the fund-raising process easier for them through rights issues and follow-on offers", said a source who did not wish to be named.
The primary market advisory committee also discussed that a more aggressive approach was needed to track the deployment of funds through rights issues and follow-on offers.
Sebi has recently taken several measures on primary market reforms, the principal ones being introduction of ASBA (Application Supported by Blocked Amount and the concept of anchor investors in IPOs, and lesser disclosure for rights issues.
http://www.business-standard.com/india/news/ipo-application-sebi-committee-wants-1-day-window-for-qibs/369785/

IRF may take 2-3 quarters to see rise in trading volumes

With financial sector players, including banks and primary dealers, gradually warming up to trading in interest rate futures (IRF), the market will have to wait for a maximum of two-three quarters to see a rise in volumes, according to dealers. IRF is a tool to hedge risks related to interest rates.
The National Stock Exchange (NSE) had on the last day of August started trading in IRF with a bang by clocking a turnover of Rs 267.31 crore — the highest to date. According to NSE data, a total of 3,439 contracts were traded on Thursday with a combined value of Rs 63.28 crore.
 

A dealer with a public sector bank said the number of contracts traded as well as their value dropped continuously throughout the first week. The trend in the second week was mixed, giving hope for stability, he said.
A few public sector banks such as State Bank of India, Bank of India and Bank of Baroda have been active in the IRF market. Among foreign banks, only Bank of America is reported to have shown some interest.
The future contracts are on the 10-year notional coupon bearing government bond. The notional coupon (interest rate) will be 7 per cent per annum with semi-annual compounding. IRF trading is available in futures contracts worth Rs 2 lakh each with a maximum maturity of 12 months.
The head of fixed income with a private mutual fund said, “The beginning has been made, but it won’t take off in a big way immediately. Market players have to get the hang of the trend, especially in the bond market where primary market issuances are huge. It will take two-three quarters before volumes rise.”
Many banks are in the process of getting the nod from their respective boards to enter the IRF space. Besides putting in place new systems, the banks’ treasury teams also have to decide on giving time for this segment, especially when volumes are small, according to a large public sector bank’s head of treasury.
Increased participation by banks is expected to infuse more liquidity this time than in 2003, when IRF was first launched in India. The expected participation by insurance companies and provident funds, which hold a sizeable chunk of government securities, will also add depth to the market.
Besides banks, brokers, non-resident Indians and Sebi-registered foreign institutional investors (FIIs) can also participate in IRF.
Suman Chowdhury, head of Crisil’s financial sector ratings, said trading in IRF should provide primary dealers with support to their earnings profiles over the medium term. In addition, the use of IRF would eliminate credit and settlement risks, cut transaction costs and enhance transparency in the debt market, Chowdhury said. The profitability of primary dealers has always been vulnerable to volatility in rates. Because of lack of adequate tools to hedge against increasing interest rates, they had had to reduce their portfolio sizes in recent years to contain losses.
http://www.business-standard.com/india/news/irf-may-take-2-3-quarters-to-see-rise-in-trading-volumes/369713/

Portfolio managers get leeway from SEBI on adding new clients

Our Bureau
Mumbai, Sept. 10 SEBI has allowed registered portfolio managers to undertake new clients provided the portfolios of existing non-compliant clients are frozen.
Earlier SEBI had restricted those portfolio managers from undertaking new clients who had not complied with Regulation 16(8) of SEBI’s Portfolio Managers Regulations even after the expiry of the extended deadline of May 10, 2009.
“Soliciting new business from even those clients who were compliant with the SEBI regulation was not possible. Top ups were not being accepted which has now been allowed,” Mr P. Phani Sekhar, Fund Manager-PMS for Angel Broking, said.
SEBI also directed the portfolio managers to discontinue the services to those clients who are not willing to open separate client accounts, after serving at least three-month notice, and return the securities/funds to the clients.
“Fresh purchases on behalf of such clients (non-compliant) shall not be made, a SEBI circular issued on Thursday said adding “selling of securities, however, from such frozen portfolios may be undertaken.”
“Transfer of securities from such frozen portfolios to respective client’s account may also be effected,” SEBI said.
According to the SEBI regulation, portfolio managers have to maintain separate client accounts, as against the earlier practice of having a pool account for securities, by February 27, 2009.
Following representation from portfolio managers SEBI had extended the deadline to May 10, 2009.
http://www.thehindubusinessline.com/2009/09/11/stories/2009091151381200.htm

ECONOMY

Industrial recovery may offset fall in farm output

Economists and policy makers have been pleasantly surprised by the sharp industrial recovery in India, which will nullify the impact of lower farm output due to deficit rains and enable the economy to grow at 6 per cent or more in 2009-10.
The recovery seems to be gaining momentum. Auto, cement and steel despatches are up, sales of medium and heavy commercial vehicles have turned positive for the first time in 14 months, prices of construction steel are up and so are property prices in key markets like Mumbai and the national capital region (NCR), and banks are again willing to lend.
Samiran Chakraborty, head of research, Standard Chartered Bank, says the industrial momentum is very strong, adding that the growth rate sequentially month-on-month is as high as what it used to be at the peak of the industrial cycle.
This is borne out by the sales of two-wheelers. “Typically, in a drought year, sales of two-wheelers begin to get impacted from August-September, which hasn’t happened this year,” says Manishi Roychaudhury, India head of equity research, UBS Securities. Two-wheeler major Hero Honda’s sales grew 36 per cent in August to over 400,000 bikes, more than 50 per cent of which are sold in rural and semi-urban areas.
The stimulus packages have done the trick. While waiver of loans improved rural incomes and spurred the sales of two-wheelers, increased pay of government employees improved the sales of compact cars in smaller towns. “If you look at the corresponding income profile, in smaller towns, the share of government employees in the pool of higher income growth is high,” says Abheek Barua, chief economist, HDFC Bank.
Crisil chief economist DK Joshi says that despite an errant monsoon, industrial growth will be better than last year. He expects the industry to grow at 6 per cent this year against 3.9 per cent last year. “Growth has not been broad-based but limited to sectors where the stimulus has been effective. But a lot of export-intensive sectors like textiles and jewellery are in dire straits,” says Joshi.
Industrial growth will partly offset the decline in agriculture, which is likely to shrink 2.6 per cent this year. That’s also because industry accounts for 26 per cent of the gross domestic product (GDP), while agriculture accounts for 16-19 per cent and services for the rest (55 per cent). So, higher growth in industry would compensate for a drop in agricultural production.

In 2002-03, an industrial growth of 6.8 per cent had partly offset a 7.1 per cent decline in agricultural growth, and there’s a growing disconnect between agricultural and industrial growth.
“It’s a weak and nascent recovery, given the industry grew at 9-10 per cent between 2003 and 2008,” adds an economist.
The current traction is driven by consumption demand, led by pay hikes to government employees and waiver of farm loans, investment demand is very tentative and patchy though companies are showing interest. Credit is growing at 15 per cent, while it was growing at 29-30 per cent a year ago. While the economy may continue to grow at 6-7 per cent, for a faster growth, the demand for investment has to pick up. Typically, when growth picks up sharply, investment demand grows at 20-25 per cent.