Domestic mutual funds (MFs) invested Rs 5,548 crore ($1.14 billion) in oil & gas, metals, power, auto and information technology stocks in July, according to a report by Mumbai-based brokerage house Net Worth Stock Broking.In contrast, the five sectors that saw the maximum outflow of MF money in the month were banks, pharmaceuticals, engineering, finance and shipping. MFs sold stocks worth Rs 1,636 crore ($337.3 million) in these sectors, indicating what experts say is a high level of sector rotating to gain from the volatility in the market.
ONGC, Sterlite Industries, Tata Consultancy Services, NTPC and ITC were the top five stocks purchased by MFs. ONGC saw a net increase in exposure by Rs 1,205 crore ($248.5 million). The top five stocks sold by MFs were RIL, IDFC, Larsen & Tubro, Cipla and HDFC Bank. MFs decreased their net exposure in RIL by Rs 998 crore ($205 million) during the period.
“Sector rotation by MFs has increased due to high volatility in markets. While valuations in the oil and gas sector were cheap, power stocks were in focus mainly due to the initial public offers by Adani Power and NHPC. Similarly, information technology (IT) saw a boost in inflows as the third-quarter results of IT companies were good. The global rally in commodities and improvement in consumer confidence is behind the rise in investments in metal and auto sectors,” said Sameer Narayan, head of equities at Fortis Investments, which manages over Rs 10,000 crore in equities.
During July 2009, the total equity assets under management (AUM) of the MF industry rose 5.29 per cent, while the broader equity benchmark index, Nifty, moved up by 8.05 per cent.
Cash levels of MFs in equity funds increased 2.19 per cent to Rs.25,167.2 crore ($5.19 billion) from Rs. 24,628.2 crore ($5.08 billion). The overall equity cash level of the industry is 14.6 per cent of the total AUM. However, the equity plus debt cash level saw a massive increase of 92.1 per cent in July to Rs 70,465.9 crore ($14.52 billion).
According to Sanjay Sinha, chief executive officer (CEO) of DBS Chola MF, unattractive yields at the end of July was the main reason MFs did not invest in debt schemes. “A majority of inflows into debt schemes of MFs in July came in the last week of the month, when yields on debt papers were lower.”

Securities and Exchange Board of India (Sebi) has its way, you may be able to buy mutual funds (MFs) from stock exchanges, eliminating the need for an agent. Taking cue from the regulator, the MF industry will meet executives of National Stock Exchange (NSE) and Bombay Stock Exchange shortly.
In a consultative meeting between the Sebi chairman CB Bhave and heads of MFs on Tuesday, the capital markets regulator discussed ways and means by which the industry can get going in the post no-load rule introduced from August 1.
While an industry in panic has worked out a distribution payoff model (to pay upfront commission from its future profits), it has imposed an exit load of 1 per cent for any mutual fund withdrawal before three years for all new subscriptions.“The regulator has asked the industry to reconsider the exit load move and see if it can bring it down to withdrawals within one year,” a source present at the meeting told Hindustan Times.
However, industry players justified their actions by saying that they want investments to be long term and also if the investors withdrew after one year without paying the exit load then they would not be able to recover the upfront commission cost.
While the regulator and the industry feel that the industry can only move up, the regulator raised the issue of non-uniformity in commission structure within the industry.
“The regulator pointed out that some fund houses fix high commissions for their distributors and is not the right thing to do as it would hurt others,” the source said.
Both the industry and the regulator felt that no entry load is a mere speed breaker, not the end of mutual funds.

In April-June 2009, private sector life insurance companies have paid Rs 321 crore in death claims compared with Rs 204 crore in the year-ago quarter, an increase of 57.35 per cent.
Life Insurance Council Secretary General S B Mathur said, “Economic downturn has not impacted the Indian life insurance industry as far as payment of death benefits is concerned. In fact, it is significant to note that death claims have increased.”
The total benefit, which comprises of death benefit, maturity benefits, periodic bonuses, periodic money back and other benefits, too has gone up 21.12 per cent to Rs 12,056 crore during the April-June 2009 quarter as compared to Rs 9,953 crore during the corresponding quarter last year.
Total benefits paid by the private sector grew 35 per cent to Rs 2,123 crore during the April-June 2009 quarter compared with Rs 1,573 crore in the year-ago quarter, Mathur said.

The Insurance Regulatory and Development Authority (Irda) has extended the deadline to September 1 for collecting the permanent account number (PAN) from people purchasing insurance policies in which annualised premiums exceed Rs 1 lakh.
Irda stated that more time was given as many insurers had expressed difficulty in meeting the August 1 deadline in this regard.
According to the regulator, representations have been made to waive off the submission of PAN in case of certain categories such as those only with agricultural income and non-resident Indians. The people have no assessed income under the IT Act and hence are exempted from the requirement of PAN.
“This request has been considered and it has been decided that insurers shall insist on PAN from all people who are required to obtain the same under the provisions of IT Act, 1961. Insurers shall, however, collect a signed declaration from persons exempted from the requirement of PAN, stating the provisions of the IT Act under which they have been exempted,” Irda stated in its circular.
It has also been decided that in cases where a proposer has applied for PAN but has still not received the same, a copy of the application acknowledged by the agency authorised to collect applications for PAN, can be accepted by insurers in lieu of PAN.
The insurer, however, should take an undertaking from the proposer that the PAN should be submitted as soon as it is received.

The Securities and Exchange Board of India (Sebi) has ruled out rolling back its order banning entry load and parity in exit loads for all classes of investors.
On Tuesday, Sebi Chairman CB Bhave met chief executive officers (CEOs) of all fund houses to take stock of the ground realities after the new guidelines.
Industry sources said while the fund houses explained that the industry was still in a nascent stage and imposition of stringent guidelines would stifle its growth, the market regulator told them to adjust within the new guidelines.
Industry players, while admitting that the step was in the right direction, said such developments were much ahead of their time.
“Sebi’s moves have moderated the distributors’ compensation and they certainly are not happy. There is no overnight solution to this new development,” said the CEO of a large domestic mutual fund house who did not wish to be named.
While fund managers said there would be three-four months before the industry would be able to gauge the impact of the guidelines, they felt their collections could be hurt. “The market regulator may have to come up with corrective measures if things do not improve,” said the CEO.
Sources added that fund houses with high cost structure would become increasingly uncomfortable in case the adjustment takes longer. “The trend will be visible from the industry’s August numbers,” said another leading fund manager.
Sebi had banned the entry load charged by fund houses from August 1. In the new regime, distributors would have to negotiate the commission with customers and be paid through a different cheque.Also, distributors would have to disclose the commission they were being paid for similar products.In yet another move, the market regulator had asked fund houses to stop discriminating between high networth and retail investors and charge them the same exit load.

Also seeks alliance with other regional bourses.
As part of its plan to start intra-day trading from November this year, the Delhi Stock Exchange (DSE) has initiated talks with the country’s second-largest bourse, the Ahmedabad Stock Exchange (ASE), for a tie-up.
DSE, which is set to resume trading after a gap of almost eight years, is also looking at other stock exchanges for business alliances.
At least two officials close to the development confirmed that DSE and ASE were in talks and that they aimed to sign a memorandum of understanding (MoU) in the near future.
“We are talking to regional stock exchanges, including ASE, for tie-ups to provide them the DSE trading platform. DSE wants to go national and, for that, we are inviting brokers from across the country,” said BK Sharma, general manager, market operations, DSE.
He said, “Both the exchanges require clearance from the Securities and Exchange Board of India (Sebi) for a tie-up. If the deal materialises, ASE brokers can trade on DSE platform.”
Sources in ASE said that a meeting with DSE officials was scheduled for Thursday to explore possibilities of a tie-up. “We are also in talks with the National Stock Exchange (NSE) and the MCX Stock Exchange (MCX-SX) for tie-ups, though nothing concrete has come out as of now,” they said, adding that they would require approval from the board before entering into any kind of agreement with any player.
DSE is the second-largest exchange of the country in terms of number of companies listed on it — 2,855. Out of these 2,855 companies, 2,343 firms, including 1,800 small and medium enterprises (SMEs), are exclusively listed on DSE.
Over the last decade, the exchange had created a commendable track record with the DSE index crossing 1,000 points in 1992 and its trading volume touching an all-time high of Rs 9648.69 crore in September 2000.
“We will give single-window services for listing of securities on DSE. This will help DSE stabilise its trading operations at the earliest and also enhance liquidity of the scrips listed on it,” said Sharma.
DSE has 379 members and plans to add 100 more by the end of the current financial year. Since there has been no trading on DSE for almost eight years now, only 600 listed companies had complied with their obligations. DSE offered a 60 per cent rebate to those who paid their arrears, and 300 companies took advantage of it.
So, now only 900 companies are eligible for trading on the exchange. Despite the absence of trading for such a long time, DSE has a cash reserve of Rs 100 crore. Once it functions smoothly for six months, the bourse may be allowed to foray into derivatives trading.
DSE has also announced two innovative schemes — Amnesty Scheme and New Deposit-Based Trading Membership Scheme — to revive the dead scrips of the exchange.

TAXTAION

For sensible capital gains taxation

The government’s proposed direct taxes code has been widely welcomed. It seeks, rightly, to bring corporate tax rates closer to the Chinese and ASEAN levels, and combine lower rates with fewer exemptions. The proposed income-tax changes will give substantial relief to the middle class, but may cause excessive revenue losses.

Experts have already analysed most proposed changes threadbare. But virtually none have focused on one area where the proposed code goes seriously wrong — capital gains tax. Indeed, the underlying issues are fundamentally misunderstood globally.

Any financial expert will tell you that it is prudent to diversify your savings, putting them in different asset classes (shares, bonds, real estate). It is also prudent to diversify within each asset class like shares — you should distribute your holdings of shares between different sectors such as finance, auto, healthcare, and IT. The sums you allocate to different assets should change with time — textiles constitute a sunset sector and IT a sunrise sector, and you should reshuffle your portfolio accordingly.

A fund manager who never reshuffles his portfolio will be sacked on the ground of incompetence. He will be guilty of having harmed the savings of the clients whose interest he is supposed to serve. Yet the proposed capital gains tax will exempt people who never sell any assets, and penalise those who do. Assets rise in value whether they are sold or not. Reshuffling a portfolio of assets means selling some assets and buying others. The proposed tax will be levied only on gains from sales, not on gains in the value of unsold assets.

So although reshuffling is economically efficient and financially prudent, the proposed code will tax this good practice and exempt the bad alternative. That is terrible policy. It makes better sense to levy capital gains tax only on assets that are liquidated — converted to money. Portfolio reshuffling should be encouraged, and so the new tax code should exempt reshuffling.

Three considerations should govern any tax proposal: efficiency, equity and simplicity. That is, a tax should promote economic efficiency and provide incentives for desirable behaviour; it should aim for vertical equity (rich folk should pay more) and horizontal equity (some sorts of gains should not get preferential treatment over others); and it should be simple to administer, reducing litigation and evasion. The proposed change in capital gains tax fails on all three counts—efficiency, equity and simplicity.

International studies show that revenue from capital gains tax is typically under 1% of total revenue. It is nevertheless widely used to check the conversion of income into capital gains to avoid tax (zero coupon bonds are one example of such conversion). For the same reason, many countries levy gift tax: this too yields little revenue but checks evasion.

This, then, is a sound reason for levying capital gains tax in India. It also improves vertical equity to the extent it gathers revenues from rich folk who are taxed relatively lightly today.


However, economic practice can vary dramatically from theory in India. Despite some improvement in tax administration in the last decade, taxes are widely evaded and many transactions (and associated capital gains) are not officially reported. Agricultural land (save that within 8 km of a town) is exempt from capital gains tax, a huge legal loophole exploited by evaders. So taxing capital gains, which looks theoretically good in terms of vertical equity, can in practice be bad for equity—it taxes honest folk while leaving out very rich evaders.

Besides, with the opening up of foreign portfolio investment in India through Mauritius and other tax havens, foreigners — as well as crooked Indians laundering their black money — are investing in stock markets via tax havens, escaping capital gains tax. In theory foreign investors have to pay capital gains tax, but they escape if they route investments through zero-tax countries with whom India has an avoidance-of-double-taxation treaty. Horizontal equity is offended when foreign investors get preferred tax treatment over Indians, and when Indian black money laundered through tax havens gets preferential treatment over white money.

How does the proposed capital gains tax score on efficiency? It will be inefficient to the extent it strengthens laundering through the Mauritius loophole. And it will reward inefficiency and imprudence in portfolio management.
What about simplicity of administration? Because of widespread tax evasion, former finance minister Chidambaram abolished long-term capital gains tax on shares transacted on stock exchanges, and instead levied a securities transactions tax (STT).

This was clearly non-optimal in economic theory. Any tax on transactions discourages them, and so imposes deadweight losses on the economy. The STT impacts day traders more than others, and to that extent is horizontally inequitable. Unlike capital gains tax, STT does not check those seeking to convert income into capital gains.

However, STT has a huge advantage over capital gains tax in simplicity of administration. STT is collected automatically from all stock markets, and is a rare tax that is not evaded at all. Stock market turnover has risen sharply after the imposition of STT, suggesting that its adverse effects on transaction volume have been limited. STT is a case where what looks second best in economic theory can be the most effective in practice.

So, viewed from the three criteria of efficiency, equity and simplicity, the proposed tax code needs a different approach to capital gains tax. The STT should continue. To check income-tax evasion, it could be combined with a low, flat tax on capital gains — say at 12.5%, half the corporate tax rate. Most important of all, portfolio reshuffling should be fully exempt from capital gains tax.

The ensuing tax system will be efficient: it will promote portfolio churning. It will be equitable (by raising revenue from richer folk) and will provide horizontal equity between foreign and Indian shareholders. It will be relatively simple — STT is collected automatically, and a flat capital gains tax will also be simple to administer. That is the way to go.
http://economictimes.indiatimes.com/articleshow/4908655.cms?flstry=1