ESCORTS MUTUAL FUND

MF buying falls after scrapping of commissions

The industry had said that this move would leave distributors with no incentive to service small investors

Mumbai: The mutual fund (MF) industry’s worst fears seem to be coming true: Distributors are not finding it worth their while to service small investors who, in turn, are either buying units online or directly at MF outlets.
But volumes have suffered. Investors bought 40% fewer MF units in August, the first month after India’s capital markets regulator told asset management companies (AMCs) to stop taking out a slice of investor money to pay MF distributors rather than invest the full amount in shares and bonds.
The industry had said that this move would leave distributors with no incentive to service small investors.
The number of units sold dropped even as the overall assets managed by MF companies rose by about 4% to Rs7.5 trillion, according to two registrars, Karvy Computershare Pvt. Ltd and Deutsche Investor Services Pvt. Ltd.
These two and Computer Age Management Services Ltd serve all AMCs except Templeton Asset Management (India) Pvt. Ltd, which has an in-house registrar.
A registrar to an MF deals with investors and manages paper work.
“Over the last few weeks, we had been tracking the volume of investments. For funds serviced by us (Karvy), we notice that there has been a dip in the transaction volumes by about 40%,” Karvy Computershare said last week in an industry analysis circulated among AMCs it serves.
According to the report, daily transaction volume of purchases has come down in August against average transaction volumes of the previous three months—May, June and July.
Samir S. Dhamankar, head (registrar services) at Deutsche Investor Services, too, said, “There is definitely a short-term impact on business, and more in the retail area.”
The Securities and Exchange Board of India had said in June that MFs cannot charge the investors any upfront commission from August. So far, investors were charged up to 2.25% of their investment in equity schemes in the form of “entry load” and this money was used to pay commissions to distributors.
With the abolition of commissions, distributors have stopped chasing investors. They are focusing more on high networth individuals (HNIs) whom they can charge fees for selling financial products and offering investment advice.
Small investors are increasingly investing in MFs directly through online channels or actually dropping investment applications at collection centres run by AMCs.
The number of direct applications as a percentage of total applications has gone up from an average of 10.58% between May and July to 16.54% in August. In terms of value, however, contribution of direct applications has gone down from 11.03% to 8.48%.
“It appears that small ticket investors are investing directly (as application count increased) and distributors are concentrating their business on big ticket investments (HNIs),” Karvy says.
Nilesh Shah, deputy managing director at ICICI Prudential Asset Management Co. Ltd, which manages Rs77,966 crore, said, “August numbers have been bad. But it’s too short a period. Already people have begun adjusting. Some distributors have started charging transaction fees from investors. We need another month-and-half to get a clearer picture of how things evolve.”
Rajan Ghotgalkar, MD at Principal PNB Asset Management Co. Pvt. Ltd, which manages Rs9,450 crore in assets, said, “There is certainly an impact of 35-40% on the inflows.” A large part of the inflows is through systematic investment plans (SIPs) in which an investor buys MF units for a certain amount at periodic intervals. The inflow of retail money would have been hit even more had there been no SIPs.
Industry body Association of Mutual Funds in India is yet to release inflow data for August.
Sunil Shetty, vice-president (mutual fund–advisory) at LKP Securities Ltd, a Mumbai-based brokerage, said some firms that had MF distribution as an ancillary business have closed down their offline sales model and moved fully online.
Arun Jethmalani, MD at ValueNotes Database Pvt. Ltd, a Pune-based research firm, said, “It was bound to happen. I would be surprised if it didn’t fall. A lot of distributors are trying to push products with loads and not sell no-load products. But they can’t do this for long. In the long run, growth has to come from volumes.”
Anil Rego, CEO at Right Horizons Financial Services Pvt. Ltd, a Bangalore-based wealth manager, said, “It’s unfortunate that when markets have begun to see new highs, the retail investor is not being serviced.”

http://www.livemint.com/2009/09/09000647/MF-buying-falls-after-scrappin.html

Industry update: MF sales hit by abolition of entry load

Mutual Funds (MF) see 9% growth in assets, the MF industry breached the Rs7-lakh-crore mark in assets in August 2009. The industry’s total assets under management (AUM) grew by Rs59,965.79 crore, or 8.69%, during the month.
At the end of August, investors poured in funds worth Rs32,673 crore, down from Rs123,679 crore at the end of July. The equity funds investing in stocks saw net outflow of Rs142 crore. Investments in MFs had slumped substantially in August, with the industry witnessing a net fund inflow of over Rs32,600 crore, a 74% decline on a month-on-month basis.
The abolition of entry loads on equity MF schemes has sharply hit sales of equity schemes in the very first month of the new rule coming into effect. Equity assets recorded a net outflow to the tune of Rs142 crore in August despite a 5% increase in the overall industry’s AUM to Rs7 lakh crore.
Thus, the share of equity assets in the total industry AUM has slipped further to 24%, including equity linked saving schemes (ELSS), from over 25% of assets until the last month.
The Securities and Exchange Board of India (Sebi) has asked all MF companies to get their systems audited at least once in two years and submit the reports to the market regulator.
The regulator said that considering the importance of systems audit in the technology driven asset management activity, it has been decided that MFs shall have a systems audit conducted by an independent CISA/CISM qualified or equivalent auditor.

http://www.livemint.com/2009/09/24123009/Industry-update-MF-sales-hit.html

MF distributors told to be transparent on commissions

Our Bureau
Mumbai, Sept. 23
SEBI has directed mutual fund distributors and agents to disclose to all investors all the commissions received for the different competing schemes of various mutual funds while recommending a similar product.
According to Association of Mutual Funds in India’s (AMFI) revised code of conduct, intermediaries of mutual funds distributors have to disclose to all, the commissions (in the form of trail or any other mode) received for the different competing schemes of various mutual funds, from amongst which the scheme is being recommended.
In case of any intermediary not complying with the code of conduct, the mutual fund shall report it to AMFI and SEBI, a circular said.
“No mutual fund shall deal with those intermediaries who do not follow code of conduct,” SEBI said.
SEBI said all intermediaries of mutual fund companies would have to follow the code of conduct strictly.

Mutual funds still charging entry fees on existing plans

Sebi had banned fund houses from charging investors an upfront fee, known as entry load, from 1 Aug

Mumbai: Despite a ban on entry fees, several asset management companies are still charging those who invest through systematic investment plans (SIPs) in various mutual funds by utilizing a loophole in the market regulator’s instructions.
An SIP is a service option that allows investors to buy mutual fund shares on a regular schedule, usually through bank account deductions.
The Securities and Exchange Board of India (Sebi) banned fund houses from charging investors an upfront fee of up to 2.25%, known as entry load, from 1 August. However, according to the new rules, existing SIPs have to be terminated and restarted to avail of the benefit. Many fund houses have neglected to inform investors about this, and have together earned around Rs45 crore in August from such fees.
“I have not heard about the Sebi circular. Even my agent has not told me anything,” said Manjusha Bagal, a Thane, Maharashtra-based homemaker who has been investing Rs3,000 every month since July 2008 in an equity scheme of a leading fund house.
Sebi on Wednesday issued a 16-point code of conduct for mutual fund and asset management companies that asks them to “ensure that all investor related statutory communications”, including entry and exit fees, are conveyed to investors “reliably and in time”.
“We have not informed (investors). Why should we?” Sunil Subramaniam, head, sales and marketing, Sundaram BNP Paribas Asset Management Co. Ltd, which manages Rs14,023 crore in assets, said before the latest code of conduct was announced.
According to data from industry lobby group Association of Mutual Funds in India, equity funds saw inflows of Rs4,036 crore in August and industry estimates suggest that at least 50-60% of that amount came through investments in old SIPs. Funds would have, therefore, earned entry fees worth Rs45-50 crore at the rate of 2.25%. SIPs typically charge between 2% and 2.25% as entry load. The association only collects aggregate numbers, and does not break them down by investment categories.
“If the amount involved is big, people have already done it (re-registered). But smaller investors continue to pay,” said A.K. Narayan, president, Tamil Nadu Investors Association. “These anomalies will take at least 6-12 months to get corrected.”
Some distributors have even put in fee structures that make re-registering meaningless.
ICICIDirect.com has announced a transaction fee of Rs30 on all transactions below Rs8 lakh. It does not make sense for an investor to re-register an SIP below a sum of Rs1,400 as the transaction fee would cancel out savings from the zero entry load.
At fund house Reliance Capital Asset Management Ltd, which manages about one million SIP customers, the highest in India, existing SIP investors are yet to re-register their portfolios to avoid the entry load burden.
“Almost all of our SIP customers are continuing with their existing load structure,” said Sundeep Sikka, chief executive of the firm that manages assets worth Rs1.17 trillion and collects Rs3,000-4,000 crore through SIPs every year.“Only new investors might like to opt for the new entry load benefits…because the existing customers feel that it may not make any significant difference in their investments by discontinuing the existing plans and reinvest in order to avoid paying the entry load,” he said, adding that while the company has told investors about the new norms, it has “not informed investors specifically about discontinuing their existing plans and re-register with us to avoid entry load”.
Distributors, who used to work on a commission from the entry charges, are also not stepping forward to tell customers about the new rules.
“Why should I shoot my own foot? No distributor would do it,” said a Mumbai-based distributor, who did not want to be identified.
V. Krishnan, vice-president and head of mutual finds at Integrated Enterprises India, a Mumbai-based distributor, said that a large part of the SIP clientele are passive investors and that not everyone is restarting SIPs to avoid the entry load.
K. Venkitesh, national head, distribution, Geojit BNP Paribas Financial Services Ltd, said that the majority of the flows in August were through existing SIPs as the ban put a crimp in fresh sales.
Large national distributors, however, said they are actively advising investors to shift to the new regime by re-registering but many still continue to pay entry load. According to a Mumbai-based official at Bajaj Capital, a financial services distributor, only 40,000-42,000 of its 130,000 SIP accounts have shifted to the new regime.
Anup Bagchi, executive director, ICICI Securities Ltd, which manages about 250,000 investors, said: “We had communicated our pricing structure to all our customers and proactively advised them to re-organize their SIPs to take advantage of no load benefit and our pricing structure. Over 70% have already taken advantage of our advice and have benefited.”

http://www.livemint.com/2009/09/23212100/Mutual-funds-still-charging-en.html

INSURANCE

Chola MS eyes Rs 900cr premium income

Cholamandalam MS General Insurance Company (Chola MS) has set a target to close the current financial with a premium income of Rs 900 crore, an increase of 32 per cent compared with Rs 680 crore last year, said S S Gopala Rathnam, managing director, Chola MS.
Speaking to reporters after launching its new motor policy — Chola Protect, he said the growth drivers would be retail, motor, health and personal accident segments. The motor segment currently accounts for 47 per cent of the business and health about 24 per cent. The company has decided to move out from the corporate group insurance policy due to heavy losses.
It would introduce 7-8 add-on products to strengthen the motor portfolio.
Chola Protect, apart from the regular offerings, would offer 100 per cent depreciation waiver, reinstatement value in case of total loss and daily allowance while the car is under repair among others.

http://www.business-standard.com/india/news/chola-ms-eyes-rs-900cr-premium-income/371011/

BANK

RBI tells banks to do a realty check

MUMBAI: No central banker wants to repeat the mistakes of Alan Greenspan, the former US Fed chief, whose loose monetary policies are blamed for the  subprime mess. With the first hint of a bubble in the local property market, the Reserve Bank of India (RBI) has told banks to watch out for pitfalls while giving loans to builders.

In a communiqué to bank CEOs on Thursday, RBI has said: “It has been observed that some of the companies operating in the real estate sector have significant exposure in the form of advances, investments, etc to their subsidiaries and other group or related entities...As a matter of prudence, banks may meticulously assess the inherent group risk of their borrowal accounts falling under the purview of real estate sector.”

Real estate firms, whose stocks have rebounded as property prices firmed up in key markets like Mumbai, often lend to and invest in group companies — a practice that makes such loans risky for banks. These less creditworthy group entities also raise money against guarantees from the parent firm or promoters, pledge stocks and cut structured deals with foreign investors who get the right to take over the company in the event of default.

But the regulator, according to one of India’s biggest builders Niranjan Hiranandani, may be worried about certain isolated cases. “RBI is an efficient regulator. This circular addresses a particular problem rather than a general sectoral trend,” said the managing director of Hiranandani Constructions. Indeed, there have been cases where local banks have been kept in the dark about deals that the realtor has struck with foreign investors.

The RBI note comes at a point when banks have resumed lending after a year-long lull. New loans extended by banks rose Rs 56,000 crore between July and September against a drop of Rs 7,400 crore from April to June. According to a city-based loan broker, a good slice of this money has gone to builders. But senior bankers feel that lenders are doing the necessary due diligence.

“This is just a cautionary note from RBI. Most banks are already following this philosophy,” said Canara Bank chairman A C Mahajan.

RBI, widely perceived as one of the most conservative central banks in the world, has been apprehensive of property bubbles ever since the Asian meltdown of 1997. As property emerged as an asset class among Indian investors in recent years, RBI hiked the loan risk weightage for banks — a measure which required lenders to have more capital to give the same loan. It also tightened home loan margin norms, which led banks to cap the loan at 80% of the property value.

In the coming weeks, realtors will try to figure out the possible reasons that led RBI to issue the circular. “Since RBI has come out with a directive, industry bodies like NAREDCO and BAI would look to know the root cause behind it,” said Rajeev Talwar, group executive director of DLF. “Some banks,” Abhisheck Lodha, director, Lodha Developers, “may have a large exposure to a particular real estate group, and this can expose the whole system to a big risk.”

It’s evident that RBI is closely monitoring the stunning recovery by real estate companies, many of which are back from the brink. A year ago, these companies had forced mutual funds to roll over bonds, made banks restructure loans and borrowed at as high as 25% interest to stay afloat. A few, which had borrowed against stocks, almost lost control of the company. Today, they are back in business.

The RBI note is specifically aimed at the large firms. It says,”....while assessing the loan requirements of large builders/land developers, they (banks) may carefully analyse the financial credentials/viability of the borrowers on a consolidated basis supported by the consolidated accounts/position of the group. They may also examine the financial credentials/viability of the relevant unconsolidated related entities such as special purpose vehicles (SPVs).”

RBI’s unstated concern may the nature of deals that these SVPs have entered into. In the past five years, the Indian real estate sector has received close to $20 billion foreign direct investment, a chunk of which has come into multiple SPVs floated by builders to promote special projects. Tagged with this money, mostly in the form of quasi debt, are tough conditions, which local builders have to meet to avoid loan recall and litigations.

http://economictimes.indiatimes.com/articleshow/5053443.cms

Citigroup plans to limit US operations

NEW YORK: Financial behemoth Citigroup is planning to scale back its US branch network to six major metropolitan cities, including New York and Washington, and also limit its lending to affluent customers , says a media report.

Attributing to people familiar with the situation , The Wall Street Journal said executives at the New York company plan to narrow the focus of Citigroup’s US branch network to six major metropolitan areas.

The company would also limit its overall consumer lending in the US primarily to credit cards and “jumbo” mortgages, while catering largely to affluent customers, it added. “At the end of the day, we are not going to have the density of distribution that others have” in the US, the report quoted one Citi executive saying.

According to the publication, bank executives are expected to present details of the plan to Citi board next month. The moves would leave its US banking operations concentrated in New York, Washington, Miami, Chicago, San Francisco and Los Angeles, where Citi has a substantial presence.

Citi could abandon or scale back where it is an also-ran , including Boston, Philadelphia and parts of Texas, the report said citing people with knowledge of the discussions. About 75% of Citigroup branches are outside the US. The bank has 1,001 US branches , compared with more than 5,000 a piece at Bank of America Corp., JP Morgan Chase & Co. and Wells Fargo & Co.

The “smaller-but-smarter”approach is the latest attempt by Citi to mend its business, the report said even as some Citi executives are nervous that scaling back in the US could spark criticism in Washington, since the government owns a 34% stake.

The report said that the US pullback would leave Citi even more dependent on corporate clients and its non-US operations, both longtime strengths that could help rev up its overall growth.

FOCUSED APPROACH
The company plans to narrow the focus of US branch network to six major metropolitan areas. It’ll also limit its overall consumer lending in the US primarily to credit cards and jumbo mortgages.

http://economictimes.indiatimes.com/news/international-business/Citigroup-plans-to-limit-US-operations/articleshow/5053568.cms

RBI offers Rs600 bn at special repo

Mumbai: The Reserve Bank of India will conduct a special repo auction for Rs600 billion on Monday and the reversal of the auction will be on 6 October, it said in a statement.
The special repo facility on a daily basis was introduced on 14 October 2008, offering Rs200 billion to meet liquidity needs of mutual funds.
The central bank later increased the facility to Rs600 billion to include liquidity needs of non-banking financial companies and housing finance companies.
At its policy review on 21 April, the central bank said the auction will be conducted on a weekly basis every Monday till March 2010.

http://www.livemint.com/2009/09/22110135/RBI-offers-Rs600-bn-at-special.html

SEBI

Sebi may segregate retail, institutional MF schemes

In a bid to protect the interests of retail investors, the Securities and Exchange Board of India (Sebi) is planning a clear segregation of retail and institutional schemes. Sources said Sebi might ask fund houses to create separate portfolios and net asset values (NAVs) for retail and institutional schemes.
Sebi is working on the move as during the liquidity crunch of October 2008, fund managers sold the most liquid stocks in their portfolio to meet redemption pressures, leaving retail investors in a spot.
At present, although mutual funds offer both retail and institutional plans, these are separate only in the name as their portfolio and NAVs are the same. The only difference is the expense ratio, which is more for retail investors. Sources said Sebi was looking at doing away with this disparity as well.
Vineet Arora, head of products & distribution at ICICI Securities, said, “It is a welcome move. There is an obvious difference in behaviour between retail and institutional investors. Institutions tend to panic more than retail investors. Since redemption pressures are more from institutions, schemes for them will have to keep more cash, which may impact returns.”
Mutual funds charge 2-2.5 per cent from retail investors in equity schemes. The fee for institutional investors is only 0.5 per cent. The expense ratio is the percentage of a mutual fund’s net assets/corpus that goes towards meeting its expenses. The ratio covers fund management fees, marketing and selling expenses, and registrar fees. Funds with lower expenses give better returns, which is one reason why institutional schemes post better returns than retail ones. A case in point is ICICI Prudential’s Focussed Equity Fund institutional plan, which has posted 19.64 per cent returns compared with the retail plan’s figure of 18.49 per cent. There are several schemes where such a disparity exists.
Deepak Sharma, CEO, Sarthi Wealth Management Consultants, said, “The segregation is necessary after the kind of outflows witnessed in October 2008. It will ensure that retail investors are not at a disdvantage during large-scale redemptions.”
Recently, Sebi Chairman CB Bhave had expressed concern over the mutual fund industry’s over-dependence on funds from corporate houses. The Reserve Bank of India has also picked holes in the business model adopted by mutual funds. “A high dependence on corporates for funds implies a lesser role for the retail investors,” it said in its Annual Report 2008-09.
According to a Celent report, institutional investors contribute 56 per cent of the industry’s assets while retail investors account for only 37 per cent. By comparison, retail contribution in China is 70 per cent.
http://www.business-standard.com/india/news/sebi-may-segregate-retail-institutional-mf-schemes/371171/

RBI, Sebi to regulate NCDs jointly

Debenture trustees may have to report company filings to the market regulator.
Non-convertible debentures (NCDs) of less than one-year maturity will now be regulated jointly by financial and market regulators. The decision was taken at a meeting between the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) earlier this week.
At the meeting, the two regulators agreed that NCDs needed to be regulated following huge investments by mutual funds in fixed income plans and banks as it posed a systemic risk in case there was any problem in redemption of these instruments.
Following this decision, debenture trustees to such instruments may be asked to report the filings by companies or non-banking finance companies (NBFCs) to Sebi which, in turn, will send them to RBI.
Before floating NCDs, every company appoints a debenture trustee, which is usually a bank or a broking firm, that acts as a custodian of the debentures.
NCDs are debt instruments floated by companies, NBFCs and banks to raise short-term finance from the market, mostly for working capital purposes. These are subscribed to in a major way by mutual funds for their short-term fixed-income portfolios, and other banks. However, NCDs are neither listed, nor reported to any regulator and thus are totally unregulated as of now.
According to sources, these instruments are privately-placed with institutional investors such as mutual funds and banks. Therefore, any data on the total mount outstanding in NCDs at a given point of time are difficult to get.
Data on NCDs are required to avoid last October-like situations that compelled RBI to provide liquidity support to both banks and mutual funds. Back then the mutual funds faced the redemption pressure, and companies rolled over the maturity of NCDs to avoid default as they found it difficult to pay the money back to debenture holders.
On the other hand, the money borrowed through NCDs belongs to the mutual funds or banks that raise it from the public. Thus, any default in such instruments has a major systemic risk.
In October 2008, liquidity support worth Rs 20,000 crore was given to the mutual funds to manage redemption pressure following defaults and eventual rollback of NCDs. Even the banks were allowed to lend against and on buyback of certificates of deposit (CDs) held by mutual funds to tide over the redemption pressure
http://www.business-standard.com/india/news/rbi-sebi-to-regulate-ncds-jointly/371170/

ECONOMY

Inflation rises to 0.37% on food surge

NEW DELHI: Annual inflation for food articles soared to 15.64% in the week ended September 12, the highest in more than a decade, fueled largely by a 75% rise in potato prices and a 45% increase in the prices of vegetables and sugar.

With elections in three states — Maharashtra, Arunachal Pradesh and Haryana — round the corner, the United Progressive Alliance government at the Centre is expected to act on a war footing to rein in run away food prices to avoid a poll debacle.

“Current surge in inflation in food prices has more to do with the market expectations rather than the supply-demand gap,” said Abheek Barua, chief economist at HDFC Bank.

With a better mechanism in place to manage the inflationary expectations the pace of rise in food prices will cool off, he said. Annual inflation measured by the Wholesale Price Index (WPI) for the week rose to 0.37% from 0.12% in the week before, a release by the ministry of commerce and industry on Thursday said. Although inflationary pressures are building up in the economy on the back of dearer food items and its second round impact, the policy makers have ruled out a hike in the key policy rates till the economy fully recovers from the economic downturn.

Finance minister has ruled out the chances of a reversal in the expansionary monetary policy. Annual inflation for manufactured items was at 0.24% and for fuel items was at negative 8.47% for the week.