Party’s over, MFs keep NFO launches simple

MUMBAI: Tough times call for tougher measures. Gone are the days when fund houses threw lavish distributor parties, extensive advertisements and countrywide roadshows to sell new fund offerings (NFOs). Post-entry load ban, fund marketers have been striving hard to keep expenses under control, cutting down on paraphernalias which were earlier considered basic necessities for fund-selling.

From reducing the subscription period to cutting the number of roadshows and designated distributors, fund houses are doing everything in their bid to keep marketing and sales costs under control. Every additional rupee spent gets accounted

upfront on the books of the fund house, turning an otherwise wafer-thin margin business into a loss-making one.
Capital market regulator Sebi had banned fund houses from charging the 2.25% entry load (while selling funds to investors) from August last year. The entry load ban has hit funds business badly, as it is from this pool that asset management companies (AMCs) paid commission to their distributors (up to 1.5%) and met a lion’s share of their fund promotion expenses.

“We’ve dropped the idea of having country-wide roadshows and hosting lavish distributor meets. The sales strategy now is to keep a very tight distribution line (partnering with only strong distributors). The idea to expand markets, usually done by fund houses at the launch of a new fund, or penetrate into sub-tier-3 markets has been totally trashed,” said the channel head of a bank-promoted fund house.

In the heydays of bull run, large fund houses covered (roadshows) as many as 150 town. This number has drastically come down to just about 25 cities. The number of investor meetings in rural areas has come down from about 50-80 meets in 2008 to just 10 meets post-August 2009 as per cost calculations provided by a fund house (fund houses spent as much as Rs 500 per investor to hold such meetings in 2008).

Printed brochures and promotional handouts have come down from about five lakhs in 2007 to just about one lakh in 2009. The number of key distribution partners, which numbered about 30-35 in 2007 and 2008, has come down to just about 10 -15.

“Marketing efforts have declined drastically, post-entry load ban. None of the fund houses are now trying to expand their reach. This has led to sharp decline in retail applications,” said Rajiv Bajaj, managing director, Bajaj Capital, adding, “Most fund houses are now relying on bulk money, which fund houses receive as investments from their parent company or bank, to ramp up their initial mobilisation,” he added.

According to sources, there is also a conscious effort on the part of fund marketers to lower the mobilisation target to make it more cost-effective. Several fund houses are thinking of reducing their subscription period to save on costs. Most fund houses have stopped giving extravagant gifts and incentives to distributors. Distributors get 1-1.5% while selling new fund offers.

“Fund houses no longer launch similar-sounding products. Most fund houses are coming out with newer products to attract investments. Funds are launched only after thorough considerations,” said Karan Datta, head-sales, Axis Mutual Fund.

Fixed maturity plans got a bad name last year as investment in some of these schemes turned illiquid as mutual funds shut their doors on investors seeking early redemption. However, these measures prevented a run and also ensured that investors got money on maturity.

Some smart investors, who made money in equity markets over the last one year, are now trying to identify a tax-effective way out to lock in their profits. Distributors have already identified the opportunity and are recommending fixed maturity plans (FMP) to them.

“Fixed maturity plans make sense for investors who come from the highest-income bracket,” says Amar Pandit, a Mumbai-based financial planner. Investors seek to park their money for a stipulated period of time after their short-term needs and needs towards emergencies are taken care of.

But investors have to be careful about their investments in such products. After some investors burned their fingers in some FMP offerings in 2008, the product was not as safe as it seemed. “Poor credit quality of papers and illiquidity of instruments were chief reasons behind the problems faced by FMP investors,” says Devendra Nevgi, founder of Delta Global Partners, a Mumbai-based investment advisory firm.

As regulators have banned mutual funds from giving out indicative yields and portfolios that induced the investors in the past, it is difficult to judge the offerings in the market. “A fund manager may end up chasing higher yield at the cost of the quality of paper. This is a big risk an FMP investor faces,” says Nandkumar Surti, CIO of JP Morgan AMC.

Investors will be better off if they prefer to do some homework. “Do check the track record of the mutual fund. Invest only with fund houses that have lived up to their promises in the past and historically avoided poor quality papers,” adds Mr Pandit.

There is another catch here. Norms make it mandatory that the units of the scheme must be listed on a stock exchange. A look at the trading history of the closed-ended schemes on bourses will make many wary of the idea of investing in FMPs. In most cases, there is not enough volume, or you may have to sell at a discount to NAV.

So if you are sure you do not require the money for say, 12-15 months, you can consider an FMP. Given the abundant liquidity in the market, this may not be the best time to invest. “Short-term rates up to one year are expected to go up by 100 basis points. In February and March, investors may come across better opportunities, given the traditional withdrawal of liquidity owing to year end,” opines Mr Nevgi.

Given the risks associated with FMP, there are experts who prefer to steer clear of them. “Investors seeking safety of capital are better served with the open-ended short-term bond funds than a fixed maturity plan,” says Nandkumar Surti. Investors who are keen to invest with one-year timeframe may consider short-term bond funds to realise healthy risk-adjusted returns.

Investors have to take a call on if they are keen to lock in their money in FMP and earn a fixed return at a risk of non-disclosure or they have to take a small amount of interest rate risk and invest in products of short-term nature with a fairly high level of disclosures.

The industry has been abuzz with news of mutual funds being available through stock exchanges for transacting. UTI Mutual fund which was first to offer thirty schemes on NSE’s mutual fund service system received 300 applications and assets worth Rs 78 lakh. However, the recent rush of reforms has left investors confused whether mutual funds will become akin to Exchange traded funds (ETFs). We try to uncover the difference between the two.
The Securities Exchange Board of India (SEBI), in a circular issued on 13th November 2009, has mandated that the stock exchange terminals offer the facility to buy and sell schemes of mutual funds. SEBI states, “Units of mutual fund schemes may be permitted to be transacted through registered stock brokers of recognised stock exchanges and such stock brokers will be eligible to be considered as official points of acceptance.”
There are about 200,000 stock exchange terminals across 1,500 towns and cities. The move is expected to extend mutual funds to investors beyond the major metros and cities in India. Thus, the market regulator has opened up another channel for retail investors to buy or sell mutual funds using the existing stock exchange infrastructure.
However, this trade facility should not be confused with the Exchange Traded Funds (ETFs). Basically, ETFs are open-ended index funds listed on stock exchanges and were introduced in US in 1993. The assets under management of the global ETF industry stands at $711 billion at end of 2008 with a share of $1.28 billion from India (source Global ETF Research).
ETFs and mutual funds

  ETFs allow exposure to different indices which reflect specific stocks, sectors, countries, fixed income or commodities. Mutual funds schemes have a specific investment objective based on which allocation to a particular asset or security is made. In fact, ETFs do not sell individual shares directly to investors and only issue their shares in large blocks (blocks of 50,000 shares, for example) that are known as “Creation Units.” (Source: Securities Exchange Commission). 
 
  The portfolio composition of ETFs will be available to investors on a daily basis unlike mutual funds where you get to see a monthly factsheet. 
 
  ETFs are traded on a real time basis which means that the prices change throughout the day as determined by the market forces while mutual funds have a Net Asset Value (NAV) at the end of each business day. The SEBI circular does not mention whether the NAV of mutual funds will fluctuate or be traded similar to ETFs. Presently, the units are allotted to investors based on previous day’s NAV or same day’s NAV in case the transaction is accepted before a particular cut-off time. 
 
  ETFs can be purchased on margin and are lendable. Thus, ETFs are for a more sophisticated investor whereas mutual funds are an investment product for a retail investor. 
 
  ETFs do not have sales load unlike the exit load in mutual funds. The expenses for ETFs are annual varying from 0.05 per cent and 1.60 per cent. Since August 2009 SEBI has abolished entry load for mutual funds. Also, there have been reports of SEBI’s advisory committee proposing to lower the fund management charges with increase in assets under management. 
 
  Investors can sell their ETF shares in the secondary market, or sell the Creation Units back to the ETF. The purchase, sale or redemption of units in mutual funds always takes place between the investor and the Asset Management Company. 
 
  ETFs work for institutional investors as an alternative to futures by establishing a short or a long position in the market. During bear markets, the most profitable investment strategy would be to short the market. However, retail investors of mutual funds would find it hard to benefit from bear markets – most of the retail equity funds provide long only exposure, meaning that investors of such funds benefit only when equity markets rise. Conversely, they will suffer losses when the equity markets plunge. Some of the equity funds with absolute return mandates or with mandates that allow for both long and short positions would be able to preserve the funds’ value slightly better than long only equity funds.
Exotic ETFs
In recent times, we also have ETFs that track fundamentals instead of market capitalisation. WisdomTree Investments, Inc. developed the first family of fundamentally-weighted indexes and ETFs. In contrast to capitalisation-weighted indexes, the WisdomTree Indexes anchor the initial weights of individual stocks to a measure of fundamental value.
The company believes its approach provides investors with a viable alternative to market capweighted indexes. To cite an example: the WisdomTree India Earnings Fund which holds assets of $526 million (as at 29 September 09), tracks the WisdomTree India Earnings Index, a fundamentally-weighted index. This index measures the performance of companies incorporated and traded in India that are profitable and that are eligible to be purchased by foreign investors as of the index measurement date. Companies are weighted in the index based on their earnings in the fiscal year prior to the Index measurement date, adjusted for a factor that takes into account shares available to foreign investors. For these purposes, “earnings” are determined using a company’s net income.
There are other exotic products like the iPath S&P500 VIX Short-Term Futures ETN, which is designed to provide exposure to equity market volatility through CBOE Volatility Index futures. Another exotic product, the iPath Global Carbon ETN, provides exposure to the performances of carbon credits.
Conclusion
ETFs and Mutual Funds fall into different segments in terms of investor profile. Mutual funds traded through stock exchange terminals are an additional avenue to transact for the retail investors. Clearly, this move by SEBI does not change the product attributes of mutual funds but in effect provides wider means of distribution.

I want to invest Rs 3,000 in three mutual funds via SIPs (Rs 1,000 each). I have shortlisted a few funds: Sundaram BNP Paribas S.M.I.L.E. Reg, Reliance Regular Savings Equity, Magnum Contra, HDFC Top 200 & UTI Opportunities. Should I opt for the first three or do you suggest some other funds?
  -Hemant
Sundaram BNP Paribas SMILE Reg and Reliance Regular Savings Equity are 5-star rated funds. They both invest heavily in mid-cap stocks. Having two aggressive funds would make your portfolio too risky. So, choose to invest in any one of these two funds.
Magnum Contra is a good 4-star rated fund. HDFC Top 200 and UTI Opportunities are 5-star rated funds, with an impressive track record. You may invest in any of these three.
I had invested in Magnum Taxgain in 2006. The three-year lock-in is over. Should I redeem or continue? I can stay invested, if needed.
-Shailesh Bhagat
Magnum Taxgain is a 4-star rated tax saving fund, with a portfolio similar to an equity diversified fund. If your portfolio has a sufficient number of equity diversified funds, then you may redeem this one and invest the proceeds in the remaining funds. You may even continue holding this fund for the long term if you wish to. 

I want to build a mutual fund portfolio with a time horizon of 10 years. I would like your opinion on my selection.
 

-Yuvaraj Patil
Your selection is impressive; it has all 4/5-star rated funds. However, we suggest you reduce your portfolio to four funds.
If you go with HDFC Top 200 and DSPBR Top 100, this will give your portfolio a large-cap tilt. You can balance this with IDFC Premier Equity, which is more aggressive since it has an exposure to mid caps.
Instead of HDFC Prudence, a balanced fund, one that invests in both equity and debt, we suggest you go for a debt fund like Fortis Flexi Debt. Avoid ICICI Prudential Infrastructure, a thematic fund which invests at least 70-100 per cent in stocks of infrastructure development companies. As for Magnum Contra, it has evolved into being a good equity diversified fund, rather than a fund that takes contra bets. You don't need to invest in it if you go for the other three schemes.
So, this portfolio of four schemes will give you a large cap, mid cap and debt orientation. Since you plan to invest Rs.14,000, you can invest Rs. 3,500 per month in each of the suggested four schemes.
Value Research

KOLKATA: Despite recent recessionary trends, the non-life insurance sector — comprising PSUs and private players — has sustained its composite growth rates in premium income for three consecutive April-December periods (calendar years 2007, 2008 and 2009). Declining growth rates in premium income experienced by private insurers were offset by increasing growth managed by their PSU counterparts during these periods.

According to data released by the Insurance Regulatory & Development Authority (Irda), the non-life sector witnessed a 9.95% growth in premiums during the first nine months of the current fiscal against 10.24% in the previous corresponding period. Growth during April-December, 2007 was marginally higher at 12%.

The private sector general insurers — 12 in all — saw growth rates decline steadily from 27% during April-December 2007 to 14% during the corresponding period in 2008 and now stands at 8% in 2009.

The public sector insurers — New India Assurance, United India, Oriental and National Insurance — managed to increase growth figures from a paltry 3.77% during April-December 2007 to about 8% in April-December 2008 and finally to 11.37% in the first nine months of 2009.

During April-December 2009, three large private insurers witnessed a fall in premium income. Largest among the private insurers, ICICI Lombard, saw a near 12% fall in premium income against a small 3.7% growth in the previous corresponding period. During April-December 2007, the insurer had managed a 13% rise in premiums against the previous period.

Bajaj Allianz, one of the largest among the private insurers, also witnessed a near 10% fall in premium income during April-December 2009, against 16% growth rate in the previous corresponding period. During April-December 2007, it achieved a whopping 31% growth.

Among the public sector insurers, United India Insurance registered the highest growth rate at 19.34% during April-December 2009 against 9.46% in the previous corresponding period and a 6.41% growth rate during the same period of 2007. Oriental Insurance managed a 15% growth during the period against 2.63% in the previous period. It had witnessed a 2.41% fall in premium income during April-December 2007.

The largest insurers in the general cover segment, New India, maintained a steady growth figure of 9.03% during April-December 2009, against 5.9% in the previous corresponding period and the preceding period.

MUMBAI: The battle between the Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) over the regulation of unit-linked insurance plans could affect the plans of companies aiming to list unless the differences are resolved soon. Life companies, when contacted, said they would stick to the line that the products come under IRDA regulation and are unlikely to either stop selling ULIPs or obtain registration with SEBI. Insurers say for the issue to be now closed, the regulators will have to sort it out among themselves or it will require the intervention of the government.

Among life insurance companies, Reliance Life Insurance had announced its intent to go for an IPO. Some time ago, HDFC Standard Life too had said it would look at an IPO in 2010-11. The Aditya Birla Group is looking at hiving off its financial services business under a new entity — an exercise which would require listing of the new arm.

Although there are no guidelines in place for life insurance IPOs, IRDA is expected to come out with disclosure norms for companies seeking a listing by end February. Following this, SEBI is also expected to come out with the disclosure requirement in a couple of months. Only after the market regulation notifies the disclosure norms, the first life insurance company can go public.

When contacted by ET, Reliance Capital chief executive Sam Ghosh, said: “We hope this issue gets resolved before we file our draft prospectus.”

Most of the life companies do not agree with SEBI’s interpretation of laws with respect to regulation of ULIPs. The market regulator last week wrote to most of the life insurance companies stating that their ULIP products raise money from the public and the money is invested in a fund chosen by public and the calculation is through net asset value which is unitised fund value.

According to SEBI, all these characteristics are akin to mutual fund schemes.

The market watchdog has cited Section 12(1)b of the SEBI Act, which says no person shall sponsor or carry on any venture capital fund, or collective investment scheme, including mutual funds, unless he obtains a certificate of registration from the board.

“Collective investment schemes as defined under Section 11A of the SEBI Act clearly excludes contracts of insurance under the Insurance Act,” said V Srinivasan, chief financial officer of Bharti Axa Life Insurance. He added that in a sense, insurance has always been a collective investment scheme where resources are mobilised for investment and ULIP is only one way of accounting and does not change the fundamental basis of insurance.

Incidentally, the provision on Collective Investment Schemes was introduced to regulate entities such as promoters of plantation schemes or timeshare schemes who escaped regulations in the past.

To save for your children, use low-cost investment avenues.

Most parents are worried about securing their child's future. Which is why life insurance companies launch a slew of unit-linked products targeting children. Recently, Bharti AXA Life launched a new child life insurance plan, 'Bright Stars Plus with Jumpstart Bonus'.
WHAT IS IT?
It is nothing but a regular premium unit-linked insurance policy, which provides a child with a Jumpstart Bonus when the policy matures. Like most policies, one needs to choose the premium to be paid and the policy term. This will decide the sum assured a person gets. Once done, the next step is to choose a fund from the six options.
WHAT ARE THE BENEFITS?
Like most insurance policies, this one will pay the sum assured immediately on death of the policyholder. However, the company adds that future premiums payable are waived till maturity and Bharti AXA will pay the premiums into the investment funds. The policy continues with all applicable benefits until maturity and on maturity the nominee,will get maturity benefits as given below.
 

You or your nominee get the Policy Fund Value + Jumpstart Bonus. Most people would really believe the company is giving a free cover and I have heard a lot of insurance agents from other companies talking about this feature in their products as well. On the contrary,the company is giving this benefit because it is charging a much higher mortality rate to the policyholder.
 

Mortality rate is the cost of risk cover and is generally expressed in terms of Rs 1.4 per thousand or any other amount per thousand. If you look at the mortality rate table, the rate for a 30-year old male is from Rs 2.95-6.68 per thousand, depending on the term of the policy. In most policies where the above benefit of an additional amount on maturity is not present, the mortality rate is far lower and around Rs 1.4 per thousand. Meaning, this policy is charging 2-4 times the mortality rate and is hence extending this benefit.
The only unique thing about this policy is the Jumpstart Bonus of 5-7 per cent. This bonus is a percentage of average policy fund value at the end of preceding 36 policy months. The percentage payable is dependent on the Policy Term chosen and is as follows:
A Jumpstart Bonus of 7 per cent is only applicable for a policy term of 15, 20 and 25 years. For policy terms of 7 and 10 years, the bonus is 5 per cent. However, based on the illustration table, the net yield comes to around 3.5 per cent of the fund value. This is very insignificant, compared to the charges in this policy.
Besides the jumpstart bonus, there is another feature , an option to decrease premium. In this product, you can decrease the premium amount any time after completion of two policy years. The decrease in premium will decrease your sum assured in the same proportion.
IS THIS POLICY FOR YOU?
Besides the higher mortality rates, the premium allocation charge (PAC)in the first 3 years of the policy is very high. There is no PAC from the fourth year onwards.
Additionally, there is a policy administration charge of Rs 60 per month, increasing at 5 per cent every year, which for smaller premiums of Rs 20,000 will be 3.6 per cent, plus surrender charges and fund management charges.
 

Overall, the policy does not really offer anything unique when compared to most other child plans available in the market today.In the case of a 30-year old male paying an annual premium of Rs 50,000 for a period of 25 years, with sum assured of Rs 2.5 lakh, the total premium paid at the end of 25 years is Rs 12.50 lakh. The fund value with the Jumpstart Benefit at the time of maturity is Rs 38.27 lakh approximately.
Now, consider a pure term plan, with a sum assured of Rs 2.5 lakh for a 30-year old male (for term of 25 years). The annual premium for this will be just Rs 1,588. The balance amount of Rs 48,412 a year (after paying premium of Rs 1,588 a year) invested in an index fund at 10 per cent a year will be worth Rs 47.61 lakh after 25 years. There is a huge difference, of over Rs 9.34 lakh. Even if you take an additional cover of Rs 2.5 lakh by paying additional premium of Rs 1,588 and invest the balance, Rs 50,000-1,588-1,588= Rs 46,824 in a 10 per cent investment, you will have a corpus of Rs 46.05 lakh at the end of 25 years. Additionally, when you mix investment with insurance, you are stuck with the same fund manager for an extended period of time.
In sum, it's best to stick with a term plan and invest the balance in a low-cost investment.

The central bank may hike CRR by 50 bps; some economists expect a rise in policy rates too.
An increase in the cash reserve ratio (CRR) by the Reserve Bank of India (RBI) might not translate into an immediate increase in lending and deposit rates, bankers said.
Bankers pointed out that the system was flush with funds and companies were still not drawing upon the sanctioned loan facilities despite a pick-up in demand for credit. For instance, till recently, for State Bank of India, the gap between sanctions and disbursals was of the order of Rs 50,000 crore.
A broad section of the financial sector players expects the Indian central bank to increase CRR, or the proportion of deposits that banks set aside, by 50 basis points (bps) in the third quarter review of the monetary policy due on Friday. One basis point is a hundredth of a percentage point. There are also a few who expect policy rates to start moving up (see graphic).
“This mode of exit — removing liquidity first and then following it up with rate hikes — appears to be an internationally-accepted norm for those economies that went in for heavy liquidity easing. The US Fed, which led the quantitative easing drive, seems to focus on withdrawing its bond buyback programme before easing rates. China’s first monetary step taken last week was a hike in reserve requirement,” HDFC Bank said in a recent report.
An increase of 50 bps in CRR would suck out around Rs 20,000 crore from the system. But given the low credit demand for the last two months on an average, banks parked upwards of Rs 70,000 crore with RBI through the daily reverse repo operations.
The growth in bank credit, which dropped to 9.65 per cent for the year-ended October 2009, has seen some improvement. But bankers attributed a part of the Rs 79,515-crore disbursals by banks in the last fortnight of December 2009 to quarterly targets. Besides, some said, the government had also put pressure on the public sector players to help loan growth.
“Liquidity is available in the system. Though an increase in CRR will suck out some liquidity from the system, but interest rate is also a function of demand and supply. Banks have sufficient liquidity and deposit growth is also healthy. Economic growth has just started and RBI may not like to do anything to hamper it, though inflation is a concern,” said Allahabad Bank Chairman and Managing Director JP Dua.
Andhra Bank Chairman and Managing Director RS Reddy added that an across-the-board rise in lending rates was unlikely due to an increase in CRR. There could be repricing of lending rates for loans granted at rates below benchmark prime lending rates (BPLR), he added. “It would help improve margins,” Reddy said.
With banks beset by low credit demand, they have been offering short-term loans at a discount to the prevailing BPLR to ensure they could earn some returns on funds which would be otherwise sitting idle. Besides, there will be a rush to meet the annual credit growth targets during the last eight weeks of the financial year, a senior banker said.
“It depends on what kind of rate hike we are talking about. If it is a (rate hike) symbolic hike, nobody will upset the term rate structure. I don’t think that a 25 or 50-bps increase in CRR will immediately upset the credit markets and term rate structure because of liquidity and the need for achieving the loan target,” said Oriental Bank of Commerce Chairman and Managing Director TY Prabhu.
In addition, the Centre’s borrowings are due to end soon with the last tranche of Rs 8,000 crore to be auctioned by the first week of February. This is also expected to result in lower pressure on liquidity, as the government has been borrowing between Rs 7,000 crore and Rs 10,000 crore a week since October.
There could be some movement on the deposit rate side, with the rate on a few maturities seeing an upward bias. So far in 2010, ICICI Bank and Union Bank of India have raised rates on one maturity each. But as ICICI Bank Managing Director & CEO Chanda Kochhar told Business Standard in an interview last week, “An increase in one bucket should not be seen as an increase in interest rates.”

If you think your money in savings bank account will be automatically converted into fixed deposits (FDs), think again. It may just happen that while you are thinking the idle cash may earn 6-6.5 per cent a year, the prevailing fixed-deposit rate for one-year funds, it may actually continue to fetch only 3.5 per cent.
That is because banks are discouraging auto sweeps, fearing erosion in low-cost deposit base in the wake of rising interest rate expectation. The savings and current account deposits (Casa) or low-cost deposits, help banks keep their cost of funds under check, and, in turn, ensure healthy margins.
Though banks have not withdrawn the product, they are not pushing it aggressively either.
“We still have the product, but we are not aggressively pushing it,” said a senior executive of Axis Bank.
Axis Bank has one of the highest Casa component in total deposits, estimated at 45 per cent at the end of December 2009 as against 39 per cent a year ago. The bank executive said the lender would like to maintain Casa at 40 per cent at all times. In the third quarter, the bank’s Casa growth was 29 per cent on year, while total deposit grew 7 per cent, mainly due to slower growth in term deposits, he added.
Interest on deposits in savings accounts is the only regulated interest rate, fixed at 3.5 per cent, and no interest rate is paid on current account balances. The Reserve Bank of India (RBI), in its annual policy announcement in April, mandated the banks to calculate interest rate on savings accounts on a daily basis. Earlier banks paid interest on savings accounts for the last 10 days of a month.
Some of the public sector banks are also increasingly avoiding transfer of low-cost deposits to fixed deposits.
“Earlier, banks used to switch savings bank deposits into fixed deposits of six-month tenure, as the differential between the rates was a mere 25 basis points, or at best 50 basis points. Now, as the gap has widened, we are not aggressively canvassing the scheme, though we still have the product,” said a senior Indian Overseas Bank executive.
The public sector banks have one more reason not to auto transfer funds to fixed deposits, as the government has given them Casa targets and not the total deposit target for 2009-10. Earlier, banks only had to indicate their growth projects for deposits, along with other parameters in their statement of intent.
As a result, most of the public sector banks have stressed on Casa this year, and most have seen growth in line with their projection, at least till the end of the first half of the financial year. Now, with interest rates expected to harden, such transfer will dent bank’s profitability, which is already under pressure due to lack of credit growth and vanishing treasury income.
Some of the banks also said though the strategy of discouraging auto transfer might be successful in urban centres where customers are aware of various investment avenues, but for smaller centres, the model may not be successful.

Securities tribunal gives boost to private equity investors

In a landmark judgment last week, the tribunal has shot down the stand of markets regulator Securities and Exchange Board of India (Sebi) that said veto rights constituted “control” of the company under Regulation 12 of the Takeover Regulations.
 Legal experts said this order has come as a major relief to investors who were wary of seeking such rights for fear of triggering the open offer regulations. The order has put to rest a lot of related ambiguities too, they added.
The case goes back to 2007 when private equity firm Subhkam Ventures, through a preferential allotment, acquired more than 15 per cent in MSK Projects thereby triggering an open offer. It filed an open offer draft document with Sebi under Regulation 10 of the Takeover Regulations, mentioning that it was only a financial investor and the acquisition would not lead to any change in the control of the company. Sebi, however, wanted the open offer to be made under Regulation 12 (change in control) along with Regulation 10. This was challenged by Subhkam Ventures at SAT, which based on the facts of the matter, ruled that “Regulation 12 does not get triggered and Sebi was not justified in making the appellant (Subhkam Ventures) incorporate this regulation in the letter of offer”.
Lawyers who deal with private equity and venture capital players said the agreements between private equity and venture capitalist entities and companies are standard in form and such ambiguities are common, so this order would set to rest a lot of issues. “This order should benefit and bring certainty to those venture capital and private equity investors who have made investments in companies on similar terms and conditions,” said Vishal Gandhi of Gandhi & Associates.
According to law firm Nishith Desai Associates, “The order brings much relief to financial investors who have been uneasy about seeking such rights in listed companies for fear of triggering the requirement to make an open offer and also the implications of being regarded as persons in ‘control’ over the company”.
Sebi’s stand in the case stemmed from the fact that the shareholder agreement between Subhkam Ventures and MSK Projects gave the former rights to veto certain business decisions, appoint a nominee on the board of the company and quorum rights (meaning Subhkam nominee should be present at the board meetings).
SAT, in its judgement, has said the provisions of the veto rights do not give control to Subhkam Ventures.
“On the contrary, it only enables (Subhkam) to safeguard its investment and interest of the shareholders in general,” it said.
Gandhi, however, cautioned that the order has still left some of the important issues unresolved. "The larger question is that if the investors are not in control and if the promoters are unable to take a decision due to the investors exercising their rights, then can one say that the promoters are in control? And, if neither the investors nor the promoters are in control, then who really is in control?" asked Gandhi.
The answer to this may be found by examining other related provisions of the shareholders agreement that specify the consequences of the exercise of a veto right by the investors, he adds.
"This ruling will help in the overall growth of the PE industry," says Vishal Tulsyan, director & CEO, Motilal Oswal Venture Capital Advisors. "One major concern was that rights of the PE player was getting diluted. This will no more be the case," he added.
Sebi has an option to approach the Supreme Court on the SAT ruling. However it is not yet known whether it will do so.

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