The mutual fund industry didn’t get anything from the finance minister, but that has not stopped them from exploring how they could work out some of the other proposals in direct taxes to their advantage . Though a sizable part of the industry was expecting the FM to scrap the tax arbitrage opportunity available to corporates investing in short-term debt products, he did not oblige.

Some mutual fund players were trying to figure out whether they could corner the extra Rs 20,000 investment that qualifies for tax deduction announced in the Budget. In addition to Rs 1 lakh under section 80C, an investor can invest an extra Rs 20,000 in long-term infrastructure bonds to claim tax deduction, the FM said in his Budget speech.

“We are not sure whether we will be able to launch a product to invest in these bonds,’’ said the chief of a private sector mutual fund. “Since this is in addition to Rs 1 lakh, even our tax saving schemes won’t be able to attract this amount,’’ he added. “MFs are unlikely to get this pie.

Even in the past, the government had allowed ICICI and IDBI to issue taxfree bonds,’’ said another MF manager. “The government is most likely to come up with a list of institutions which can issue such bonds in the near future.’’

Financial advisers are unanimous that the bonds will be useful for investors looking for long-term taxfree returns. However, they await details — such as the lock-in period and interest rate — before recommending them to their clients. They believe that the bonds could lose their charm if they have a long lock-in . However, the tax-free status, backed with government guaranty, would still make them hugely popular among risk-averse investors.

In a rising interest rate regime, fixed maturity plans can offer good returns. But exit in the interim is difficult because of listing.
When interest rates start going up, investors seek options that will give them good returns. There are various options – fixed deposits, debt funds, corporate deposits, non convertible debentures and fixed maturity plans (FMPs) of mutual funds.
FMPs are schemes with a pre-specified tenure. The basic objective is to generate steady returns over a fixed period. Thus, investors are assured of returns if they stay in these products for the entire period.
Since these products are of different maturities, investors have the option of buying schemes that suit their requirements. Since these schemes are closed-ended in nature, investors earlier had to pay an exit load. However, last year, the Securities and Exchange Board of India (Sebi) made it mandatory for FMPs to be listed in the stock exchanges.
At best, these schemes can be best equated with a fixed deposit in a bank, but with a caveat. The maturity amount of a fixed deposit in a bank is 'guaranteed', but only 'indicative' in case of an FMP.
Last year, Sebi issued a directive whereby fund houses were instructed not to declare any ‘indicative portfolio’ and ‘indicative returns’ to investors in FMPs. However, while buying it, one can look at the returns that are being offered at a particular time.
But what investment strategy do these FMPs follow? These are invested in fixed income instruments, like certificate of deposits (CD), commercial papers (CP), money market instruments, corporate bonds; debentures of reputed companies or in securities issued by Government of India and fixed deposits selected by the fund manager.
These have lower risk of capital loss due to their investment in debt and money market instruments and are least exposed to interest rate risk as the fund holds the instruments till maturity getting a fixed rate of return. Here, fund managers primarily invest in AAA, P1+ or such kind of good rated credit instruments with maturity profile of the securities in line with the maturity of the plan so there is also low credit risk with minimal liquidity risk involved.
Since the instrument is held till maturity, there is a cost saving in respect of buying and selling of instruments.
FMPs have better tax efficiencies whether you invest in the short term or in the long term. The long-term capital gains (investment of more than a year) enjoy indexation benefit (Indexation is a technique to adjust income payments by means of a price Index , in order to maintain the purchasing power of the public after inflation).
Importantly, if you stay invested for just over a year, there are double indexation benefits. For instance, if you buy an FMP of 14 months in February 2010, scheme will mature in April, 2011. In this case, the investor will get inflation indexation benefits for the years 2009-10 and 2011-12. After that, the tax rate is 10 per cent without indexation and 20 per cent with indexation.
In case of short-term capital tax, it is similar to interest income from bank fixed deposits. The returns are added to the income of the investor and taxed as per his/her slab.
However, remember that these schemes are not-so liquid anymore. Since they have to be listed at the stock exchanges, exiting before the scheme matures is difficult. For one, there are few buyers. And even if there are buyers, the units have to be sold at a discount. As a result, enter these products only if you are sure that

Though it has been more than six months since the ban on entry load on mutual funds (MFs) came into force, independent financial advisors (IFAs) are still shying away from selling MFs. Instead, they are opting to sell other more lucrative products such as unit-linked insurance plans (Ulips). Some of them have even ventured into stock broking. IFAs say customers are not willing to pay the advisory fees.
The Securities and Exchange Board of India (Sebi) had barred fund houses from charging entry load from August last year.
Says Pradip Saxena, a Jaipur-based financial advisor: “The investors’ mindset has not changed. They are still reluctant to pay us for our services despite being offered better advice. The market for mutual funds is down and we are pushing more insurance products, mainly Ulips.”
Most IFAs share this view. “Sebi made the product cheaper for investors, but what about our earnings?” asks Nidhi Aggarwal, a Lucknow-based advisor. “If we can’t even get normal commuting charges, it’s better to avoid the product.”
Says Nitin Garg, a Bhopal-based advisor: “Before the ban, my average income from sale of mutual funds was close to Rs 20,000 per month. Now, it has dropped to as low as Rs 5,000. Whatever commission we get are from asset management companies as upfront and trail commissions. I shifted to stock broking.”
Arindam Ghosh, chief executive of Mirae Asset, admits IFAs are still struggling. “It’s a fact that distributors are still pushing products like Ulips, as they provide better commission than mutual funds. The challenges are enormous and I believe headwinds will persist.”
It is because of the 90,000 certified IFAs that the mutual fund industry could penetrate the retail segment to some extent.
“IFAs helped drive our growth. We are continuously arranging awareness programmes for them, so that they can step up their distribution model to advisory model. It will take time. On the other hand, bigger distributors such as banks and national distributors have been quick to adapt to the regulatory change,” said Jaideep Bhattacharya, chief marketing officer of UTI Mutual Fund.
“We did our best to incentivise IFAs by raising upfront fees. Beyond this, we cannot scale up. There is lack of awareness on part of both IFAs as well as investors. Unless both change their mindsets, it will not be easy for financial advisors to make money by selling our products. The concept of paying for advice will take years to be adapted in India,” said an official of an industry leader who did not want to be named.

The Tatas will have to either buy out the 26 per cent stake in its life insurance joint venture or rope in another partner if Prudential UK buys out the Asian life insurance business of American International Group (AIG).
The Tata Group has two joint venture partnerships with AIG, in life and non-life insurance. The US insurer holds 26 per cent stake each in both the ventures.
While the non-life business will not be affected, as the deal is expected to cover only the life insurance business, Prudential cannot hold stake in two life insurance ventures in India. The company already has a joint venture with ICICI Bank in life insurance.
This is because the insurance regulator does not allow either a domestic or a foreign player to have more than one joint venture in the same space. R Kannan, member, actuary, Insurance Regulatory & Development Authority (Irda), said: “We have not received any communication from the Tatas. But, if Prudential is indeed buying out AIG’s life business in Asia, our clear view is that no one company can have two insurance joint ventures in India in the same space.”
Neither AIG country head and CEO Sunil Mehta nor Tata’s spokesperson could be reached for comment. An industry source said the Tatas had shown interest in buying out AIG’s stake in the life business but had not approached the regulator so far.
Prudential holds 26 per cent stake in ICICI Prudential. While it is not present in the non-life insurance segment in India, Tata’s non-life insurance is part of AIU, another arm of AIG, which is not part of the buyout by Prudential UK.
In 2008, the US government had bailed out the beleaguered AIG after the US insurer suffered huge losses in the global financial slowdown. Last year, the US government decided to sell part of its stake in its Asian operation under AIA, an arm of AIG, through an initial public offer which would have helped AIG repay part of the bailout money.
Earlier both US’s Metlife and French insurer Axa were said to be in a race to buy out AIG’s Asian operation.

To restructure its sagging business and repay its $182.3-billion bailout, the once global insurance leader American International Group (AIG) today said it would sell its Asian life insurance unit American International Assurance (AIA) to British insurance major Prudential for $35.5 billion.
AIG has signed a definitive agreement for the sale of AIA, to Prudential for $35.5 billion — $25 billion in cash and $8.5 billion in face value of equity and equity-linked securities — and $2 billion in face value of preferred stocks of Prudential, subject to closing adjustments, the company said in a statement here today.
“This transaction, the most significant milestone to date in our ongoing effort to repay taxpayers, also gives us greater flexibility to move forward with AIG’s restructuring and focus on enhancing the value of our key insurance businesses, which will benefit all stakeholders,” AIG President and Chief Executive Officer Bob Benmosche said while announcing the deal.
The cash portion of the proceeds from the sale will be used to redeem preferred interests with a liquidation preference of $16 billion held by the Federal Reserve Bank of New York (FRBNY) in the special purpose vehicle formed to hold the interests in AIA, and to repay $9 billion under the FRBNY credit facility.
“In considering two viable and very attractive alternatives to successfully monetise AIA, including an initial public offer, we decided that a sale to Prudential enables AIG to realise value on a faster track to repay the US taxpayers,” Benmosche added.
Further, AIG intends to monetise the $10.5-billion in face value of Prudential securities over time. All net cash proceeds from the monetisation of these securities will be used to repay any outstanding debt under the FRBNY credit facility.
The AIG board, which is nearly 80 per cent owned by the US government has approved the transaction which is to close by the end of 2010. The transaction is subject to approval by the Prudential shareholders, regulatory approvals, and customary closing conditions.

Usual suspects line up for banking licences’
RBI to issue guidelines soon, will insist on diversified holding.
A host of non-banking finance companies such as IDFC, Aditya Birla Financial Services, Reliance Capital, Religare Enterprises and Indiabulls is planning to queue at the Reserve Bank of India to seek banking licences.
Following Finance Minister Pranab Mukherjee’s announcement of RBI’s intent to grant fresh bank licences, smaller finance companies such as Srei and Shriram Transport have also expressed their intent to approach the regulator.
Foreign banks, most of which operate in the country as branches of an overseas subsidiary, are unlikely to apply given the higher tax that they would have to shell out on setting up an Indian banking company. Besides, many of the global banks are going slow on overseas expansion due to the stress in their home markets. In the last five years, RBI has not given any fresh licences.
“There will be eligibility criteria, which we will work out, and some guidelines, which are already there, like diversified shareholding. NBFCs will be one category of applicants, and any other applicant — whether a corporate or a group of individuals — will be allowed subject to the eligibility criteria. We will look at the criteria that we already have, but the basic principle of ownership and governance will remain unchanged, so we have to work on it,” RBI Deputy Governor Usha Thorat said.
IDFC and Anil Dhirubhai Ambani Group-promoted Reliance Capital had approached RBI for permission to convert the finance companies into banks, which was turned down by the regulator. While Reliance had approached RBI with the proposal at the height of the financial crisis, when liquidity was tight, IDFC held discussions on the matter last year.
Banking sources said that IDFC, which will now be classified as an infrastructure NBFC, might be the only finance company to get a licence, while the others may find it difficult given that their parents are business houses. In the past, RBI had expressed its displeasure in granting licences to industrial houses.
Asked about the prospects of a corporate house getting bank licences, Thorat said: “The basic principle of diversified shareholding will apply to them."
The move comes despite RBI Governor D Subbarao telling Business Standard in an interview in October that the regulator did not plan to allow new players into the banking arena. “The banking system has undergone consolidation in the last few years and more banks will improve penetration, competition and efficiency,” Thorat said.
Finance companies, which are barred from accepting deposits, are keen on getting a bank licence as it will help lower their cost of funds.
“When the first set of licences was given to private players in 1992, RBI had not allowed industrial houses and state government enterprises into the sector. The past 18 years have shown that bank promoters need deep pockets and commitment, and the government and RBI do not want to take any chances with depositors’ money,” said Ashvin Parekh, National Leader-Global Financial Services, Ernst & Young, a consulting firm.
“Applying for a banking licence is a natural progression for any integrated financial services player. Currently, in terms of our distribution and presence, we are larger than most banks in the country with a presence across more than 2,000 locations. We await details on this and once things are clearer, we shall objectively view the situation to see how well it fits in with our overall strategic growth plans,” said Religare Managing Director and CEO Sunil Godhwani.
“We wholeheartedly welcome this initiative and will definitely apply for a licence. The Aditya Birla Group is confident that we will meet any eligibility criteria that might be set,” said Ajay Srinivasan, Aditya Birla Group’s chief executive - financial services.
“This move will potentially open exciting new avenues of growth for Reliance Capital in the future. We await further details and guidelines," Reliance Capital Chief Executive Sam Ghosh added.
“This is a welcome move and we are definitely interested. As and when the norms are finalised, we will apply for a banking licence. Since we serve under-banked customers, it will help us widen financial inclusion,” said R Sridhar, managing director, Shriram Transport Finance.
“A number of countries, particularly the US, benefited immensely when NBFCs were allowed to extend their reach. Any measure which allows the public greater access to capital is good,” said a senior executive from Tata Capital. He declined to comment on whether Tata Capital plans to apply for a banking licence.
http://www.business-standard.com/india/news/usual-suspects-linefor-banking-licences/386955/

17 Companies with Sebi nod waiting for IPOs
Volatile markets, poor retail interest said to be the trigger.
As many as 17 companies which have got Securities and Exchange Board of India (Sebi) clearance for initial public offers (IPOs) are yet to announce the date for their public issues.
The firms are planning to raise Rs 10,000 crore from markets collectively.
Companies such as Reliance Infratel, Lodha Developers, IL& FS Transportation, Nitesh Estates, DQ Entertainment (International) and AMR Constructions are among those who obtained Sebi approval but have not declared the dates.
Companies are waiting for the right time to launch their issues as markets are volatile and retail participation in the recent IPOs has been dismal, companies and bankers say.
The BSE Sensex shed 7 per cent in 2010 after foreign institutional investors (FIIs) pulled out around Rs 9,435 crore from equity markets, after a 10 per cent rise between November and December 2009.
“We are working on the dates and getting ready for roadshows, as we have obtained the approvals. We want to time it correctly, as there is a volatility in markets. Though retail participation is weak, we are relying on institutional participation,’’ said a banker close to Nitesh Estates’ issue.
With the lukewarm response for its REC follow-on offer, the government is also not taking any chances. The state-run SJVNL, which is planning to hit the market before March, is likely to delay its IPO due to unsuitable market conditions.
Five out of nine IPOs such as Hathway Cable, Vascon Engineers and DB Realty, which were listed in February this year, are trading at 4 -35 per cent below their issue price.
The poor interest shown by retail investors in recent IPOs is also a big concern for companies planning to launch new issues. Though DB Realty got an overall subscription of 2.63 times, the retail participation was just 0.35 times. Similarly, Hathway got retail participation of 0.22 times, though the overall subscription was 1.34 times.
Now, the interest of companies for public issues are waning thanks to the the double whammy — declining markets and poor retail interest.
Only four new companies, Gyscoal Alloys, Mittal Corp, Inventuregrowth and Securities and Asian Business Exhibition and Conferences, applied for fund raising from equity markets in February.
As many as 61 companies had applied with Sebi to raise funds through IPOs between August 2009 and January 2010.
Some are waiting for signals from the Union Budget. “We will take a call after the Budget, as we would want to see what signal it sends out,’’ said a person close to the IPO of Lodha Developers.

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