Escorts Mutual Fund

In the draft Direct Taxes Code, 2009 (Code) currently under review for public comments, the government seeks to exempt venture capital funds (VCFs) from the liability to pay income tax, thereby bringing VCFs on par with mutual funds. While the re-introduction of the much coveted pass-through status is a positive step, a finer reading of the Code reveals potential pitfalls.

‘Mutual fund’ vs ‘mutual fund’: By placing VCFs under the umbrella term, ‘mutual fund’ (as distinguished from ‘Mutual Fund’ under Sebi (Mutual Funds) regulations, it seems that income from a VCF unlike a Mutual Fund may not be tax-exempt. It would have been prudent to use terminology such as ‘Sebi-registered Mutual Funds’ and ‘Sebi-registered VCFs’, instead of using alphabet cases as a differentiating factor.

Investor-level taxation: The Code does not provide for the mechanism of taxation of investors in a VCF as Section 115U of the current tax laws does. There is no operational provision for taxation of income of a VCF in the hands of its investors. A definitional provision cannot be construed as a provision for the characterisation and taxability of income in the hands of investors in a VCF.

Some may argue that as most VCFs are set up as trusts and a trust is not a separate legal or a taxable entity (defined to include legal obligations under the Code), characterisation of income in the hands of investors will be the same as that in the hands of the trust. To clear any ambiguity, the Code should clearly articulate details on taxability of investors in a VCF, especially for such VCFs that are set up as a company. Further, the proposal of imposing up to 30% tax on all forms of capital gains is another dampener.

Confusion reigns supreme on the taxability of dividend income in the hands of investors in a VCF, especially when provisions regarding the classification of a VCF as an exempt entity is read along with the provisions of dividend distribution tax (DDT). The Code provides that no DDT (currently taxed at an effective rate of 17%) is to be levied on the distribution of dividend to pass-through entities such as VCFs. Further, only such dividends received on which DDT has been paid, are tax-exempt. While this appears to benefit VCFs, in reality, investors receiving dividend income from the VCF will end up having to pay tax on such dividends at the regular applicable rates (up to 31%).

http://economictimes.indiatimes.com/Personal-Finance/Mutual-Funds/Private-equity-funds-New-code-new-issues/articleshow/4961523.cms

MUMBAI: Shriram Life Insurance (SLIC) on Tuesday launched a unit linked premium plan - Shriram Pension Plan which gives clients varied options to Invest their money and receive maximum returns post-retirement.

The plan gives a unique feature of no life cover, which provides clients who do not require further life cover (or do not qualify for life cover for medical reasons) with the option of a savings only, the company said in a statement.

The other feature under the plan is Auto Transfer, which reduces the risk of investing the full premium into a fund with a volatile NAV by allowing premiums to be invested in a low risk fund (Secure Plus) and gradually transferring the money into the chosen investment portfolio.

The plan also offers low risk fund like Secure plus (a debt linked fund for those desiring stability) and Tyaseer fund, a Shariah friendly investment fund.

"With this plan we aim to provide our clients varied options to invest their money so that they can receive maximum returns in their future," Shriram Life Chief Executive Officer (New Channel), Gerhard Joubert, said.

The country’s five largest asset management companies have reported a sharp increase in their average assets under management (AAUM) during August.
Data released by the Association of Mutual Funds in India (Amfi) this evening showed that HDFC Mutual Fund’s AAUM rose 12.6 per cent from Rs 83,366.10 crore in July to Rs 93,874.19 crore in August.
The AAUM of Reliance Mutual Fund, the country’s largest fund house, went up by 8.28 per cent to Rs 1,17,313.78 crore at the end of August. HDFC continued to remain the second-largest fund house, followed by ICICI Prudential, which witnessed a growth of 6.32 per cent to Rs 77,966.86 crore in its AAUM.
UTI’s AAUM shot up by close to 10 per cent from Rs 67,251.89 crore in July to Rs 73,925.89 crore in August. The assets of the fifth-largest fund house, Birla Sun Life, increased 9.65 per cent to Rs 62,866.56 crore. While data for all 38 fund houses were unavailable, trends show that the mutual fund industry will be able to surpass the July AAUM of Rs 6,89,946.12 crore.
The surge in assets came despite distributors and independent financial advisors threatening to shun mutual fund distribution after the market regulator, the Securities and Exchange Board of India (Sebi), banned entry load for mutual fund investments. The Sebi move came into effect from August 1.
Sebi also restrained fund houses from charging unit holders different exit loads based on the value of their investments. In simple terms, it asked fund houses not to discriminate between different classes of investors. Fund houses had lined up new fund offers to cash in on the “pre no-load” regime. However, distributors said that none of the NFOs were attracting large investor interest. “Retail investors are still concerned about the sharp run-up in equity markets. Although risk appetite is returning, it is not huge,” said the head of a bank-sponsored distribution house.
Krishnan Sitaraman, head, Crisil Fund Services said, “Since monthly AUM at the end of July was substantially high, the incremental increase in assets may not be that higher.”

Let me quote from a dialogue in a recent Dilbert comic strip that spoofs corporate life. Dogbert the CEO is holding forth on business plans.
“We’re getting into the financial services game. That way, all our products can be imaginary,” he says, and then, while talking to the pointy-haired boss, elaborates, “We’ll start ten mutual funds, each with randomly-chosen stocks. Later, we’ll build our advertisements around whichever one does the best purely by chance. My goal is to be the premier provider of imaginary expertise.” I don’t know how many mutual fund investment managers would have given a guilty start upon reading this strip, but I’m willing to guess that at least a few would have.
Does this really happen? Do mutual fund companies actually launch a lot of funds with more-or-less randomly chosen variations and ride the roll of the dice? Some fund or the other will always do well and you’ll basically get by. As it happens, Value Research is in the middle of a large project to analyse a fundamental shift in the relative performance of Indian equity funds evident over the past three years.
I have been tracking Indian mutual funds for almost two decades now, and it has always been clear to me that Made-in-USA theories about most funds not being able to outperform the market indices were simply not true for India. For most of this period, a large proportion of equity funds had consistently beaten the Nifty and the Sensex by a wide margin. There were long periods (long as in five years and above) when above 90 per cent of funds would beat the big indices consistently. During the entire period, you would never find a single article or paper by an indexing proponent which would dare to quote Indian data.
But please note that I’m talking in the past tense. Things have changed. There are still plenty of Indian funds that beat the indices and by good margins. But their numbers are fewer and the list is not consistent. While this was expected, what is puzzling is that it seems to have happened in a narrow time-band that can be pointed to the mid-2006 correction.
After this, the consistency with which funds beat indices declined sharply and has never really picked up. Of course, most of the period after mid-2006 has not been very normal anyway, but I don’t think that’s an explanation. Whatever has happened is of considerable importance to the investor and I hope we will figure out the mystery soon.

http://www.hindustantimes.com/News/columnsbusiness/Mystery-shrouds-mutual-funds-that-have-lost-edge/Article1-448936.aspx

'MFs may head for consolidation as novices face test'

MUMBAI: The mutual fund industry is likely to see consolidation earlier than expected, as many new entrants may not be able to withstand the financial stress arising from the need for higher investments, rising expenses and the importance of organised channels for distribution, says a report by consulting firm Mckinsey & Co.

The report says the new Sebi regulations have the potential to transform the asset management landscape both for AMCs and distributors.

Last month, the market regulator abolished the system of entry load from August 1, and decreed that distributors should collect their commissions directly from the investors.

This is expected to strain the profitability of both asset management companies as well as distributors. According to the Mckinsey report, portfolio management services and alternates will grow faster as the affluent/HNI segment grows and AMCs/distributors also push higher margin products. Within equity, the prevalence of closed-ended fund structures will increase, with AMCs trying to keep the churn ratio to the minimum. Industry experts, however, believe well-positioned players should not lose sight of the opportunities presented by the new regulation, which could catalyse multiple innovations in business models for distributors as well as AMCs.
On the charge structure and the subsequent shift in dynamics, banks and national distributors (NDs) are seen as better positioned to charge customers, given their control over a larger share of customer wallet across multiple products (e.g., deposits, broking) and also their wealth management platform.

“For some, it presents an opportunity to move from transaction-led pricing to an advisory-led pricing model. This would mean adopting a ‘relationship value’ view of customers and charging them on their overall AuM, rather than on a per MF transaction basis. In parallel, the retail customer segment may evolve towards transaction-based charges for mutual fund purchase and redemption. These may be ‘tiered’, depending on ticket size, very much in the way banks currently charge for other services such as draft issuance,” the report said.

Amongst independent financial advisors (IFAs), only the bigger IFAs, with the ability to deliver enhanced service and advice to customers, are expected to be able to charge the customers. However, the smaller IFAs may not be able to charge anything to customers on an average. Hence, the impact of the regulation on distributor economics may be the greatest on IFAs, especially smaller IFAs, who act as a transaction intermediary rather than an investment advisor. Unless compensated by higher volumes, IFA revenues could be impacted to the extent of 30% revenue loss in the worst scenario.

The asset management industry in India in FY08-09 saw assets under management (AuM) declining by approximately 17% compared with year-on-year growth of approximately 50% between FY03 and FY08.

“The capital markets decline and consequent preference for debt and liquid funds resulted in a significant shift in the product mix, with the proportion of debt and liquid funds increasing significantly in FY09. Retail debt and liquid proportion increased from 23-40% between FY08 and FY09, and institutional debt and liquid proportion increased from 86-91% in the same period. Industry profitability, measured as basis points of average AuM, dropped from approximately 22 bps to approximately 14 bps, putting significant pressure on asset management companies,” the Mckinsey report said.

http://economictimes.indiatimes.com/Personal-Finance/Mutual-Funds/MFs-may-head-for-consolidation-as-novices-face-test/articleshow/4952415.cms

IDBI Fortis Life Insurance Company Ltd, which started its commercial operations from March 2008, aims to sell 10,000 Termsurance Grameen Surakshya (TGS) policies in Orissa during the current fiscal.
It has already sold 3500 policies targeted at rural poor in partnership with the Regional Rural Development Centre (RRDC), the Orissa based developmental organisation.
As a measure to promote financial inclusion in rural Orissa, IDBI Fortis and RRDC have entered into a tie up for offering TGS policies protecting the lives of rural poor.
Talking to the media, Amish Tripathy, national head (marketing and product management), IDBI Fortis, said, the product is specially designed to make life insurance affordable to the rural poor. It can offer financial inclusion to a large number of rural people not having access to life insurance.
Mike Wood, chief actuary, IDBI Fortis said, the unique feature of this product is affordability. The customers can pay in four convenient premium slabs of Rs 50, Rs 100, Rs 150 and Rs 200. However, the benefit in terms of sum assured will be Rs 10,000, Rs 15,000 and Rs 20,000 respectively.
He said, an integrated model bringing micro-finance and micro-insurance has been evolved with Sambandh, the micro-finance branch of RRDC, in charge of covering lives of the people who avail micro-finance facilities from it. Murali Iyer, national head (agency and alliances) said, it is a single premium product and the life cover will be for three years. Livinus Kindo, founder, RRDC said, the Sambandh initiative started in 2006 and about Rs 9.3 crore was disbursed to 4000 beneficiaries by the end of the last fiscal. The rate of recovery in case of micro-finance loans has been about 100 percent with the average size of the loans being Rs 10,000. In the next five year, RRDC plans to expand the coverage of the micro-finance facility to 1,50,000 households.

The Visakhapatnam division of Life Insurance Corporation of of India (LIC) is targeting a 25 per cent increase in premium collection to Rs 2,500 crore during the current financial year. The division comprises three coastal districts of Visakhapatnam, Srikakulam and Vizianagaram.
“During last fiscal we collected Rs 2,000 as total premium, of which new premium stood at Rs 292 crore. This year we are targeting Rs 2,500 crore, of which new premium would be Rs 380 crore, excluding group insurance policies,” D Nageswara Rao, senior divisional manager - Vizag, LIC, told mediapersons here on Tuesday.
The division sold 126,000 insurance policies and collected Rs 98 crore as new premium as on August 31, 2009. It expects to sell 460,000 policies during this fiscal as against 400,000 during the preceding year.
The division has 15,000 insurance advisers and plans to add another 2,000, apart from introducing a direct marketing wing at Vizag. It currently has 20 branches and six satellite offices across the three districts and would add two more satellite offices, he said.
“From September 2, LIC is introducing a new micro insurance policy called ‘Jeevan Mangal’. We are aiming to sell 50,000 policies under this,” he said.

In a bid to ensure that high networth individuals (HNIs) stayed with them, public sector banks, including State Bank of India (SBI), Union Bank of India, Bank of Baroda (BoB) and Bank of India (BoI), have been climbing on the wealth management bandwagon in recent months.
The country’s largest bank, SBI, has decided to set a cut-off of Rs 60 lakh for any individual to be called an HNI. This would qualify nearly 200,000 clients for specialised services such as relationship managers.
Armed with specially-designed software, which is being tested, the manager will ensure that the customer does not have to visit a branch. And, in case someone does have to visit one, the plan is to have special sections with five-star ambience.
While all this is still being finalised, the bank has kicked off operations in a small way with focus on the affluent section. So, customers with over Rs 5 lakh in the bank are eligible to avail themselves of this service. The bank is currently offering this service at 502 branches through 1,100 customer relationship executives.While SBI’s liability group, personal banking division and the new business group are working on the project called ‘Attracting HNIs’, Bank of India is contemplating on how to enter the space.
“It will happen in due course of time. We have not yet started anything formally, but it is one of the options being considered at the moment. It could be a subsidiary, a joint venture or a separate department altogether. Discussions are at different stages and we should be able to come up with something in a year’s time,” said BoI Chief Financial Officer VKR Aggarwal.
However, Union Bank and BoB have opted for tie-ups. The former recently launched its wealth management services along with Wealth Advisors, a Chennai-based company, to offer wealth management for its customers in south India. For customers in Mumbai, it has tied up with Edelweiss Securities. Under terms of this tie-up, Edelweiss will offer a whole range of wealth management products and alternative investment options, such as structured products, real estate funds and art, to Union Bank’s HNI clients. It will also provide them equity and debt investment options. The minimum ticket size for such investments is Rs 10 lakh.
BoB’s wealth management foray is so far limited to only United Arab Emirates (UAE).
However, unlike the foreign banks and some domestic players, the Indian public sector banks would not offer services such as succession planning. “In reality, art investment and a lot of other services that they talk about are all on paper. Succession planning is essentially advisory and the family has to take the final decision. So, as a bank, we are not in a position to advise our clients on such sensitive issues,” said a public sector bank executive, who spent several months trying to understand the services on offer.
The key reason for public sector players entering the wealth space was to ensure that well-off customers did not move away to private banks that offered services such as relationship manager.
In addition, they realised that branding the well-off as HNIs with a low cut-off made some clients feel special. The biggest advantage was the focused approach to cross-sell. For instance, SBI’s mutual fund or insurance arm can now sell the group’s products, which was not the case earlier.
What has further prompted the move of the public sector banks to enter wealth management is the recent Sebi ban on entry load for distributors of mutual fund schemes. The ban hit these banks hard as they were quite active in distribution of mutual funds’ schemes. Although, government banks are still distributing mutual fund schemes, the ban has eroded their fee-based income. Now these banks are getting only 0.75-100 basis point upfront commission from fund houses compared to the 2.25 per cent load earlier.
Hence, some of these banks are planning to offer advisory and charge clients for the same. Sebi mandates distributors and advisors to charge clients for advisory services.
Experts said that public sector lenders’ entry into wealth management might offer some competition to private and foreign banks that have been dominating the space. Government banks might have an edge over the private and foreign players because of their large deposit base, they added.
Barclays Wealth Chief Executive Officer (CEO) Satyanarayan Bansal said, “Private banking in India is still in early stages of growth. There is enough potential for players to come and expand in this market. It will also depend on the quality of services and products offered by various players.”

Chennai-based NBFC Sundaram Finance Ltd (SFL) has announced a downward revision in interest rates on two and three year fixed and cumulative deposits with effect from September 7, 2009. The company will be paying 8% on two-year and 8.5% on three-year deposits. The previous interest rates were 8.5% for two and 9% for three-year deposits. Interest rate on one year deposit remains unchanged at 7.5%. Sundaram Finance's net profit from continuing operations for the year ended March 31, 2009, stood at Rs150.73 crore, a company release said.

MUMBAI: The Securities and Exchange Board of India (Sebi) has refused to mediate in the ongoing conflict between banks and brokers over commissionsharing for initial public issue applications through the Application Supported by Blocked Amount or ASBA process. This is an alternative mode of payment in public issues, where a retail applicant’s money leaves his bank account only after the share allotment.

In a meeting between the market regulator and a few primary market intermediaries some days ago, this issue was bought up among other matters. Market participants are learnt to have told Sebi officials that this spat was the key reason for the lack of increased used of ASBA. But, according to the officials at primary market intermediaries, who were part of the meeting, Sebi declined to intervene as the spat involved “financial matters” , rather than those related to policy.

“Sebi has hinted that both bankers and brokers need to sit across the table and sort out the issue in a way that is viable to both of them,” said a person, privy to the matter. The squabble between the two parties is over the terms of commission-sharing in the ASBA process. Brokers allege that banks are unwilling to share the commission on applications received through ASBA. The role of banks in this payment method is uploading details in the bidding system and blocking or unblocking of the account, while brokers sell the public issue to prospective investors .

Banks claim that they are responsible for getting the ASBA applications, processing the data and wrapping up the entire process and so, there is no logic to share the fee. Brokers contest the claim saying banks never market any of the public issues, as that is not their core activity. “Brokers have no monetary incentive to sell a public issue through ASBA.. so, they continue to sell it through the usual route,” said an official at a brokerage, which markets initial public offers.

Only 12% of the total retail investor segment in the recent NHPC IPO, which was a big success, applied through the ASBA route. As part of its attempts to promote the ASBA method, Sebi plans to extend this payment mode to the high net worth investors segment. Currently , only retail investors can use this route to subscribe to public issues. Brokers believe HBIs will be in a better position to take advantage of the ASBA route, given the larger sums of investments involved.

The Securities and Exchange Board of India (Sebi) may soon issue rules for setting up stock exchanges dedicated to small and medium enterprises (SMEs).
“Sebi is working on the concept paper on SME exchanges. It may soon release the guidelines,” Minister of State for Micro, Small and Medium Enterprises (MSMEs) Dinsha Patel said at a seminar organised by MCX-SX and the Society for Capital Market Research and Development here today.
He said SMEs were not able to raise capital through the market since they could not meet the listing and trading requirements of BSE and NSE. Hence, a separate exchange for them was required, he added.
He said India could use experiences of SMEs listed on stock exchange in countries like the US, the UK, Japan and China.
MSME Secretary Dinesh Rai said there should be more than one exchange for SMEs. “Sebi is working on the guidelines keeping in mind the nature of SMEs. I feel strongly that we need to have more than one SME exchange,” he said. There are over 13 million MSMEs in the country employing about 42 million people.
BSE, NSE and the new entrant, MCX Stock Exchange (MCX-SX), had shown an interest in setting up an SME exchange, said an industry source.
MCX-SX Vice-Chairman Jignesh Shah said India did not have mature venture capitalists to fund small and medium firms and the stock exchange was the only place where they could raise capital.
“We are waiting for Sebi guidelines to offer services to SMEs on our platform,” he said. Speaking on the sidelines of the seminar, the minister said the ministry had approached defence and railways ministries asking them to procure 20 per cent of their requirements from MSMEs.
http://www.business-standard.com/india/news/sebi-may-issue-normssme-bourses-soon/368780/

Takes decision after Income Tax Department informs regulator of a Rs 1,047-crore fraud.
The Securities and Exchange Board of India (Sebi) today barred Austral Coke and Projects from raising any further capital on finding that the company was involved in a fraud amounting to Rs 1,047 crore.
Further, the market regulator has ordered an investigation into buying, selling or otherwise dealing in the securities of the company.
Sebi swung into action following a communication from the Income Tax Department on August 26, which pointed to serious irregularities in the company’s books of accounts.
The tax department had carried out searches on Austral Coke’s premises on June 23. The letter also said that bogus purchases had been claimed to have been made from 29 non-existent concerns, running into several hundred crores.
The non-existent concerns were floated by an Ajitkumar Jindal of Kolkata.
Between 2006-07 and 2008-09, Austral Coke, according to the letter, made bogus purchases and sales of worth Rs 1,047 crore.Jindal, the letter said, admitted having provided bogus bills for the purchase of raw material as well as plant and machinery to the company.
Austral Coke, which is engaged in the manufacture and sale of low ash metallurgical coke refractory in India, had raised Rs 142.3 crore through an initial public offering (IPO) last year.
The Sebi order, released this evening, said that part of the funds raised through the IPO were shown in the books as utilised towards purchase of capital goods, which were found to be bogus.
“A serious case has been made against the company for making fictitious entries in its accounts, procuring bogus bills,” said the order said.
The order came ahead of Austral’s board meeting, scheduled for Wednesday.
The company’s board was to consider raising Rs 970 crore through private placement of shares with qualified institutional buyers (QIBs).
http://www.business-standard.com/india/news/sebi-bars-austral-cokeraising-capital/368841/

NEW DELHI: The government aims to allow firms to identify oil exploration areas they want to drill from 2011, ending the current regime of licensing rounds, the upstream regulator said on Tuesday.

The country currently auctions specific blocks under its exploration licensing rounds which are open for a fixed period, unlike the open acreage system where a company can delineate the area it wants to drill and bid for it any time of the year.

For the shift to an open acreage system India would set up a National Data Repository by March 2010, V K Sibal, director general of hydrocarbons told reporters at an international conference on a National Data Repository.

"The first phase of the National Data Repository will be set up by March 2010 and in 2011 we hope to shift to open acreage system," Sibal said, adding there could be a maximum of two licensing rounds before a complete switch over to the new system.

Countries including Australia, Norway, Britain, Brazil, Canada, and the United States have a national data repository, Sibal said, adding that his department held data on 5,000 wells drilled in India and details of seismic surveys of about 200,000 line km.

"We have to give more thrust on data on onland blocks, we have details of offshore wells drilled...the data repository will showcase the hydrocarbon potential of India," he said.

"Apart from storage of data at one place, it will facilitate opening up of the country's unexplored and poorly explored areas for systematic exploration," he added.

India has so far awarded 203 exploration blocks under its previous seven licensing round and has offered 70 blocks in the latest round, which will close on Oct 12.