FUND FULCRUM

March 2011

The average assets under management (AUM) of the fund industry surged 2.3% in February 2011 to Rs 7.07-lakh crore. According to data compiled by Association of Mutual Funds in India, the mutual fund industry witnessed inflows of Rs 25,757 crore in all schemes, with equity and money market schemes seeing inflows of Rs 2,495 crore and Rs 8,770 crore, respectively, in February 2011. The domestic mutual fund sector has seen a record high inflow in its equity segment in February 2011 since the entry load ban of 2009.

Piquant Parade

Market regulator, the Securities and Exchange Board of India (SEBI), has given the final approval to Indiabulls Financial Services, India Infoline, and Union Bank of India-KBC Asset Management to start their mutual fund business. Indiabulls and India Infoline had applied for a mutual fund licence in 2007 and 2008, respectively. Union Bank had applied in 2009. Currently, SEBI has around 23 pending mutual fund applications with it.

Goldman Sachs Asset Management Company would acquire Benchmark Mutual Fund, an ETF-focussed Indian fund house. Benchmark mutual fund manages assets worth around Rs 3000 crore. The deal would be finalised by the end of 2011, subject to regulatory approvals. Goldman would pay Rs 130.5 crore or approximately 4.3% of Benchmark's average assets under management (AUM). All Benchmark employees would be retained by the new management. Regulatory approval is expected in the next 3-4 months. Through the deal, Goldman Sachs aims to bring actively managed on-shore funds into India. The financial services major has an office in Mumbai with eight employees, providing research on Indian and BRIC equities for offshore funds. Though Goldman Sachs had received SEBI nod to enter India in September 2008, it kept plans on hold following the economic downturn of 2009.

Tamilnad Mercantile Bank Ltd. (TMB) and Birla Sun Life Mutual Fund have signed an MoU to distribute and market mutual fund products through branches of Tamilnad Mercantile Bank. Birla Sun Life Mutual Fund would benefit from TMB's 231 branches, especially in south Tamil Nadu and thus reach across to pockets where they have no representatives.

Regulatory Rigmarole

For the mutual fund industry (though not investors), the towering moment of the Union Budget was surely the decision to allow them to access foreign investors directly. Initial reactions were that not only could this be an important new market for India's mutual funds, it could also enhance the flow of foreign funds into Indian markets. Certainly, that was the way the Finance Minister announced it in the budget speech. However, this goal may not be achieved to any meaningful extent. In any case, India and other emerging markets are not core investments for anyone elsewhere in the world. No end-user's portfolio is made up of a majority of Indian stocks. India, at best, is a garnish on top of equities from the major western markets. This will not change in the foreseeable future. What might change eventually is the ease with which financial intermediaries operating in those markets can now get to offer Indian funds to their customers. However, for that to happen, Indian AMCs will be going through the effort of complying with the regulatory framework of those countries. This will take time and effort and each AMC will make its own cost-benefit calculations about doing so.

SEBI recently stated that asset management firms can use exit load to pay for their sales and marketing expenses. This means that investors will indirectly pay advisory fees to independent financial advisors (IFAs). This decision does not really hurt investors, as exit loads are only applicable for those who redeem units within a certain period. Nevertheless, the decision is significant as it indicates that the advisor-fee model introduced in August 2009 has not been successful.

SEBI’s latest note on the usage of load balance has drawn criticism from smaller fund houses who allege the step does not ensure a level playing field in the industry as it is advantageous to bigger players. The note also talked about segregating the load balance into two accounts. The first account to reflect the balance which existed till July 31, 2009, and the other for accretions since entry load ban came into effect. However, no restrictions were placed on the use of funds lying in the second account. It is clarified that though the unutilised balances can be carried forward, yet in no financial year, the total spending can be more than one-third of the load balances on July 31, 2009.

Mutual funds have given their distributors till the end of March 2011 to comply with stringent identity verification norms wherein agents are required to get biometric cards that carry information like finger-print impressions.

Taking the first step towards forming regulations to curb mis-selling of mutual funds by distributors, the Securities and Exchange Board of India sent a note to all AMCs, asking them to ensure that their distributors follow certain due diligence while selling mutual fund schemes.

Faced with the herculean task of handling lakhs of investor complaints, market regulator SEBI plans to rope in third party agencies for processing and maintenance of grievance so as to help it resolve these complaints on a fast-track basis. The regulator is said to be against outsourcing of the market entities’ core and investor-sensitive activities. The activities to be outsourced by SEBI include receiving complaints from investors, forwarding them to the concerned market entities and companies, tracking their status and conduct necessary follow-ups and preparation of periodic as well as ad-hoc reports on the investor grievances. Besides, the agencies would also be responsible for entry of the complaints into SEBI’s computerised grievance redressal system with proper categorisation and codification, updation of the system with Action Taken Reports (ATRs) and keeping investors informed about progress on their complaints. SEBI is putting in place this web-based centralised system, named SEBI Complaints Redress System (SCORES), for speedy redressal of grievances. SEBI’s existing investor grievance redressal mechanism lacks a centralised database and the resolution of the complaints often gets delayed due to physical movement of files from one desk to another across its various offices. Besides reducing time gap between receipt and redressal of a complaint, the new system would also help in storage of the investor grievances, whose numbers have swelled to over 2.7 million since SEBI’s inception. SEBI received more than 32,300 investor complaints in 2009-10, while the numbers are even higher at over 39,600 in the first nine months of the current fiscal. The new system would have a centralised tracking system for all grievances at various offices and divisions of SEBI. Currently, the list of investor grievances is maintained at various divisions and regional offices of SEBI.

Asset management firms — including private equity, portfolio managers and mutual funds — are believed to be increasing their presence and augmenting their teams in the emerging markets. In India, companies such as Goldman Sachs, BNP Paribas, Canara Robeco, Aditya Birla Financial Services, and Helix Investment Advisors are working towards expanding their bases and presence in India. There is huge potential in India as less than 2% of the population participates in the stock markets. There is more disposable income at hand and there is huge opportunity for these firms.