FUND FULCRUM (contd.)
January 2012

Piquant Parade

Reliance Mutual Fund has mopped up Rs. 1,500 crore by issuing more than 3 lakh ATM money cards to investors since its launch in 2006. The facility is a first of its kind initiative from Reliance, which competes directly with debit cards, which are widely used for cash withdrawals. The main advantage of this card is that it offers higher interest rates compared to saving bank account combined with the flexibility to invest in other Reliance mutual fund schemes. Further, it allows investors to withdraw and spend at visa-enabled ATMs and merchant outlets across the world. Investors can withdraw as per the limit set by bank or 50% of the balance in scheme account or Rs. 50,000 (whichever is lower). They can spend up to 50% of the balance in the primary scheme account or Rs. 1 lakh per day (whichever is lower) at PoS terminals. The facility is available for all Reliance Mutual Fund investors. New investors need to invest in Reliance Liquid Fund - Treasury Plan or Reliance Money Manager Fund which acts as primary scheme account and can be accessed at all visa ATM and merchant establishments across the world. Once investors open a folio in either of the two schemes, they can transfer investments into debt, equity and gold funds. Other schemes act as secondary scheme account and can be accessed at HDFC Bank ATMs for cash withdrawal or balance enquiry. There are no charges for using this facility except for international cash withdrawals and international balance inquiry, which are Rs. 69 (plus service tax of 10.30%) and Rs. 21 (plus service tax), respectively.

Regulatory Rigmarole

‘Qualified Foreign Investors' (QFIs) - a foreign individual, a foreign pension fund or even a foreign trust will be able to invest directly in the Indian equity market w.e.f. January 15, 2012. This has been done in order to widen the class of investors, attract more foreign funds, reduce market volatility and deepen the Indian capital market. At present, foreign institutional investors (FIIs) or foreigners, through sub-accounts with registered FIIs, can invest in the equity market. Unregistered foreign individuals and institutions invest through participatory notes (PNs). However, investment is restricted to QFIs from countries that are compliant with the Financial Action Task Force (FATF) recommendations and are signatories to the international body of securities market, IOSCO's, memorandum of understanding. This condition will allow investors from over 80 countries to access the Indian equity market, save Pakistan and some other countries. The QFIs will have a separate ceiling from FIIs and non-resident Indians (NRIs). A QFI can hold up to 5% of paid-up equity of a company and all QFIs put together cannot hold more than 10% in a company. All QFIs will first need to open a demat account with any of the depository participants (DPs), as sale and purchase of equity will be allowed only through such an account. Moreover, one QFI will be permitted to open only one account. The Central Board of Direct Taxes (CBDT) will issue a separate form for Permanent Account Number and KYC, especially for the QFIs. The depository participant can facilitate the QFIs to fulfil all these statutory requirements.

SEBI has streamlined the KYC process by putting in place guidelines for common KYC agencies through its circular issued on December 23, 2011. The KRA system shall be applicable for all new client accounts opened from January 1, 2012. SEBI has permitted wholly-owned subsidiaries of stock exchanges, depository and SROs registered with SEBI as eligible entities to become KYC Registration Agency (KRA) for a period of five years. The KRA has to have a net worth of Rs. 25 crore. Market regulator SEBI has appointed CDSL Ventures Ltd. (CVL) as the KYC Registration Agency (KRA). CVL already possesses the database of all KYC compliant mutual fund investors. Now, it is mandatory for intermediaries – distributors, scheduled commercial banks or RTAs to carry out in-person verification (IPV) of its new investors. Investors need not have to undergo the KYC process again if they are KYC compliant with any of the above-mentioned SEBI registered entities. However, fund houses can demand a fresh KYC of the investor, if required. Fund houses can also undertake enhanced KYC process depending on the risk profile of investors. SEBI has urged existing investors to complete IPV, though it is not mandatory. KRA will send a confirmation letter to the investor about the receipt of the initial/updated KYC documents by the fund house within 10 working days. Fund houses will upload the details of the investors on the system of the KYC Registration Agency (KRA). Distributors can download the new KYC forms from AMC websites.

New investors will now have to make some investment in the form of SIP or STP or lump sum from January 1, 2012. New mutual fund investors cannot open zero balance folios from January 1, 2012.

SEBI has asked the brokers/distributors to stop offering any incentive, whether direct or indirect, in any manner, whether in cash or kind or services or otherwise to any individual for making an application for allotment of the public issues of debt securities. According to SEBI, passing on part of the brokerage/commission gives an unfair advantage/bargaining power to a certain set of investors and distributors while on the other hand it also adds to the cost of issuance for the company.

SEBI may relax the recently introduced advertisement rules, which require AMCs to display the performance data of all the other schemes managed by the fund manager of that particular scheme in advertisements. Performance advertisement shall be provided since inception and for as many twelve month periods as possible for the last 3 years, such periods being counted from the last day of the calendar quarter preceding the date of advertisement, along with benchmark index performance for the same periods. The circular states that fund houses should display the top three and bottom three funds if the fund manager is managing more than six schemes. It also mandates AMCs to mention the number of schemes managed by that particular fund manager. For the sake of standardisation, SEBI has also mandated fund houses to show point to point return on a standard investment of Rs. 10,000 and benchmark equity schemes against Sensex or Nifty in addition to scheme’s existing benchmark. For long-term debt schemes and short-term debt schemes it has asked AMCs to benchmark against 10 year GoI security and 1 year Treasury bill respectively. To comply with this rule, AMFI had asked CRISIL to construct two benchmarks.

The Association of Mutual Funds in India (AMFI) is exploring the possibility of redrafting the disclaimer – “mutual fund investments are subject to market risks. Please read the scheme information document carefully before investing” – to add a positive flavour and encourage more investors to park their funds in such schemes. The disclaimer along with mutual fund advertisements and offer documents were acting as a hindrance in attracting new investors. Disclaimers were essential to safeguard the fund house from the possibility of getting entangled in litigations. However, there needs to be some redrafting in order to give it a positive flavour.

The government may make it mandatory for all taxpayers to provide details of their overseas assets, including bank accounts, while filing their annual tax returns. The proposed Direct Tax Code, or DTC, has a provision for this but the government is now considering a proposal to amend the Income Tax Act to incorporate this provision, as the DTC may not come into effect from April 1, 2012. India's income-tax laws do not specify that locals have to disclose their foreign assets or income. But there are provisions in the law that state global income of an Indian citizen is taxable in India. Failure to report this is a punishable offence. The government now thinks it will soon be able to generate more information about global financial activities of Indians than in the past, thanks to tax treaties and agreements it has signed with countries and regions dubbed as tax havens earlier.

Market regulator SEBI plans to allow mutual funds and insurance firms to subscribe to preferential issues of companies even if they have traded the shares of the issuing corporates in the past six months, to boost liquidity in the markets and make it easier for firms to raise funds. Such transactions are currently banned, blocking a key source of funds for companies. But this restriction will continue to be in place for promoters. Institutional investors such as mutual funds and insurance companies play an important role in ensuring liquidity in the secondary market. It is felt that they should be differentiated from promoters while applying the lock-in relating to pre-preferential issue. This unduly restricts the trading ability of institutional investors.

SEBI is planning to tighten the valuation norms of liquid and liquid plus funds. The regulator is planning to impose mark-to-market (MTM) requirements for instruments with a residual maturity period of 60 days and more. SEBI, eventually, wants all instruments irrespective of their tenure and type to be quoted on market rates and the net asset value (NAV) calculated accordingly. This move is likely to make liquid and liquid-plus funds more volatile because of the fluctuations in underlying assets.

SEBI has hiked the minimum investment limit in the portfolio management scheme (PMS) to Rs 25 lakh per client from the current Rs 5 lakh. This may result in portfolio management services soon going out of the reach of many retail investors. The decision to hike the minimum investment limit comes despite valiant efforts by portfolio managers and wealth managers to retain the minimum investment level at Rs 5 lakh per client. In portfolio management services, investors get a range of specialised investment strategies to capitalise on opportunities in the market. Portfolios are suited to individual client needs and risk appetite. The enhanced investment threshold will apply on a prospective basis. It will apply only for new investors and existing accounts will not get affected. However, existing investors in PMS are welcome to increase the investments in such schemes if they have the capacity to do so.

To facilitate speedy grievance redressal, SEBI has mandated all stock exchanges – functioning on their own and through other exchanges — to set up an investor grievance redressal committee (IGRC) at every investor service centre. For claims up to Rs 25 lakh, the IGRC will comprise one person, and for claims higher than Rs 25 lakh, the committee would have three members. Further, the three-member committee shall have independent persons qualified in the area of law, finance, accounts, economics, management or administration. They will also have experience in financial services especially the securities market. In addition, one member of the committee should be a technical expert capable of handling complaints related to technology issues such as internet based trading, algorithmic trading, etc). Finally, the members of the IGRC should not be associated with a trading member in any manner. SEBI has advised large exchanges NSE, BSE, MCX and USEIL to open investor services centres in other large cities in a time-bound manner. Exchanges have been asked to submit a list of such centres. The circular comes into effect immediately and exchanges have to communicate the implementation status of this circular in their monthly report to SEBI.

To give a leg-up to the National Pension Scheme, the regulator for pension funds has changed the incentive mechanism for distributors by fixing it at 0.25% of the contribution made by subscribers, subject to a ceiling of Rs 25,000. At present, the distributors are allowed to charge only Rs 20 every time a subscriber contributes to the scheme. This is one of the main reasons the NPS has failed to take off since it was opened up for all citizens in May 2009.

After a series of investor-friendly measures, SEBI plans to back it up with a first-of-its-kind advertising campaign to be launched next month. The primary objective of the campaign will be to spread investor awareness and increase penetration. SEBI plans to do so by trying to demystify the securities market and highlighting some recent initiatives, such as the toll-free helpline. The campaign will be in various languages and across platforms like print, radio and television. One-time KYC for opening trading accounts, setting up investor grievance redressal centers, circuit filters and extension of call auction to IPO and relisted scrips and increasing inspection and monitoring of intermediaries are the other highlights of the campaign. The regulator has earmarked about Rs 12 crore for the media campaign and investor awareness programmes for 2011-12.

SEBI had constituted International Advisory Board (IAB) in September 2011 to guide SEBI by bringing in global experiences and emerging developments and challenges. The IAB took note of the initiatives taken by SEBI for enhancing the retail participation and for increasing penetration beyond top-10 cities and observed that there is a need to widen the reach of the mutual fund industry in the country, both horizontally and vertically. It emphasized that in order to enhance the participation of households, the mutual fund industry has to educate the investors of the attractiveness of mutual funds in terms of returns and cost effectiveness, compared to other financial products. Offering life cycle products along with plain vanilla products, an effective framework for regulation of distributors, risk-based customer due diligence processes without granting any sort of exemptions to any category of investors, ways to pull in domestic savings into securities market, the development of a vibrant corporate bonds market, and introduction of securitized debt instruments and real estate investment trusts with appropriate risk management were some of the recommendations of the Board. All the recommendations are pragmatic and if practised by all participants, it will definitely lead to the growth of the mutual fund industry.