Impact 
Lobbying is not new to India. We have been seeing states lobbying to attract investments, a bunch of companies lobbying to get policy concessions; even political lobbying doesn’t need a mention—it’s too obvious to ignore. In a capitalist society, the strongest lobby wins the battle. Anything that comes in the way of profit maximisation will be opposed, no matter who’s right on moral grounds. It’s a jungle. However, what is rare in India is this—an industry using legal language against the mighty regulator.
The Securities and Exchange of India Board (SEBI) has waged a war against malpractices that prevailed in the mutual fund industry for a long time. The commission-driven approach of mutual fund houses and distributors put off investors. As a result, the cheated investors are disgusted, and have been shying away from mutual fund investing.
The “clean-up drive” of the capital market regulator has pulled the rug from under their feet. As you may be aware, SEBI has tightened the guidelines governing investment decisions of mutual funds. New disclosure norms have hit the industry very hard. So much so that, many distributors feel the new rules will kill their money plants.
Until now, the distributors took a sober route, requesting the regulator to reconsider its decision. In that process, they put their case forth, protested mildly, and highlighted flaws of the new rules. But now they believe that the regulator is hard of listening, they have taken out their howitzers.
In an open protest against the regulator, a segment of distributors wrote to the industry body, Association of Mutual Funds In India (AMFI), and CEOs of mutual fund houses highlighting that SEBI breached the international protocol by introducing the mandatory disclosures of commissions. The dissent is so robust that the distributors have communicated their request for a rollback to the Finance Ministry as well.
In a strong letter, a section of distributors catergorically posed a direct question and offered a piece of advice free to SEBI. The letter says, “If SEBI believed that more commission disclosures are required than what has already been in force since 2009, on what basis did it come to this conclusion? Why did SEBI not consult a single distributor association before coming to the conclusion that this regulation is necessary?” Distributors further added that, “We would urge SEBI, which is a member of IOSCO, to follow these guidelines in letter and spirit.” International Organisation of Securities Commissions (IOSCO) is the international body of financial market regulators.
SEBI’s response to this protest has been nonchalant, reflecting its firmness on the decisions it made. However, the SEBI officials have been avoiding a detailed questionnaire as the reports in Business Line dated June 01, 2016. Nonetheless, remarks of the SEBI chief, UK Sinha, on the subject have been quite telling. He said in an interview to the press, “Obviously, a section of advisors are very unhappy with it but that is a challenge that SEBI as a regulator has to face all the time. We’re doing this because these are recommendations of the report by the Sumit Bose Committee (which was formed under the Ministry of Finance). The data doesn’t indicate that this will affect the industry. The fact remains that product costs are very high and this needs to be contained.”
Well, it seems a bunch of antelopes is locking horns with a giant rhino. The only way an antelope can beat a rhino is if it deceives the latter with its speed, and the rhino ends up hitting on the trunk of a massive tree. IOSCO might be “that tree” in this case.
Twists and turns will continue. Will lobbying pay off this time or it’s going to be a long drawn out battle with no concrete results? Only time can tell.
Impact
The Monsoon is just around the corner and Indian Meteorological Department (IMD) has predicted it to be above average this year. This was a ray of hope to the agriculture sector, which has been facing tough times for the last couple of years due to bad monsoon. The financial condition of farmers has detonated. This is reflected in the falling rural demand. On this backdrop, the price hikes in Minimum Support Prices (MSPs) announced recently by the Government for this session (2016-17) may appear inadequate from the farmer’s perspective. The input cost in agriculture is going up, which is driving down the economic viability of farming for many farmers. Moderate price hikes in the MSPs discourages farmers.
The other angle to MSPs is unless they are increased prudently, retail inflation can go out of the roof (which India has experienced in the past). So the Government has tried doing the balancing act by offering more remuneration for crops that address the demand-supply mismatches. It has provided more incentives to farmers growing oilseeds and pulses, as prices increased the last session abruptly. Moreover, if a particular state believes the MSP is inadequate, it has the liberty to provide additional incentives at the state level.
Moreover, recent initiatives of the Government such as “Pradhan Mantri Fasal Bima Yojana”, “National Agriculture Market” (NAM) scheme”, issuance of soil health cards and with a greater emphasis on implementing “Pradhan Mantri Krishi Sinchai Yojana” across the country are expected to lessen the unpredictability involved in the Farming sector. Better irrigation facilities and the effective crop insurance scheme may help reduce the dependency on monsoon.
Will this affect RBI’s decision on monetary policy in any way?
Retail inflation has been the most important factor these days in all monetary policy decisions, and the level of inflation affects the interest rate movement in the country. A second bi-monthly monetary policy, scheduled to be released on June 07, 2016, may tell us what the RBI thinks about the recent developments that have a direct connection to the urban inflation and rural demand.
As far as the impact of these events on your finances is concerned; PersonalFN believes, you should not speculate on any policy decision or the macro level development. Instead, you should focus on your financial goals and take prudent investment decisions based on your personalized asset allocation that takes into account a whole host of factors such as your age, financial goals, risk appetite, and current financial position among others.
Impact
“Responsibilities fall heaviest on those willing to take the load.” – Heather Day Gilbert
At present, the question is, are Credit Rating Agencies (CRAs) ready to take the load? Following the Amtek Auto fiasco, the Securities and Exchange Board of India (SEBI) is thinking about making the disclosure norms for CRAs more stringent. Similarly, it endeavours to tighten the noose around exchanges, intermediaries, and brokers.
Amtek Auto defaulted on its short-term debt last year, causing the investors of JP Morgan Mutual Fund to lose a chunk of money. This wasn’t the first occasion where CRAs failed to recognise and report the risk in time. Even in the case of Bhushan Steel and Jaiprakash Industries, the CRAs had failed to accurately gauge the solvency issues and had probably misconstrued them as short term cash mismanagement. Both these companies enjoyed good rating just before the crisis came forth. Although rating agencies suspended the ratings, the timing of the suspension served little purpose. Massive downgrades in quick time tend to create panic and are equally ineffective.
To make the matters worse, investors, even institutional investors such as mutual funds, have been relying excessively on independent credit rating agencies for the credit quality of debt. SEBI seems to have recognized the need to take the corrective steps and make CRAs more accountable for their job.
The need for higher disclosures:
A company seeking to obtain a credit rating pays for the services of independent CRAs. This may create a conflict of interest. The global financial crisis of 2008 exposed the limitations of CRAs in predicting the trouble. Moreover, CRAs find it easy to hide behind disclaimers, as the current disclosure framework is not as robust as it needs to be given the importance of credit appraisals in today’s times.
To ready more about this story and Personal FN’s views over it, please click here.
Impact
The Amtek Auto episode has been a blessing in disguise for mutual fund investors. It got the Securities and Exchange Board of India (SEBI) to awake up to the JP Morgan Mutual Fund blunder. The reaction of the capital market regulator has been so strong that other mutual fund houses will not be able to follow the footsteps of JP Morgan Mutual Fund in future. The investment norms for mutual funds has changed in the recent past. SEBI also issued new disclosure rules, and now it is plugging the last loophole negligence.
SEBI has recently issued a circular tightening the redemption rules. JP Morgan Mutual Fund was believed to have favoured a few institutional investors to exit from two of its troubled schemes that held the tacky debt of Amtek Auto, but imposed restrictions on the redemptions for others.
An open-ended mutual fund scheme allows its investors to buy and redeem units anytime they want. However, fund houses such as JP Morgan imposed restrictions on redemptions without taking their investors into confidence in the past. Mutual funds denying redemptions for saving themselves is not a good sign, in fact it leaves a bad impression on investors.
The new redemption rules will govern all existing and to-be-launched schemes will come into effect on July 01, 2016. After this date, a mutual fund under no circumstances will be able to deny any redemption under an open-ended scheme upto the value of Rs 2 lakh. In other cases, mutual funds can impose the restriction on redemptions only under exceptional circumstances, affecting the market at large.
To ready more about this story and Personal FN’s views over it, please click here.
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