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October 08, 2010
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Impact 
In the month of September 2010, the Indian equity markets (BSE Sensex) surged sharply by 2,098 points or 11.7% (BSE Sensex at 20,069 as on September 30, 2010). This sharp up-move came in as the Foreign Institutional Investors (FIIs) reallocated funds from the developed markets to the emerging markets, as the U.S. economy continued to grapple with the uninspiring data on consumer confidence index and employment.
 (Source: ACE MF, PersonalFN Research)
FIIs bought aggressively worth  24,979 crore in the Indian equity market betting on India’s robust long-term economic data [Index of Industrial Production (IIP) for July 2010 at 13.8% (data released in September 2010) and GDP growth rate at 8.8% for Q1 of fiscal year 2010-11]. In the last month too FIIs pumped in 11,688 crore in the Indian equity markets.
We believe that continuous participation by the FIIs in the Indian equity markets, reveals their confidence in the long-term economic prospects of India. However, huge dependence on FII inflow also makes India vulnerable to volatility caused by FII flows. Hence, in such a situation we believe that it would be prudent to adopt the Systematic Investment Plan (SIP), while investing in equity mutual funds, and continue to invest for the long-term.
To read more about FII and mutual fund activity during September 2010,
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Impact
In order to provide an undisrupted money transfer facility, the National Payments Corp. of India (NPCI) will launch (next month) a first-of-its-kind, 24-hour payment system that will allow bank customers to remit money to any account in India for free, using their mobile phones. NPCI’s Interbank Mobile Payment System (IMPS) will be the first globally, to allow such transactions between individuals that will be routed in tandem through the bank and the mobile services provider.
Mr. A.P. Hota, Managing Director and Chief Executive of NPCI said, "RBI (Reserve Bank of India) has permitted only a pilot run with a limited number of banks. Five banks (State Bank of India, ICICI Bank, Union Bank of India, Bank of India and Yes Bank) are already live."
As per RBI guidelines, there will be cap of 50,000 per day on mobile banking transactions, and even the no-frills (no additional facilities) savings account holders can avail of this facility.
The senders of the transaction will have to be registered for mobile banking with their banks. Moreover, both the sender and receiver must get a special Mobile Money ID (MMID) from the bank, besides sharing their mobile numbers with it. Also the senders will be given a Personal Identity Number (PIN) after which they can download the mobile banking application on their handset. Both the sender and receiver will get a SMS (short messaging service) confirming a transaction.
In our opinion such an initiative will go a long way in making banking transactions effortless and hassle free. However, banks and RBI should maintain high standards of security system to keep a check on any kind of fraudulent transactions.
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Impact
Putting investors’ interest in the forefront, the Securities and Exchange Board of India has directed the Portfolio Management Services (PMS) providers to charge fees on the basis of “high water mark” principle.
Under the high water mark principle, a PMS provider would receive performance fees only when the PMS fund’s Net Asset Value (NAV) rises above its previous high. Say for instance, if NAV of the PMS fund is 10 which rises to 12, then the fund manager is entitled to charge a performance fee on profit of 2 earned. As such 12 now becomes the new water mark below which no performance fee can be charged. Similarly, now if the NAV falls to 11, the PMS provider, will not be entitle to charge fees until it crosses 11 the earlier water mark level of 12. Subsequently, if the NAV increases to 13, then that becomes the water mark, and the PMS provider will be entitled to charge the performance fee on differential amount between the current water mark and the previous water mark. (i.e. in this case 1)
This directive is applicable for all fresh client agreements with effect from November 1, 2010, whereas for existing clients, the revised terms shall be implemented by January 1, 2011.
Moreover, in order to ensure transparency and adequate disclosure regarding fees and charges, the SEBI circular stated that "The annexure shall contain details of levy of all applicable charges on a sample portfolio of 10 lakhs over a period of one year. The fees and charges shall be shown for three scenarios - when the portfolio value increases by 20%, decreases by 20% or remains unchanged."
We believe that such an initiative to regulate the PMS fees would link the fund manager’s interests more closely to those of the investors. This regulation would also bring in more transparency regarding fees and other charges.
| | | Weekly Facts |
| Close | Change | %Change | | BSE Sensex | 20,315.32 | 246.2 | 1.23% | | Re/US$ | 44.20 | 0.8 | 1.67% | Gold  /10g | 19,585.00 | 435.0 | 2.27% | | Crude ($/barrel) | 84.72 | 4.7 | 5.82% | | FD Rates (1-Yr) | 6.25% - 7.10% | Weekly change as on October 7, 2010 |
In this issue
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In an interview with Financial Express, Mr. Jyotivardhan Jaipuria, Managing Director and Head of Research, BoA Merrill Lynch, India, shared his views on Q2 corporate earnings, impact of US economic turmoil on India and Foreign Institutional Investors (FII) flows in India.
Mr. Jaipuria expects that the earnings growth will be strong for the second quarter (July – Sept 2010) - in the range of 20-25%, even though the earnings in the last two quarters have disappointed on the margin side. He also believes that the equity market is somewhere at the top-end of its fair-value range, and it is good if markets consolidate as valuations eventually catch up during these times.
He believes that a weak US economy will have a negative impact on all the economies, but the impact in his opinion on India is not likely to be more than 20-30 basis points chop-off from GDP growth rates. However, in his opinion two risks could play spoilsport for the Indian markets. Firstly, freezing-up of the global credit market, as India needs international funding to finance its economic growth. The other is a spike in oil prices which worsens the fiscal situation of the country.
According to Mr. Jaipuria, India has attracted flows from the emerging markets as well as India-dedicated funds. He believes India will be strong contender in attracting global funds. Even among the BRIC (Brazil, Russia, Indian and China) nations, India has done well as an emerging market. However being cautious, he is of the opinion that India is also the most expensive among all emerging markets and hence to that extent many people will be keep looking at other places. He eyes China as India’s biggest contender in attracting FII flows.
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Foreign Direct Investment: An investment abroad, usually where the company being invested in is controlled by the foreign corporation.
(Source:Investopedia) |
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- Food inflation climbed to 16.44% for the week ended September 18, 2010. In the week prior (week ended September 11, 2010) food inflation was 15.46%. The rise in food inflation is attributed to rise in cost of cereals, fruits, some vegetables and milk due to supply disruptions caused by heavy rains and floods.
- Life Insurance Corporation (LIC) of India plans to approach the Insurance Regulatory and Development Authority (IRDA) in next 8-10 days to get approval for floating infrastructure bonds (to the tune of 5,000 crores).
However, IRDA Chairman Mr. J. Hari Narayan said, "As a regulator, we have certain concerns with regard to insurance companies issuing infrastructure bonds. I think there should be certain curbs on such issues by insurance companies. We are yet to look into this issue."
- Fitch (a rating agency) has kept FY 2010-11 GDP estimate of India unchanged at 8.5%. Fitch said that although the relatively low share of exports protects India from higher global risks, the Foreign Direct Investment (FDI) poses a downside risk in a global double-dip scenario.
The rating agency has trimmed its forecasts for FY 2011-12 to 8.5% (from 9%) and for FY 2012-13 to 8% (from 8.5%).
- The American International Group Inc., (AIG) is in talks with potential buyers to sell its mutual fund business in India having 1,019.77 crores of Assets Under Management (AUM). Bank of America Merrill-Lynch has been appointed as the investment banker for the transaction.
- At last the Finance Ministry assured that the entire 9.5% interest on Employees Provident Fund (EPF) will not be taxed.
Commenting on the issue, one of the officials’ of the Employees Provident Fund Organisation (EPFO) said that "Since the notification was put up by the finance ministry before the Central Board of Trustees (CBT) meeting, it must have been based on the assumption that the 8.5% interest rate that had been maintained in the last five years would continue this year as well.”
- The Department of Posts (DoP) is seeking Law Ministry’s opinion on whether the insurance schemes run by it (DoP) could be brought under the regulatory ambit of the IRDA. However, the IRDA had earlier expressed its inability to regulate the financial activities of the DoP citing greater clarity on the changes required to the legal framework that govern the insurance policies of the postal department.
An Official of the Postal Department commented - "Corporatisation of the life insurance business will enable the postal department to compete with private insurance players on a level playing field."
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