Impact 
The entry load ban which came into effect in from September 1, 2009 did not go well with the mutual fund industry. The distributors started migrating to other financial products in search for better commissions as their commissions from mutual funds dried up considerably. Thus now, in order to make it attractive for distributors to sell mutual funds, Mr. U.K. Sinha - the new chief of SEBI, is all set to provide distributors with new incentives.
While addressing at the 7th Mutual Fund Summit (organised by Confederation of Indian Industry -CII), Mr. Sinha expressed so, but gave no hints about the nature of these incentives or whether investors would pick up the tab. At present Mr. Sinha has formed a special committee at SEBI in order to look into the issues affecting the mutual fund industry and its recommendation has suggested that the regulator should allow incentivisation of distributors and raise the accountability bar.
At the summit Mr. Sinha also emphasized on several other proposals for Asset Management Companies (AMC) like providing track record of individual fund managers to investors, simplification of the initial public offerings, simplification of disclosure norms for better understandable of ordinary investors, break-up to be provided by fund houses of their AUM to help assess money put in by individual investors and institutional investors, etc.
In our opinion the entry load ban implemented was, in a true sense, a pro-investor measure. But the present initiative of incentivising the distributors to revive the mutual fund industry taken up by the newly elected Chairman of SEBI Mr. U.K. Sinha does not seem to be a pro-investor move at all.
Yes, financial advisors too, should be rewarded for their unbiased advice but not from the investment kitty of the investors. Instead fee-based advisory model encourage as it will help both the investor as well as distributors. Bringing awareness amongst the investors is very important for the mutual fund industry to flourish.
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In the month of February 2011, the Insurance Regulatory and Development Authority (IRDA) had proudly announced that the policyholders will be able to change their health insurers without changing any terms and conditions of the health insurance policy in question. The IRDA had also ensured the companies that it would make policy-wise claim history available for effecting quick portability.
But failing to keep its commitment, the IRDA has now postponed the health insurance portability by three months to October 1, 2011. The insurers in order to implement portability must have historical data on policyholders' health related details of claims. But since the IRDA has failed to setup such a facility the delay of launching the health insurance portability has become inevitable.
We believe that the delay in implementing the health insurance portability brings out the inefficiency of the IRDA as well as the insurance companies. The initial decision to launch portability should have been complemented with relentless efforts on the part of the insurance companies as well as the IRDA in order to implement the same on time.
Moreover in our view once the portability is in force, the IRDA should be on a constant vigil to keep in check any malpractices undertaken by insurance companies in order to stop a policyholder from migrating to other insurers.
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Impact 
In order to attract stable investments into the mutual fund industry, the Finance Ministry liberalised the rules to allow foreign retail investors to directly buy units of Indian mutual funds up to a cumulative total of $10 billion per year. Thus now, this move will allow a new class of investors, known as Qualified Foreign Investors (QFIs) to participate in the mutual fund industry (first proposed by Finance Minister Pranab Mukherjee while presenting the 2010-11 Budget).
QFIs are basically those who have given sufficient proof to banks or regulated brokerages to open a demat account. A QFI can be an individual or pension and insurance funds. SEBI will regulate both the channels of investment and frame the detailed eligibility conditions by August 1, 2011.
A QFI can invest in Indian mutual funds in two ways:
- In the first method, QFIs can open demat accounts with SEBI-registered depositories who will execute their orders and also hold units on their behalf. However, these depository will need to have a paid-up capital of at least
 50 crore.
- In the second option, eligible investors will place orders with a foreign depository for buying units on their behalf. This depository will in turn place the order with an Indian custodian bank which will purchase the units and keep them with itself. The foreign depository will then issue Unit Confirmation Receipts, or UCRs, to investors against the units. UCRs are similar to participatory notes.
Moreover, only those QFIs which are from Financial Action Task Force (FATF) compliant jurisdictions and with which SEBI has signed MoUs under the International Organisation of Securities Commissions can invest in mutual fund schemes. FATF is an international body that aims to combat money-laundering and terrorist financing. Currently, there are 34 member countries in FATF.
In our opinion this is a welcome move for the mutual fund industry as the industry will get foreign retail participation and that too in a stable form, which is unlike FIIs who pump in hot money but cause high volatility due to their short-term traits
Also, the mutual fund houses would now have to raise their service standards to meet the expectations of the foreign retail investors which in turn will benefit the domestic investors as well. | |
Impact
So far since the beginning of the calendar year 2011, Foreign Institutional Investors (FIIs) have turned their back on the Indian equity markets as they have been net sellers to the tune of 28.4 crore as on June 24, 2011. But interestingly, they have evinced interest towards the Indian debt markets as they have been net buyers to the tune of 733.8 crore as on June 24, 2011.
(Data upto June 24, 2011)
(Source :ACE MF, PersonalFN Research)
Debt markets have appealed to them as interest rates have uptrend but nearing their peak, which is making debt market look more attractive as yields are getting an upward push. Moreover, the detrimental factors such sticky WPI inflation, corruption charges cropping up against the Government in power, debt overhang situation in the Euro zone and withdrawal of QEII (Quantitative Easing - Round II) in United States, is also instigating them to look at debt instrument, rather than equity.
However, in our opinion going forward, in the near term these factors will exert a pull effect on the Indian equity markets, and make FIIs head turn toward debt markets, as high coupons are an enticing factor. From the long-term they would keep their eye on the Indian equity as it would be a favourable asset class to beat inflation. Moreover, valuations in the Indian equity market are looking very attractive and long-term synergy for the Indian equity market is intact as the GDP growth rate (8.5% for the fiscal year 2010-11) offered by India is quite robust along with the consumption story too being intact.
| | | Weekly Facts |
| Close | Change | %Change | | BSE Sensex* | 18,762.80 | 522.1  | 2.86% | | Re/US$ | 44.69 | 0.3 | 0.60% | Gold /10g | 21,965.00 | (530.0) | -2.36% | | Crude ($/barrel) | 112.40 | (1.5) | -1.29% | | FD Rates (1-Yr) | 7.25% - 9.25% | Weekly change as on June 30, 2011
*BSE Sensex as on July 01, 2011
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In an interview with the Economic Times Mr. B. Prasanna - Managing Director and Chief Executive Officer of I-Sec Primary Dealership shared his views on Reserve Bank of India’s (RBI’s) policy rate stance, bond market’s reaction to high inflation and government borrowing and RBI’s steps to develop bond market.
Mr. Prasanna believes that the RBI has neither been over aggressive nor behind the curve in taming inflationary expectations. It has been hiking rates according to him, to normalise from the ultra accommodative level maintained after Lehman crisis. He explained further by saying that, "It is not justified to now say in retrospect that RBI is ahead of the curve. The cornerstone of any successful central bank is its credibility in maintaining inflation-fighting credentials and the 50 bps hike was needed to keep this reputation intact."
As far as bond markets are concerned, Mr. Prasanna is of the view that there are uncertainties associated with growth-inflation trade-off as well as fiscal borrowing at any point of time and as such the bond market has no choice but to struggle with it. According to him the cause of concern is that the inflation doesn’t seem to be easing even after a one-and-a half year of interest rate cycle. Explaining further, he said, "Pricing pressures are well established in manufacturing. Thus the RBI would probably need to raise rates further."
Mr. Prasanna feels that despite RBI’s measures in bond market reforms, the bond market have not yielded results. Products like Interest Rate Futures (IRFs) and repo in corporate bonds he says, have not found favour with a wide section of the market. Explaining RBI’s efforts in bond market reforms, he said, "The RBI is moving in the right direction by introducing piecemeal reforms in bond markets. The global financial crisis has exposed vulnerabilities of light touch regulation in over-the-counter market and, therefore, some well-thought safeguards seem justified. But since some speculative interest is essential for development of any financial market, excessive regulation that restricts speculative activity could potentially stifle evolution of a product."
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Interest Rate Futures: A futures contract with an underlying instrument that pays interest. An interest rate future is a contract between the buyer and seller agreeing to the future delivery of any interest-bearing asset. The interest rate future allows the buyer and seller to lock in the price of the interest-bearing asset for a future date.
(Source: Investopedia) | |
QUOTE OF THE WEEK
"Stressing output is the key to improving productivity, while looking to increase activity can result in just the opposite."
- Andrew Grove
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