Impact 
Recognising that reforms in the financial sector are vital for more efficient market intermediation between savers and investors, and to add depth to the capital markets; Budget 2012 proposed to introduce, the "Rajiv Gandhi Equity Saving Scheme". The said scheme was proposed to be a 3 year lock-in, which will allow income tax deduction of 50% to new retail investors, who invest upto Rs 50,000 directly in equities and whose annual income is below Rs 10 lakh.
While not much details were revealed in the budget speech (citing that they will be announced in the due course), now the Finance Ministry is expected to come out with guidelines on the same by month-end. Under the guidelines, besides stocks of BSE-100 companies, investors may be allowed to invest in stocks of Public Sector Undertakings (PSUs). Moreover, there is likely to be a revision in the lock-in period to 1 year (from 3 years proposed earlier), as the scheme would compare unfavourably with tax saving funds already in the market.
We believe by restricting investments in RGESS only to shares of companies in the BSE-100 index and PSUs, the Government has tried to infuse stability to one's RGESS portfolio. But as far as investing in PSUs stocks is concerned, we are of the view that the excessive price control which PSUs are subject to, impedes their earning capability, and return on investments (if such shares held as major composition in one's RGES portfolio).
Speaking about the reduction in the lock-in period to 1 year (from 3 years as proposed), we think that the Government should not amend the original proposal of 3 years, as reduction in lock-in period may only promote hazardous trading habits amongst individual (retail) investors, and not infuse on long-term saving habit which is vital for wealth creation and adding depth to the capital markets. .
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Impact 
Several factors both domestic as well as global have impacted the Indian equity markets negatively in FY12. Right from high domestic inflation to debt contagion in the Euro zone, the equity markets have had a rough ride. The benchmark index BSE Sensex fell 10.4% in FY12. Amidst this, the mutual fund industry too, wasn't spared. The Average Assets Under Management (AAUM) for the mutual fund industry fell by 10.6% as at the end of March 2012.
(Source: ACE MF, PersonalFN Research)
The above graph clearly depicts the rough waters through which the mutual fund industry has sailed along in FY12. In quite contrast to Q1FY12, where the MF industry's AAUM was Rs 7,43,719 crore, the last quarter of FY12 saw a plunge of 10.6% in its AAUM and thus stood at Rs 6,64,791 crore.
We believe that the reduction in the AAUM of the mutual fund industry is purely because of a rough patch in the Indian equity markets. Fundamentally there is nothing wrong with the Indian economy and going forward the growth prospects offered by the country may attract foreign capital flows too. But we believe that India's tax policies have to get more predictable, and should not depict wrong signal to the global economy. But for you as investors to sail through uncertain times (and manage the volatility which comes along with it), we recommend you to stay invested and adopt the SIP route to investments in order to reap the benefits of rupee cost averaging and invest with a long term horizon in order to avail the power of compounding for your portfolio.
It is noteworthy that at present the mutual fund industry is a well regulated, in the interest of investors. Thus, while there are mutual fund houses, are selling their asset management businesses, it is seen that interest of investors is protected. Going forward we may even see some mergers or consolidation taking place in the mutual fund industry space.
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Impact
In an attempt to make insurance available to people of the lower income groups in the semi-urban and rural areas, the Finance Minister (FM) - Mr Pranab Mukherjee has urged the insurance regulator - Insurance Regulatory and Development Authority (IRDA) to adopt an appropriate model which can deepen the insurance market (and thereby bring financial inclusion).
Also stressing on the need to enhance market profitability of the insurance companies, Mr Mukherjee advised the insurance regulator to have a holistic approach by putting in place a new business model and not merely adopt aggressive price based competition; since unhealthy competition is matter of concern.
To know more about what changes the FM has suggested please click here.
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Impact
Authority to an individual or an organisation is always complemented with adequate responsibility. The two cannot work in isolation. While at our office we may be enjoying an authoritative position, as a decision maker it also tags along equal amount of responsibility which makes us accountable for every decision we take. Thus, any given authority is always followed by some responsibility. And to monitor this equation of authority and responsibility, we often have someone above us experienced, who oversees and takes corrective actions to restore the balance between authority and responsibility.
Likewise for the capital markets, it is the Securities and Exchange Board of India (SEBI) who keeps vigil on the activities of the stock markets and the intermediaries therein. Recently, the capital market regulator observed irregularities in the activities of the stock markets, and it decided to take the following actions.
To know more about the initiatives proposed by SEBI please click here.
This Week's Poll !!!
Do you invest in PSU shares, assuming they are safe?
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In an interview with the Economic Times, Mr Jaideep Khanna - Managing Director at Barclays India shared his views on restructuring India business due to tensions in the Euro zone, business outlook for India and the impact of the proposed changes in the tax law.
Mr Khanna affirms that despite the pressures in Europe's domestic market, Barclays is committed to the Indian market. He says that Barclays has refocused its operations in India. "Despite the commitment, businesses go through cycles and we have restructured our India business. We have brought the corporate and investment banking business together. We have de-emphasised our small and medium enterprises business. As an international bank in India, we have limited reach to our clients," he said.
On the business outlook for India, Mr Khanna believes that fundamentally business is a function of a macro economy. Thus he's of the view that if the growth picks, up there will be plenty of opportunities. Moreover, he does not see why financial services industry cannot benefit from this growth. At present, according to him most of the clients are not executing projects. They are watching the environment and thinking about opportunities. "There may be a lull but if you have a longer-term perspective on a country, you have to stay still. We would prefer to see more activity. Telecom, healthcare, and the energy sector - be it oil or unconventional energy - will see some activity," he said.
According to Mr Khanna, the fundamental thing for any investor is returns. He thinks that if the macro India looks strong, people will invest. He is of the view that investors look for consistency, the rule of law and the ability to predict returns and manage their investments while making investment decisions. "As the economy re-gains stable footing, I do not see any investor shying away from India. In the first three months, we have seen very good foreign institutional flow. The feedback we are getting is that if macroeconomic issues are addressed, India is good for investment. The change in tax laws per se is not going to drive investors away," he added.
Euro zone crisis is far from over; although of late there has been some optimism due to the flush of Long Term Refinance Operations (LTRO) by the European Central Bank (ECB). Amidst political anxiety in Greece due to the likely elections scheduled in May 2012, the main worry has been the rise in borrowing costs in Spain close to 6% highest since January 2012. Thus any negative news disseminated from the Euro zone may create a rippling effect for the Emerging markets like India.
Despite the global uncertainty, the Indian economy managed to post a GDP growth of 6.1% for the Q3 FY 12. Moreover, according to the latest bi-annual Regus Business Confidence Index (BCI) report which tracks the opinions of over 16,000 business managers and owners from 86 countries, business confidence in Brazil has reached 148 points in March 2012 followed by India at 143 points. Thus, business confidence in the country is high.
But at the time when the Indian economy is slowing down, uncertain policy reforms may further ruin the growth prospects of the country. The amendment in the tax laws (the GAAR) may dampen the investment mood in the country leading to reduced long term foreign capital flows.
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- The capital market regulator Securities and Exchange Board of India (SEBI) is mulling ways to deepen the Indian stock markets as the number of new investor accounts have fallen by nearly half in the last fiscal year and trade volumes nearing a plateau. One of the measures, the SEBI is proposing is to introduce no-frills trading accounts to attract new investors to cash market and launch new products in the derivatives segment.
- The SBI Mutual Fund has decided not to levy the recently introduced transaction fee while selling mutual fund schemes to investors. The state-owned bank, one of the largest distributors of mutual fund schemes among lenders, which had earlier decided to charge its clients this fee, has now decided against it citing inconvenience in fee collection as the reason.
- Jewellers across the country ended a long 21-day stir (opposing over the proposed 1% excise duty on unbranded jewellery and doubling the import duty to 4% on gold in the Union Budget 2012), after the Finance Minister assured them of a rollback over the tax proposal made (for gold).
- In an effort to eliminate any corruption in the Government payments and bring in good governance and transparency, the Controller General of Accounts (CGA) has issued orders stating that from 1 April 2012, all payments above Rs 25,000 to suppliers, contractors, guarantee and loanee institutions will be directly credited to their bank accounts. While the government servants would continue to have the option to receive their salaries by cash or cheques, they could also opt to receive their salaries in bank accounts.
- Indian Government is seeking higher ratings from Standard & Poor's (S&P) , even as the rating agency asked the finance ministry about the rationale behind its optimism that economic growth would rise to 7.6% this financial year, against 6.9% in 2011-12. It also asked the ministry about its plans to rein fiscal deficit. However, the Ministry officials have based their arguments on the premise of good economic growth prospects, higher revenue generation and efforts to contain fiscal deficit. Currently S&P has assigned India a sovereign rating of BBB- with a stable outlook.
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Derivatives: A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.
(Source: Investopedia)
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QUOTE OF THE WEEK
"Anyone who lives within their means suffers from a lack of imagination." - Oscar Wilde
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