SEBI begins process to preclude mis-selling of mutual funds Jun 04, 2010

June 04, 2010

Weekly Facts
	Close	Change	%Change
BSE Sensex	17,022.3	355.9	2.14%
Re/US$	6.69	0.6	1.29%
Gold Rs/10g	18,545.00	25.0	0.13%
Crude ($/barrel)	74.31	4.0	5.66%
FD Rates (1-Yr)	5.00%-6.50%

Weekly change as on June 3, 2010

SEBI begins process to preclude mis-selling of mutual funds

Impact

At a meeting held on Monday (May 31, 2010), the Securities and Exchange Board of India’s (SEBI’s) Mutual Fund Advisory Committee took the first step in order to preclude mis-selling, by putting in place a system for distributor regulation. A note released by the committee, titled - “Right Selling vs. Mis-selling: building institutional processes”, is a virtual road map to put in place, sales guidelines for all sellers of mutual funds, including banks, national distribution houses and independent financial advisors.

The SEBI proposal seeks to install a system of product suitability, which would mean, that a set of products will be described as having attributes that fit a certain type of investor. Hence selling something inappropriate to an investor would be a violation of the rules. For instance, a retired person whose objective of investing in a fund is regular income will not be sold a mid-cap fund, which is a high-risk product, suiting the risk appetite of a young investor.

The note also looks at a system of written documentation and call recording to generate a trail to the final outcome that an investor experiences after the investment decision.

It is noteworthy that at present, financial products such as mutual funds do not have effective regulations in place that apply to those selling these products. Only the manufacturers (the mutual funds) are regulated by SEBI.

We think that the proposals put forth by SEBI’s Mutual Fund Advisory Committee are a good attempt to preclude mis-selling. However in our opinion, regulating sellers of mutual funds will not entirely wash-out the atrocities of mis-selling unless a comprehensive monitoring mechanism is in place. A small step in the right direction highlights the need for many large steps!!

GDP grows as 7.4% in FY10

Impact

India’s GDP

(Source: CSO)

The Indian economy expanded at 7.4% in FY 2009-10, thus bettering the Government’s earlier estimate of 7.2% growth, despite the drought and the global economic meltdown. The Gross Domestic Product (GDP) stood at Rs 44,64,081 crore (at 2004-05 prices), over the previous year's Rs 41,54,973 crore. Even in Q4 of FY 2009-10, GDP expanded at 8.6%.

The expansion in GDP was fuelled by a growth of 10.8% & 0.2% in manufacturing and agricultural activity respectively. It is noteworthy, that growth rate in agricultural activity looked appealing on account of the upward revision (earlier growth rate was -0.2% in the advance estimates) in agricultural produce. However, slower growth in services, brought concerns on sectors such as information technology.

Commenting on the GDP growth, the Chief Statistician of India, Mr. Pronab Sen interestingly said, “the numbers are along expected lines and it does not change the diagnosis much. The growth in agriculture is a positive surprise. We have come out of the crisis but the growth drivers are still not as strong as one would like them to be”.

Meanwhile, Finance Minister Mr. Pranab Mukherjee exuded confidence that the economy would expand by over 8.5% in 2010-11.

We think that the GDP growth rate posted for FY 2009-10, is impressive. However, we also believe that this is on account of the prudent stimulus measures adopted by the Government during the global economic meltdown. Going forward, we feel that for sustainability of such a GDP number, a normal monsoon is much needed along with growth in manufacturing and service sectors.

Now withdraw upto Rs 1 lakh at ATMs

Impact

Bank customers can now withdraw upto Rs 1.00 lakh in a single day from Automated Teller Machines (ATMs) and moreover, can shop for even a higher amount of Rs 1.25 lakh with debit cards.

At present (with effect from June 1, 2010), only HDFC Bank is allowing these enhanced banking limits to its customers, but other banks may follow suit soon. The ATM withdrawal limit for HDFC Bank Imperia Gold Debit Cards now stands increased to Rs 1.00 lakh, and that for shopping to Rs 1.25 lakh, from Rs 50,000 per day. Currently the bank is in the process of informing its customers about these enhanced debit card limits.

We believe that while the enhanced limits for ATM withdrawals and debit card swiping would convenience customers and result in higher amount of transactions at ATMs, it would also bloat the cost of refilling ATMs with cash. This is because, most banks in India use external agencies to refill cash. Who will bear this extra cost? We believe, it will be the customer!

INTERVIEW

In an interview with the Business Standard, Mr. Lenny Feder, Group Head of Financial Market at Standard Chartered Bank, shared his views on correction in the Indian equity markets in the context of the euro crisis and liquidity flow across asset classes and markets.

On the correction, Mr. Feder believes that India is better positioned than most countries, on account of drivers in economic growth and prudent regulation by policy makers. However, given the global economic turmoil, he also believes that there has been some sell-off in Indian equity. But, not nearly as sharp as in China. This is mainly due to the domestic nature of the Indian economy and his belief of lack of property-led bubbles here. Nonetheless, he does not indicate that India is immune to the situation in Europe. He explained this by saying “Some adverse impact on growth might be inevitable if the euro crisis deepens further — Europe remains one of the most important export destinations for India with 22 per cent of Indian exports going to Europe. The crisis will also impact the overall confidence”.

On liquidity flow across asset classes and markets, he said that the Greece crisis has caused many institutional investors to pause and they are taking a more guarded approach to investing right now. However, he also did mention that investors who are following fundamentals recognise India as the future and are investing here and thus we can expect continued foreign investment.

AND OTHER NEWS...

Kingfisher Airlines expects to come out with $100 million Global Depository Receipt (GDR) issue by July. “I expect our (GDR) issue by early second quarter”, said Mr. Ravi Nedungudi, CFO of UB Group, which owns the airline.

Manipal Education entered into an agreement with National Stock Exchange (NSE), to conduct training programmes on capital markets across the country. The training programmes would start from June 12, 2010.

In a notification released by SEBI, with effect from June 1, 2010 mutual fund distributors and agents will need certification from National Institute of Securities Management (NISM) to sell mutual fund products.

At a meeting held on Monday (May 31, 2010), SEBI’s Mutual Fund Advisory Committee, comprising SEBI and mutual fund industry representatives, recommended the retention of the expense ratio at 2.25%. The Committee has also proposed a cap on the exposure of any scheme in derivatives, at 100% of its actual holding in stocks, thus limiting the fund house’s excessive play in Futures & Options (F&O) market. We believe that such a move to cap exposure in derivatives will reduce the investment risk for investors’.

HSBC India Manufacturing PMI (Purchase Managers Index) climbed to 59.0 (its highest level since February 2008) in May 2010, up from 57.2 in April 2010, thus revealing fastest expansion in India’s manufacturing, since the last two years. This jump was primarily driven by a sharp increase in production backed by new orders, even as input cost continued to rise sharply.

India’s fiscal deficit for 2009-10 stood at 6.6% of Gross Domestic Product (GDP), which was slightly lower than the projected level of 6.7%. Fiscal deficit rose 24.89% in the financial year to Rs 4,12,307 crore over last year, against the revised estimate of Rs 4,14,041 crore.

The rise in fiscal deficit was on account of the stimulus measures taken by the Government to help the Indian economy recover from the effect of the global economic meltdown.

“Inflation in India is higher than RBI would like it, while GDP growth rate at 7.4% for 2009-10 is encouraging but not surprising”, said Dr. D. Subbarao - RBI Governor.

The Finance Ministry has said that income tax payers will have to mention the receipt number of Tax Deducted at Source (TDS) forms in the returns to claim refunds, from this fiscal. Tax payers will have to mention this number along with their Permanent Account Number (PAN) and tax-deduction account number of the deductor, otherwise refunds may not be considered.

The ministry has also changed the last date of filing TDS returns from last quarter of the financial year to May 15, from the earlier date of June 15.

New Issues

Axis Mutual Fund launched an open ended income fund named “Axis Income Saver Fund”. As per the offer document, the fund is mandated to invest 65% - 99% of the collected corpus, in Indian debt and money market instruments and 1% - 35% in equity and equity related instruments.

As per the offer document, the investment objective of the scheme is “to generate regular income through investment in debt and money market instruments, along with capital appreciation through limited exposure to equity instruments. It also aims to manage risk through active asset allocation”.

The New Fund Offer (NFO) is open for subscription from May 24 to June 21.