  | | September 10, 2010 |
Impact 
 In order to provide adequate disclosure and curb the ongoing menace of "rating shopping" (in terms of credit ratings), Securities and Exchange Board of India (SEBI) is considering making it mandatory for all credit rating agencies (CRAs), to disclose in the public domain all the ratings, including those ratings that are not acceptable to the companies getting rated.
Other steps being considered by SEBI in this regard are as follows:
- Allowing CRAs to offer unsolicited ratings
- Make available to investors', whether the ratings were rejected by the companies and/or were unsolicited
- Asking the companies to get themselves or their securities rated from two or more competing agencies
- Enhancing disclosure on relationships between CRAs and clients.
Moreover, it is believed that SEBI may also ask CRAs to completely separate their analytical and business development teams, in order to maintain the true worth of the ratings.
As per the current regulations in India, companies are given an option either to accept or reject a rating assigned by CRAs; which in turn disseminate only the accepted ratings. If a rating is not accepted, CRAs keep it confidential.
Regulators in the US and Europe have also recently cracked whip on "rating shopping", as the failure of over-rated financial institutions and securities is believed to be a key reasons for the recent global financial meltdown, from which the world economy is yet to recover fully.
We believe that such a move goes through, investors' would see unbiased ratings being offered, which would thus build investor confidence in ratings and also bring the true worth of a security or company. Moreover, it would also make companies accountable and efficient enough to deserve a good rating.
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Impact
In the month of August 2010, the Indian equity markets (BSE Sensex) continued to show its indecisive movement depicting a consolidation, but nonetheless ended the month in green by mere 270.2 points (1.5%). The southward movement in the IIP number to 7.3% in June 2010 (data released in August 2010), from 11.5% in May 2010 also attributed in this lacklustre upside movement.
 (Source: ACE:MF)
But nonetheless, the Foreign Institutional Investors (FIIs) continued to exude confidence on the long-term prospects of the Indian economy, and bought cautiously net to the tune of Rs11,688 crore in the Indian equity markets; as compared Rs 16,617 crore (net buying) in July 2010.
We believe that continious 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 situtation 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 August 2010,
click here
| Impact
 Ever since the ban of entry load on mutual funds, several mutual fund houses, adopted the practice of paying upfront commissions to distributors from their own pockets, as a marketing effort to grow Assets Under Management (AUM). But such a practice now seems to be pinching their pocket, as mutual fund houses are now planning to stop paying upfront commissions to distributors. According to a mutual fund industry official, beginning October 1, 2010 fund houses would pay only trail commission to their distributors.
Hence, now while adopting the new model and sustaining their marketing effort, several fund houses would pay only the trail commissions to the distributors. To benefit the distributors such trail commissions have been increased to 1% of net average assets under management from the earlier level of 0.75%.
On this Sundeep Sikka - CEO of Reliance Mutual Fund said, "It is a scheme-specific issue... We are still paying small amounts". Another CEO of a respected fund house also said, "It is not as if the distributor will not have any income. The trail commissions, which constitute a major portion of the income, will continue".
We believe that the initiative of banning entry loads (on mutual funds) taken by the SEBI, a year ago has brought the Mutual Fund Industry in order, and in our opinion is truely commendable. We think that now, as upfront commissions are stopped, you'll hear your distributor telling you stay invested in your existing schemes, rather than entering new ones; as this in turn will be in his interest, as he will earn through the trail commissions on the AUM sustained by him. We also think, this move may tempt some distributors to adopt the fee based advisory model,in order to survive in their business.
| Impact
 In a recent report (generated by Noida-based think tank Invest India Economic Foundation (IIEF) and US-based firm AECOM) the Government has made a suggestion that Indian companies should create a separate fund for meeting gratuity payments of their employees to ensure that retirement savings of workers are not wiped out in corporate bankruptcies.
A study commissioned by the Government made this suggestion in a recent report submitted to the finance ministry.
At present the Payment of Gratuity Act seeks to protect such savings, but there are no mandatory disclosure norms for employers. Therefore, the report now suggests making such disclosures mandatory.
Currently to be eligible for gratuity, an employee needs to complete five years of continuous service with an organisation. Firms that employ more than 10 workers have to pay gratuity at the rate of half a month's basic salary for every year completed in service. Payment is made on termination, retirement or otherwise, as and when required. The government is considering hiking the gratuity limit to Rs 10 lakh from the current Rs 3.5 lakh.
In our opinion Gratuity is an important component in an employee's retirement savings. Such funds should not be exposed to vagaries of corporate events. There should be some stringent rules and guidelines that need to be drawn but to make all this successful, constant governance is required.
| | | Weekly Facts |
| Close | Change | %Change | | BSE Sensex | 18,799.66 | 561.3 | 3.08% | | Re/US$ | 46.47 | 0.3 | 0.54% | | Gold Rs/10g | 19,075.00 | 65.0 | 0.34% | | Crude ($/barrel) | 77.37 | 1.5 | 2.00% | | FD Rates (1-Yr) | 6.00% - 7.10% | Weekly change as on Sep 9, 2010 |
In this issue
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In an interview with Business Standard, Mr. Sanjay Sinha, CEO of L&T Mutual Fund shares his views on the equity markets, inflation and interest rate scenario in India.
On the equity markets, Mr. Sinha is of the view that in the near term if three factors i.e. liquidity, valuations and events are supportive, then there is quite a possibility of revisiting the highs of 2008. According to him the Indian equity markets are fairly valued, and he believes that from a forward perspective there is room for more upside, and thus expects an annualised return of 15% - 20% in one to three years. Over a five year period, Mr. Sinha believes that two things will guide the markets, one being a strong possibility of outperformance of Indian markets compared to global markets and other being strong growth trajectory of India extending over five years.
On inflation, he's of the opinion that it would moderate by year-end, as the base effect comes into play, and good monsoon will mitigate supply-side inflation.
On the interest rate scenario in India, he said, "Today, liquidity is very tight and is affecting interest rates. With an increase in government spending, liquidity should improve and rates should moderate". |
IDBI Mutual fund launched an open-ended passively managed equity fund called the "IDBI Nifty Junior Index Fund".
As per the offer document the investment objective of the fund is "to invest in the stocks and equity related instruments comprising the CNX Nifty Junior Index in the same weights as these stocks represented in the Index with the intent to replicate the performance of the Total Returns Index of CNX Nifty Junior Index. The scheme may also invest in derivative such as Futures and Options linked to stocks comprising the index or linked to the CNX Nifty Junior Index .The scheme will adopt a passive investment strategy and will seek to achieve the investment objective by minimizing the tracking error between the CNX Nifty Junior Index (Total Returns Index) and the scheme".
The fund will benchmark its performance against the CNX Nifty Junior Index (Total Returns Index).
The new fund offer (NFO) is open for subscription from September 2, 2010 to September 15, 2010. |
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Credit Rating : An assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities.
(Source:www.investopedia.com) |
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- Kotak Life Insurance launched two new Unit Linked Insurance Plans (ULIPs) - Kotak Secure Invest Insurance and Kotak Wealth Insurance.
Kotak Secure Invest Insurance is an equity exposure plan and is backed by capital guarantees with in-built investment advice of the guarantee fund, helping the investor to gain through market participation at the same time limiting the downside risk.
Kotak Wealth Insurance is a complete package that provides investment growth along with comprehensive triple benefits in the event of death. It has eight fund options to allow investors to balance their risk profile with the tenure of their investments.
- India's public debt as on June 2010 stands at Rs 26.98 trillion, up 4.1% from a quarter ago, backed by increased market borrowings by government to bridge its bloated fiscal deficit. The Finance Ministry report also highlighted the share of internal debt which increased to 89.75% (Rs 24.21 trillion) of the total public debt by end June from 89.33% at the end of March (Rs 23.16 trillion).
- The State Bank of India (SBI) inaugurated a first of its kind branch, at Kohinoor Banjara Premium Banking Centre for High Networth Individuals (HNI) where it takes minimum Rs 1 crore to open an account, and that too on invitation only. The branch is located at Banjara Hills in Hyderabad.
The branch is spread over 4,000 sq ft, offers specialised banking facilities like relationship managers, 24/7 lockers, extended banking hours, doorstep pick-up and drop facilities, in addition to pampering customers five-star amenities at the branch.
- As the New Pension Scheme (NPS) is losing its steam, the Government has now decided to roll out a national retirement plan that promises fixed income to the unorganised sector.
Reacting to this, D Swarup, the recently retired chief of the Pension Fund Regulatory and Development Authority (PFRDA), commented saying the move was premature. "NPS for the unorganised sector was made available only 16 months ago. We must give it some time to gather steam. Guaranteed return is not a part of the original design. Providing a guarantee will fundamentally change the character of the scheme and enhance the fiduciary responsibility of the government", he said.
- The Insurance Regulatory and Development Authority (IRDA) plans to set up a centralised grievance redressal mechanism, which will ensure that customer's complaints are addressed in time. The new Integrated Grievance Management System (IGMS), when implemented would help IRDA to monitor the effectiveness of the grievance redressal procedure setup by the insurers. The system (IGMS) involves mirroring of the grievance database of insurers in a central repository created for the said purpose.
"The Authority is in the process of developing the new Integrated Grievance Management System (IGMS) which will facilitate policyholders to register or track their complaints online with insurance companies", IRDA said.
- The Bombay Stock Exchange (BSE) plans to buy a controlling stake in investor services company - Computer Age Management Services (CAMS) for Rs 650 crore.
In our opinion, the intended move of an inorganic growth strategy seems to be aimed at improving the valuations of the exchange, as the exchange has unable to garner much growth post demutualization.
Demutualisation refers to a process through which an exchange is converted from a private club of brokers into a limited company.
- India's leading bourse, the National Stock Exchange (NSE) has been rated as one of the top two Asia-Pacific bourses (next to Korea Exchange (KRX)); having the highest volume of trading in derivatives, in a report by global consultancy firm Celent. The list of the top 10 Asia-Pacific financial derivatives exchanges is led by the Korea Exchange, with a trading volume of 3.10 billion contracts, and the National Stock Exchange, with 918.5 million contracts, according to the report.
- In order to have a better control on foreign banks in terms of capital adequacy and liquidity management, the Reserve Bank of India (RBI) is planning to adopt the Wholly-Owned Subsidiary (WOS) route for foreign banks entering India.
Currently, foreign banks can either use the branches-only route or opt for the WOS mode, but in practice, the latter has never been employed.
- LIC Housing Finance has approached the Pension Fund Regulatory and Development Authority (PFRDA) seeking a licence to act as aggregator under the New Pension Scheme (NPS).
- Addressing to the issue of Investor Protection, SEBI may soon make it compulsory for brokerage houses to send emails with brief details of every transaction to investors. The details will include what was bought or sold, with the price.
- IDBI Federal Life Insurance has launched IDBI Federal Wealthsurance Milestone Plan under the new norms set by IRDA. The plan comes out with a wide range of 13 options that facilitates customers to customise the plan according to their needs.
As many as 13 options have been provided which may confuse the investors further, as not all investors are well versed with the new norms. In our opinion, as far as possible, new products should be kept simple.
- SBI Life Insurance has launched two new ULIP plans - "SBI Life Smart Performer" and "SBI Life Unit Plus Super".
"SBI Life Smart Performer" comes in with '5% Higher than Highest Guaranteed NAV' during the first seven years or prevailing NAV at Maturity, whichever is higher. The plan offer two options - "Secure Plan" and "Secure N Grow Plan". Under the "Secure Plan" only NAV is guaranteed, while under the "Secure N Grow Plan" market upside benefit along with NAV guarantee, is provided to the policyholders.
"SBI Life Unit Plus Super" is a flexible non-participating ULIP specially designed to meet your changing requirements at various stages of life. The plan offers as many as nine varied fund options. |
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