IIP growth for June moves southward   Aug 20, 2010

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Impact

After showing a good run-up from October 2009 onwards, the Index of Industrial Production (IIP) is now slowing down. The first signs of slow down appeared in May 2010 (11.5%), and in June 2010 (data released in August 2010) too, this downward trend continued with the IIP number slipping to 7.1%; slowest pace in past 13 months.

According to the quick estimates released by the Central Statistical Organisation (CSO), the main reason for the southward movement in the IIP growth was on account of:

• Decelerating manufacturing growth - The manufacturing index, which is the principal component of the IIP, decelerated to 7.3% in June, when compared to 12.3% in the previous month (May 2010).
• Loss of growth in sectoral output - The growth in the output of capital goods mellowed to 9.7% in June 2010 (from 34.3% in the previous month) along with the output of consumer non-durables mellowing to 1.3% (2.4% in the previous month). However, the output of consumer durables grew to 27.4% (23.7% in the previous month), with the overall growth in consumer goods being at 8.3% (8.2% in the previous month).

Reacting to such IIP numbers, Finance Minister - Mr. Pranab Mukherjee expressed disappointment saying, "I expected it to be a little better". Meanwhile Mr. Montek Singh Ahluwalia - Deputy Chairman of the Planning Commission said, "For a year as a whole it (IIP) does not necessarily have to be in double digit... to achieve 8.5% GDP growth. But we do want double digit industrial growth".

We believe that despite the deceleration, the IIP numbers are yet signalling robustness of the Indian economy and also support the Government's expectations of an 8.5% growth in Gross Domestic Product (GDP) for the current fiscal year. Moreover, in our opinion, the deceleration in IIP numbers may not preclude Reserve Bank of India (RBI) from continuing to adopt the calibrated path, and thus it may increase policy rates by 25 basis points in its mid-policy review meeting (scheduled for September 16, 2010).

Impact

In a strong response to the lacklustre attitude of mutual fund houses towards updation of investor-related documents, the Securities and Exchange Board of India (SEBI) has directed mutual fund houses to comply with the requirements by November 2010.

The documents to be maintained and made available include anti money laundering, combating financing of terrorism, Know-Your-Customer (KYC) documents and the Power of Attorney (PoA). These (documents) need to be updated by November 15, 2010 for existig MF folios. In all the mutual fund houses need to adhere to the following:

• Obtain all investor-related documents on an immediate basis
• Halt payment of commissions to distributors till full compliance
• Set up a grievance redressal mechanism
• Send statement of holdings and all transactions since inception of folios in duplicate on a one-time basis to investors and seek confirmation from the unitholders
• No new folios should be opened without referring the investors’ documents
• Make available these documents with mutual fund houses / Registrar & Transfer Agents (RTAs) and not just with the distributor

Reacting to the SEBI directive, a CEO of large mutual fund house said, "Clients are reluctant to give documents to the distributors. It’s a long process to obtain such documentation and takes longer time".

In our opinion these are very well thought out directives issued by SEBI, which are in the long-term interest of investors, as this will instill more discipline amongst mutual fund houses and also enable investors to get efficient service.

Impact

The Insurance Regulatory and Development Authority (IRDA) has stepped further in order to curb mis-selling by agents. It plans to cap the charges on all traditional life insurance policies.

The IRDA may cap the surrender charges in the traditional non-linked plans from the fourth year onwards. The charges can be maximum 10% of the fund value, declining progressively every year. Traditional policies are those where insurance forms a major component of the premium and the investments are governed by the Insurance Act and not decided by the policyholder, as in the case of ULIPs.

"In three years, an insurance company typically recovers all costs and during this period the surrender charges can go up to 100%. Between the fourth and the 15th year, the surrender charges can go up to 70%. It is unfair to levy such high charges even after recovering all costs during the first three years. Therefore, IRDA plans to cap the charges fourth year onwards,- said S.B.Mathur, the Secretary of Life Insurance Council. He is also of the view that anything done to the traditional policies would affect the government’s borrowing as two-thirds of the money collected in traditional policies goes back to the government in some form or other. "If Irda wants to stop insurers from charging absurd amounts, why can’t it stop such products at the approval stage?", he said.

We believe that if such an initiative is taken by IRDA, for traditional insurance policies, it would benefit the policyholders, as they would receive almost the entire amount back even if they withdraw from the policy before maturity. Moreover it would enable to keep a check on the mis-selling done by insurance agents.

INTERVIEW

In an interview with DNA Money, Mr. Nilesh Shah, Deputy Chairman and Managing Director of ICICI Prudential Asset Management Company, shared his view on the Indian equity markets and the themes which look promising.

Mr. Shah is very bullish on the Indian equity markets and sees markets multiplying multi-fold, on a five to ten year basis, from the current levels. However from a near-term perspective he believes that it is very difficult to predict, because Foreign Institutional Investors (FIIs) flows may be affected, as there could be valuation issues. But having said that, he believes that over the medium to long-term, India will receive good FII inflows. Comparing U.S. and India he said that, U.S. markets in the last 10 years had a good time. The U.S. had good credit expansion, good economy, and benevolent central bank. But he thinks that they would have to pay a price for the deficit, and therefore doubts whether they would move forward in the next 10 years. Whereas for Indian equities he believes, that we (Indian equities) would be at significantly higher levels over the same period. Also comparing ourselves (India) to the emerging Asian markets he said, "We are faster growing, we are more diversified and our return on equity is superior to any other emerging market".

Mr. Shah is bullish on the consumption theme and the infrastructure theme.

AND OTHER NEWS...

• Credit Suisse (a Swiss-based bank), received a licence from the Reserve Bank of India (RBI) to establish its branch in Mumbai. This branch will accept deposits and use its balance sheet to provide financing to clients, complementing the capabilities of Credit Suisse’s non-bank financial company in India. The licence also permits the bank to deal in government securities, other domestic fixed income products and foreign exchange.


• Ahemdabad Commodity Exchange Ltd. (ACE Ltd.), promoted by Kotak group, will function as a national commodity exchange in 8-10 weeks. According to Mr. Dilip Bhatia - CEO of ACE Ltd. initially four commodities which include agriculture and bullion will start trading on the exchange.


• The Infrastructure Development Finance Company Ltd. (IDFC Ltd.) has shown its disinterest in seeking a banking licence from the RBI. "We are not planning to ask for banking licence from RBI. We are happy with our infrastructure status," said Rajiv Lall, Chief Executive and Managing Director of IDFC Ltd.


• Concerned over brokers misusing funds lying in investors’ trading accounts, market regulator - SEBI has asked broking entities to return client’s unutilised cash at the end of every month or quarter.
  
  However some brokers are resisting the move, citing high costs associated with such frequent transfers of funds to and from the clients’ accounts. SEBI has also asked them to transfer within a day the funds withdrawn by the investors.


• In order to provide a fillip to the success of Infrastructure bonds, the Government of India has decided to exempt infrastructure bonds from getting the credit ratings; which are mandatory for all the other kinds of bond issuances. The approval process would make sure that only highly-rated institutions get classified by RBI and the issue could be revisited again if it is felt that a credit rating needed to be mandatory for bonds issued by certain entities.


• Life insurance companies are likely to reduce the premium on their products after an updated mortality table comes into effect. At present a committee, including Mortality and Morbidity Investigating Centre (MMIC), an affiliate of the Institute of Actuaries of India (IAI), actuaries and members from the industry have prepared a new mortality table based on 2008-10 data, which is presented to the Insurance Regulatory and Development Authority for approval.
  
  In our opinion if the new mortality table is approved, life insurance premiums will reduce considerably. We think that the positive impact (reduction in premiums) of the new mortality table would be felt mostly on the term insurance plans, along with the insurance part of ULIPs. On endowment plans, the impact would be felt on the bonus pay-out since 8% - 9% of the premium is linked to mortality rates.


• The Centre for Monitoring Indian Economy (CMIE) in its monthly report stated that the Indian economy is all set for a 9.2% growth trajectory in FY11. "The boom in economic activities is likely to continue in the remaining three-quarters of FY 11. As a result, we project a 9.2% growth in real GDP in fiscal 2010-11," the CMIE report said.
  
  The services sector is also projected to expand by 10% in FY 11 as compared to 8.6% in FY 10, led by the trade and transport segment.


• The Wholesale Price Index (WPI) inflation for July 2010 finally fell to 9.97% under the single-digit territory. In our opinion, such a WPI inflation number would provide some relief to the government which has come under severe pressure of managing escalated prices, but we think that the drop in WPI inflation is due to the fading of base year effect.


• Kotak Mahindra Bank introduced a new product called "Stock Ace", which provides individual customers an overdraft facility, against their investments such as equity shares, mutual funds and other marketable securities that are approved for lending by the bank. The facility is offered only against dematerialised securities.


• ICICI Prudential Life Insurance Company Limited launched an online term insurance plan called "iProtect", where an individual can apply online and make the premium payment either through an internet banking account or through a credit card. The plan provides a life cover immediately once the premium is paid, and upto a certain limit of sum assured, one is not required to undergo any medical tests. The minimum and maximum entry age for an individual under the plan is 20 and 65 years respectively, and the minimum and maximum term of the policy is 10 and 30 years respectively. The maximum age at policy expiry is 75 years.


• Tata AIG Life Insurance Company Limited launched "Tata AIG life Maha Guarantee" - a traditional non-participating endowment plan with guaranteed returns. The plan offers 5% of the basic sum assured as the guaranteed addition along with upto 250% of the basic sum assured as the guaranteed maturity benefit. Under the plan the life cover doubles from the very first day, which increases annually with the guaranteed additions. The plan is available in 10, 15 and 20 year terms, with a five year limited pay option. The policy comes with a high life cover of twice the basic sum assured, chosen at policy inception.


• After making sweeping changes in the way life insurance companies transact Unit-Linked Insurance Plans (ULIPs), the insurance regulator - IRDA has now cautioned insurers on the advertisement front.
  
  "A review of the advertisements, especially those relating to unit-linked life insurance products, reveals the necessity to improve the content and presentation in compliance with the provisions of the above referred regulation and guidelines", IRDA said.
  
  As per the regulator on any advertisement highlighting the benefit of guarantees, life insurers should have a clear disclosure on the underlying conditions under which the guarantee operates, including the cost of guarantee and charges. Moreover the advertisement will also have to clearly state the availability of underlying elements of ‘life insurance coverage’ to help identify the product as an insurance product. IRDA has also warned insurers from using any brand names for products that use terms or phrases that convey a fabricated sense of security.


• Pramerica Asset Managers Pvt. Ltd., the newest entrant in the mutual fund space, intends to bring its global quant fund exercise to India. At present the firm globally manages assets worth $690 billion. It aims to breakeven in 5-7 years and may launch 3-4 debt and equity products by the end of the calendar year, subject to regulatory approvals.


• The impact of recent rate hikes by RBI has been manifested earlier than expected increase in lending rates by several banks. India’s largest public sector bank - State Bank of India (SBI) and the largest private sector bank - ICICI bank increased their Bechmark Prime Lending Rates (BPLRs) by 50 basis points. The BPLR of ICICI Bank now stands at 16.25% and that of SBI at 12.25%. Following the suite, Kotak Mahindra Bank (another private sector bank) also raised its BPLR by 25 basis points to 16.00%.


• Religare Enterprises, the financial services firm controlled by Malvinder and Shivinder Mohan Singh, may join the league of companies seeking new banking licences to be issued in six years in India. The company will make final decision only after the rules for procurement of licence are set by the RBI.

NEWS ISSUES...

• Pramerica Asset Managers Pvt. Ltd. (the Indian asset management venture of US-based Prudential Financial Inc. (PFI)) unveiled its first fund "Pramerica Liquid Fund" - an open ended liquid scheme.
  
  As per the offer document, the investment objective of the scheme is "to provide reasonable market related returns with lower risk and higher liquidity through a portfolio of debt and money market instruments. However, there is no assurance that the investment objective of the scheme will be realised and the scheme does not assure or guarantee any returns".
  
  The fund will benchmark its performance against the Crisil liquid Fund Index, and will be managed by the fund manager - Mr. Mahendra Jajoo.
  
  The New Fund Offer (NFO) is open for subscription from August 23, 2010 to August 26, 2010, and will re-open for continuous sale and repurchase on August 30, 2010.