The day after Moneylife exposed how the Association of Mutual Funds in India (AMFI) was dilly-dallying for over five months on whether trail commission would continue to be paid to the old distributor even after a customer has walked away, the fund lobby has decided to ask for a new vote on the issue. All chiefs of asset management companies got an email on Tuesday afternoon asking them to vote on three questions—whether the trail commission of a departing customer: a. should be paid to the old distributor; b. should be paid to the new distributor; c: should not be paid at all. Funds are supposed to vote a simple yes/no to each of the three questions.
It may be recalled that yesterday we had reported on the fact that there is continuing confusion about who gets the trail commission in a mutual fund transaction, where a client has moved away from one distributor to another. The confusion persists to this day, due to the inability of the fund lobby, AMFI, to implement the decision, by vote of hand, of its own members not to pay trail commission to the old distributor.
About five months ago, AMFI formed a committee with representatives from ICICI Prudential and Birla Sun Life to decide on who should be getting the trail commission. The committee argued that that the original trail should be there for life even if the client has shifted. There were major objections to this idea. In principle, trail commission is paid for maintenance of an account, not for acquisition. For acquisition of clients, fund companies were paying upfront commissions. If a distributor was not maintaining the account, there was no reason for him to get paid anymore.
The decision was debated and put to a hand of vote. It appeared that 11 funds voted in favour of the committee’s flawed decision while 17 were against. However, till date, this has not been implemented. Later, there was a lot of pressure on CEOs who voted for trail commission termination, to take back their vote.
Today’s email asks the funds to vote again on the idea. When Moneylife asked one of the CEOs why should AMFI ask its members to vote again on something that was roundly defeated, one of the CEOs replied, “It’s all a farce. I am not sure what AMFI wants to achieve and whether it will be implemented this time.” What is also a mystery is why are some funds so keen to keep paying commissions to the old distributor, which not only seems illogical but patently anti-investor. It is the investors’ money that is being paid out and it’s unjust to pay his money to a distributor he has decided to walk away from. However, this is precisely what some large funds are supporting
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Where promoters have increased their stake, the growth has been excellent leading to higher share price
Continuously rising stake by promoters can lead to an early signal of improving fundamentals and of course, a sharp rise in stock prices. A recent study by Moneylife found that promoters of 71 companies out of the 1,328 companies from our database have increased their stakes in the last four consecutive quarters.
It’s unusual to see promoters’ holding increase on a regular basis. They usually step in to buy after a sharp market decline to shore up their holdings. They don’t continuously increase their stake, quarter after quarter in a rising market. If they did, it would not only indicate their confidence about their companies but also show that they are very bullish indeed. This is exactly what has happened. As the Moneylife study found out, rising promoter holding was an early indicator of financial performance and stock price performance.
Promoters’ stake has increased the most in Linc Pen & Plastic, by 41% in the December 2008 quarter to the September 2009 quarter. Its operating profit has grown 164% and the stock has surged 119% in the same period. Promoters of JBF Industries (24%), Hexaware Technologies (22%), Genus Power Infrastructures (14%) also were a very confident lot. These companies have performed very well at the operating level and their stock has been in the investor’s radar over this time period. JBF Industries posted a strong operating profit growth of 50% and its stock soared 230%. Hexaware recorded a 533% rise in operating profit from a low base of last year and its stock rallied 284% in the same period. Genus Power Infrastructures also posted a strong performance as its operating profit grew by 36% and stock rose by 69%. All these companies have recorded significant growth in profit and therefore in share prices.
Promoters in the pharmaceutical sector were especially upbeat. Their holding in eight drug companies increased in each of the past four quarters. Companies like Suven Life Sciences, Shasun Chemicals & Drugs and FDC Limited were some of the pharma stocks that attracted investors’ interest because of their operating profit growth. Shasun, Suven and FDC posted a rise in their operating profit by 549%, 178% and 162% respectively. These three stocks gained 145%, 87% and 50% respectively.
Auto components was another sector where promoters were bullish where Banco Products (India), Autolite (India) and Ramkrishna Forgings posted a rise in operating profit of 205%, 155% and 133% respectively. These three stocks gained 115%, 58% and 128% respectively. Despite the general feeling that the textile companies were in the dumps, many of the spinning companies have been doing well and not surprisingly, promoter activity was intense in many textile companies too. In six companies, there has been a rise in the stake in each of the past four quarters. Nahar Spinning Mills and Eurotex Industries & Exports posted a growth of 492% and 433% in operating profit. Their stock prices grew by 140% and 110% respectively. So, next time, you see promoters increasing their stakes in successive quarters, you know that the financial performance is going to be good and the stock prices would possibly be higher.