Citizens' Issues
Brokers need clarity before dealing in MF products

Aiming to enhance the distribution network for mutual funds, SEBI has allowed mutual fund schemes to be routed through stock exchange brokers. Are brokers equipped to handle an entirely different business?

Market watchdog Securities and Exchange Board of India (SEBI) has enlisted the services of stock exchange brokers for dealing in mutual fund units. SEBI plans to use the existing infrastructure in stock exchanges for facilitating investors to buy and sell units in a mutual fund. Over two lakh exchange terminals are to be used for facilitating transactions in mutual fund schemes, providing a reach to over 1,500 towns and cities. Notwithstanding infrastructure advantages over current distributors, it remains to be seen how brokers actually go about dealing in mutual fund units. Chandrashekhar Layane, senior VP, Fairwealth Securities said that a separate order routing mechanism would be developed for the same in the existing broker terminal. Existing mutual fund holders who are not having demat accounts would need to open demat accounts to allow smooth transactions through the broker terminal.

The fact is, mutual funds represent a broadly different line of business altogether. Brokers’ expertise lies in dealing with equity instruments and for them, switching over to the complexities of mutual fund schemes will involve a huge learning curve. Said Jagannathan Thunuguntla, equity head, SMC Capitals, “The various qualification exams can help brokers to gain knowledge. However, to make them completely conversant with the nuances of the mutual fund products can take some time. Over a period of time, the brokers can gain the relevant expertise and knowledge. However, the large brokers who have the in-house research arms, databases and the network can have an edge in terms of the research.”

While fund investors will benefit from the convenience of getting access to their neighbourhood broker, clarity is yet awaited on the costs involved for transacting through brokers. Presently, distributors are required to charge commissions directly from investors through negotiation, after SEBI banned funds from levying entry loads or initial fees for participation in their schemes. This has deprived distributors of large commissions and they have lost their incentive to sell mutual funds. Brokers’ charges for transacting in mutual funds would be same as that for equities. This means commissions could range somewhere between 0.25%-0.50% per transaction. However, it is not clear how additional costs such as securities transaction tax and stamp duty would be levied. Mr Layane confirmed, “The commission structure will be roughly equal to a delivery-based brokerage i.e., from 0.25 to 0.50 of the transaction value. Roughly it will be less than the existing entry load—around 1.25% charged by MF houses, which has been abolished by SEBI recently. But still some things will be unclear, like what will be the commission charges for SIP units.” Mr Thunuguntla said, “The commissions that brokers are going to charge will evolve over a period of time, once this new system gets operational and once all the market participants become familiar with this.”

Further, brokers would be wary of the poor volumes that mutual funds normally attract, especially from retail investors. For brokers, trading in equities is a bigger game, where the volumes are far better and hence the total commissions are also larger. Mr Thunuguntla added, “The volumes are better in equities. However, selling mutual funds can give brokers one more revenue stream and over a period of time, even the volumes in mutual funds can pick up.”

Sanket Dhanorkar with Ravi Samalad [email protected]


IPO processing time should be brought down to seven days: Bhave

There would be more efficiency in the listing process, if the time taken for processing an IPO application can be reduced

In a bid to bring in more efficiency in the primary market, market regulator Securities and Exchange Board of India (SEBI) on Wednesday said that it wants to bring down the time required for initial public offer (IPO) processing to seven days from 20 days at present over the next one year, reports PTI.
This would mean that the time taken for processing an application for an IPO will be lesser, which will bring in more efficiency to the listing process.
"The listing time should come down from 20 days to seven days. The primary market is somewhat inefficient compared to the secondary market," SEBI chairman CB Bhave said at a conference in Mumbai.
However, while doing so, the timely settlement of transactions will become the biggest bottleneck to the system, which needs to be addressed, Mr Bhave said.
SEBI has requested the Reserve Bank of India (RBI) to allow clearing entities to have an account with the central bank, Mr Bhave said.
With a view to bring in more transparency, SEBI had introduced Application Supported by Blocked Amount (ASBA) process in the IPO process and is looking at making it applicable to retail investors as well, Mr Bhave said.
The ASBA allows releasing an applicant's money only if the allocation is made. If ASBA process becomes popular, SEBI would like to reduce the IPO allotment period to five days, Mr Bhave had said earlier.
Earlier in August, the market regulator had issued a circular that said that changes in sections like any material development in risk factors, an aggregate increase of 5% or more of the shareholding of promoters, change of more than 10% in the estimated issue size or estimated means of finance, change of more than 10% in estimated deployment of funds, among others, as reasons required for fresh filing of draft offer document with the board. According to media reports, some merchant bankers felt that the directives from SEBI related to updations in the offer documents for initial public offerings, would make the process as tedious as filing a fresh offer document.
The move came after SEBI observed that in some cases material changes informed by merchant bankers resulted in major deviations from the draft offer document that was available in the public domain and called for fresh scrutiny and processing of the draft offer document by the SEBI board.
At present, it takes around two weeks for allocation of public issues and around three weeks for them to be listed after they close.

-Yogesh Sapkale [email protected]


The shine fades from wine

Winemakers see stocks piling up for want of takers due to the ongoing slowdown

Although Cyclone Phyan hit Nashik a week back and damaged a major portion of the grape crop under cultivation, consumers might not have to pay much for their bubbly in the coming months as last year’s recession has left unsold stock of wine at various wineries across Maharashtra.

The unsold wine stored in tanks will result in winemakers selling their produce at a lesser price. Sula Wines still has over 40%-50% of its wine lying unsold in its tanks, while Indus Wines has around 90% of its wine still in its inventory.

“Because of the recession and the terrorist attacks, the hospitality industry was hit hard. People stopped patronising hotels or visiting Mumbai. The food and beverage industry also took a hit with a result that our wines could not be sold,” said Violet D’souza, director, Indus Wines.

For winemakers, the season from Diwali to the end of the year is the peak season which sees maximum wine sales taking place.

The market for wine before 2007 was growing at 28%. However, since 2008, the market has dropped by 30%.

The problem facing the industry is not only reduction in sales and demand, but also the restricted marketing structure—both domestic and international—for Indian wine firms, according to Nasik Valley Grape Promotion Association president, Pradeep Panchpatel.

Adding to this, winemakers are a part of the agriculture industry, but are made to pay 20% sales tax as wine is considered as ‘hard liquor’ which impacts the annual bottom-line of various winemakers.
According to Sula Wines vice president Neeraj Agarwal, the prices of grapes will increase by at least Rs10/kg as there will be a shortage in the fruit output this year.

“The production cost will increase by about 10%-20% as the wines are still in our tanks. Holding cost will go up,” Mr Panchpatel said, adding that due to the cyclone the production of grapes will decrease.

Even with this scenario, winemakers will not increase prices of their product as their main objectives for this year is to promote the product, Mr Panchpatel added. This view is maintained by Indus Wines which has launched Mumbaai Dreamz, a low-priced wine category.

- Aaron Rodrigues [email protected]


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