The Department of Disinvestment wants mutual funds to spend a minimum Rs15 crore towards marketing and advertising expenses for the NFO for public sector ETFs. The regular practice is to spend a little over Rs5 crore, that too only in a rising market
The Disinvestment of Department (DoD) of the Union government is hell-bent on failing in yet another another effort at disinvestment after its botched up efforts in the 2010-13 period. The new idea is to launch an Exchange Traded Fund (ETF) for Public Sector Units (PSUs). For this, asset management companies (AMCs) that run mutual funds, have been asked to bid for creating the ETFs and market them to the investors. However, the know-all and imperious DoD wants AMCs to commit themselves to a minimum of Rs15 crore towards marketing and advertising expenses.
Typically, an AMC, during the heydays, spent about 5% of the fund cost towards marketing and advertising. For higher sums collected the percentage goes down. While the AMCs spend a little over Rs5 crore for marketing a new fund offering (NFO) of an equity-oriented scheme, for ETFs the expenses are less than Rs3 crore. And this too, when the markets are on the rise.
At present, the markets are down and yet the DoD’s insistence has left no option for many AMCs but to opt out from the race. According to a report from the Business Standard, of the six AMCs that have shown interest in launching the CPSE ETF, only two—Goldman Sachs AMC and UTI Mutual Fund—made presentations before the inter-ministerial group. The other four, which had planned to join the race, were DSP BlackRock, Kotak MF, Reliance MF and SBI MF, the report says.
The government’s efforts to disinvest its stake in PSUs has failed miserably over the past three years because the babus who have overseen them had only one objective: maximise the cash collected from disinvestment at the expense of investors. This meant that the officials have consistently ignored the views of capital market professionals and have ended with trying to disinvest the shares of wrong companies, at the wrong time and at the wrong prices.
The same attitude continues. The DoD in its request for proposals (RFP) says, “The selected AMC/ETF provider shall incur marketing/advertising expenses to the extent of at least Rs15 crore, under NFO expenses, for the CPSE ETF. The AMC/ETF provider may incur marketing expenses under NFO expenses, over and above this stipulated amount. The key expenditure heads and the item-wise amounts to be spent under this head shall be finalized and approved by the government, in consultation with the AMC and the advisor. It may be noted that these expenses shall be devoted only towards marketing activities and are in addition to the expenses which shall be borne by the AMC.”
This is excluding the payments or incentives the AMC would have to pay to distributors and brokers. In addition, the selected AMC will pay statutory expenses or fees as applicable, payments to depository, cost for creation and maintenance of index and any other cost for creating and launching the ETF.
The proposed CPSE ETF will serve as an additional mechanism for the government to monetize its shareholdings in listed CPSEs that eventually would form part of the ETF basket. ICICI Securities is advising the DoD in launching the CPSE ETF.
For FY13, the government had fixed Rs30,000 crore as disinvestment target. Till February 2013, it was able to realise Rs21,504 crore through stake sale in five companies including NBCC, Hindustan Copper, NMDC and NTPC.
Investors in Yatra Art Fund-II have alleged that the trustees have spent about 50% of the capital towards fees and expenses, including advisory fees. Will SEBI act on it?
With market regulator Securities and Exchange Board of India (SEBI) finally deciding that Osian's Art Fund was a collective investment scheme (CIS) run illegally, questions are being raised about other such art funds. An investor in Yatra Art Fund-II has alleged that the fund handed over just 50% of the principal amount invested in 2011-12, and indicated the balance as loss.
“While it is possible for an investment to lose value, in this case, the available data seems to indicate that the actual loss was primarily due to mismanagement of the fund and its assets by the trustees. Out of the actual loss, almost 50% has been wiped out over the term of the scheme in fees and expenses. The trustees had complete right on what expenses to approve and it seems that they have used it fully for personal gains at the expense of investors,” said the investor, who does not want to be named.
Mumbai-based Sakshi Art Gallery’s Geetha Mehra with the help of venture capitalist Pravin Gandhi and Sanjay Kumar launched Yatra Art Fund in 2005. These three, along with Nilesh Shah of Edelweiss Capital, were the four trustees and advisors of the fund. While Ms Mehra and Mr Kumar were promoter trustees, the other two were supposedly independent trustees.
For its first tranche, Yatra Art Fund was advised by Edelweiss and collected Rs10.75 crore in September 2005. The fund had a lock-in period of five years.
Buoyed by the success of first tranche, Yatra then launched second tranche of its Fund. The Yatra Art Fund -II, launched in 2006, mobilised around Rs23 crore from investors, mostly high networth individuals (HNIs).
The minimum investment amount into the scheme was Rs10 lakh, out of which Rs5 lakh were paid at the time of application and balance was called for later. The scheme became operational in January-February 2007 with a total committed corpus of over Rs21 crore. As per the term specified it should have ideally closed in 2011, however, investors were advised in January 2011 that it is being extended by another year as the market had turned bad.
According to the investor, each investor into the scheme was handed over only 50% of his principal in parts during 2011 and 2012 and the balance was indicated as a loss. Many investors have written to and some have even personally met the trustees to seek clarifications. However, no proper response is being provided, he said.
While investors of Yatra Art Fund received at least 50% of their principal amount, investors of Osian’s Art Fund were not that lucky. As per the Osian Art Fund prospectus, the fund distribution had to commence from 10 July 2009. The company invoked a specific clause that allows payment of the returns within a period of 120 days (four months). Backed by the clause, letters were sent to the unit holders that the money would be paid by 10 November 2009. (read Osian’s Art Fund is running late on payments)
Extension and expenses
Yatra Art Fund -II was supposed to be closed in four years. However, the tenure was extended by one more year. However, the extension did not help the fund to earn more revenues and it was foreclosed.
“In the entire tenor of the fund a large sum of money continued to be charged as expenses, most of it as advisory fees and trusteeship fees. All the fees and expenses continued to be approved even in the extended period while investors suffered losses. The cumulative effect of the various fees and expenses, other than towards actual transactions and original set-up fee itself was almost Rs5 crore or about 20% of the Fund capital. A big part of this fee was “advisory fee” and a significant part was “trusteeship fee”," the investor said.
Purchase and valuations
According to the investor, trustees used to value artwork and charge fees accordingly, however, the last audited balance sheet for FY2011-12, the year of extension, shows that artwork which was being valued at Rs10.22 crore on the books was sold for Rs3.44 crore translating into a loss of Rs6.78 crores before expenses, towards the sale. “However, surprisingly an advisory fee of Rs31 lakh was still charged in the same year. Much higher levels of expenses were charged in previous years on the same inventory. It seems that the authority to approve expenses over investor's money was misused,” he alleged.
Fire sale for ‘trustees’?
Fire sale transactions are usually done as final measure to sell unsold stock. “Yatra Art Fund-II offered art works at a fire sale price and ‘in the absence’ of response from investors, the promoter trustees picked it on their own books at the fire sale price,” the investors said.
He said, investors into the fund did not understand the art market and don’t know how to value art pieces unlike promoters and trustees. “They had invested in this fund expecting a better job to be done by the ‘advisors’ and ‘trustees’ given their experience and background for which all the fee was charged.
“...the trustees were valuing this inventory for balance sheet very differently (read much higher), and then apparently Christie’s valued it at another level for which it had been willingly shipped off for sale. When that also did not work, it was picked at another lower price fixed by the trustees again as the other potential buyers had no clue of how to value what's on offer,” the investor said.
Buying art works in dwindling markets
The promoters and trustees of Yatra Art Fund-II were aware about the market conditions post the 2008 global meltdown. However, during 2008-09, they made purchases worth Rs2.9 crore. It was followed by other purchases worth Rs77.5 lakh in 2009-10 and Rs20 lakh in 2010-11. The last purchase was made in the year of repayment.
The investor said, “It is clear that adequate holding period was not available for these purchases and they have simply added to the losses of investors. Were these purchases made to suit or favour an entity? Investors do not have the data of who these items were purchased from (could be promoter gallery?) and what financial implication did it have on the fund.”
While there is not much data available on the art works owned by Yatra Art Fund-II, Osian’s Art Fund had inventories including artworks by famous artists like MF Hussian, Bikash Bhattarchjee, VS Gaitonde, Akbar Padamsee, Jogen Chaudhary, Somnath Hore and Tyeb Mehta. (read Osian Art Fund delays payout)
According to media reports, as of August 2008, there were five art funds operating in India. Osian Art Fund was launched by Osian's-Connoisseurs of Art Private Ltd while Yatra Art Fund was supported by Edelweiss. Copal Art Fund, after a series of funds worth Rs10 crore in 2006, launched a fund worth Rs150 crore with an option to invest in paintings of one's choice. With a minimum and maximum investment of Rs5 lakh and Rs2.5 crore, Copal Art Fund offered flexible payment plans without any lock-in period.
The fourth fund, Crayon Capital Art Fund was launched in November 2006, had art critic Ela Dutt as advisor and Vadehra Art Gallery as main source for buying and selling. Indian Fine Art Fund was set up by UK-based The Fine Art Fund group founder Philip Hoffman. This five-year close ended offshore fund had an initial corpus of $25 million.
“It seems evident that people who claim to be morally and ethically right seem to wilt and act differently when it comes to managing money for others on which they exercise full control,” he concluded.