Citizens' Issues
Court to hear Koda plea seeking Manmohan's summoning September 21
 A special court on Friday set September 21 for hearing the CBI's reply on former Jharkhand chief minister Madhu Koda's plea seeking summoning of former prime minister Manmohan Singh in the coal block allocation case involving Jindal Steel.
 
Special Judge Bharat Parashar listed the matter for September 21 after special public prosecutor R.S. Cheema submitted that the Central Bureau of Investigation will want to know the opinion of other accused on Koda plea before advancing its argument.
 
The court directed other accused to file a reply on the plea by September 21.
 
Koda has filed a plea last month seeking summoning of Manmohan Singh in the case.
 
In his plea, he said: "Materials placed by the CBI shows the said conspiracy, if any, cannot be complete without the involvement of the (then) coal minister (Manmohan Singh) who had the final say in the entire allotment."
 
He also sought summoning of the then energy secretary Anand Swaroop and the then mines secretary Jai Shankar Tiwari, saying they were part of the three-member sub-group formed by the Jharkhand government to evaluate the pleas of firms and suggest suitable application for recommendation by the state.
 
The court was hearing a case related to the allocation of Jharkhand's Amarkonda Murgadangal coal block to Jindal Steel and Gagan Sponge.
 
Apart from Koda, Congress leader Naveen Jindal, former union minister of state for coal Dasari Narayan Rao, former coal secretary H.C. Gupta and others have been named as accused in the case.
 
They have been charge sheeted for criminal conspiracy and cheating as well as under the Prevention of Corruption Act.

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Nifty, Sensex within days of sharp short-term rally – Weekly closing report

Nifty will bounce back sharply, around middle of next week

 

We had mentioned in last week’s closing report that Nifty and Sensex are still under pressure and that Nifty has to stay above 7,900 for an upmove.  The major indices in the Indian stock market have declined by 4% over the week ended Friday, 4 September 2015.  Investor sentiments were dented by global cues on Friday.

 

 

On Monday, the market suffered marginal losses. Despite hopes of healthy economic expansion data, the slide in Asian bourses and a weaker rupee dented the Indian equity markets during the mid-afternoon trade session on Monday. Analysts pointed out that the negative cues emanating out of Asian markets, especially due to the slide in the Chinese markets, made investors reluctant to chase stocks, even though they have declined sharply. Sector-wise, capital goods, automobile, banks, consumer durables and fast moving consumer goods (FMCG) came under heavy selling pressure.
 
On Tuesday, most of the indices in the Indian stock market suffered a decline of more than 2%.  Almost all the sectors were trading in the red. Heavy selling pressure was seen in metal, banking, realty and consumer durables sectors. The slide in Asian markets and weak macro data sobered investor sentiments, leading the Sensex to close 2.23% down. The Q1 GDP came in at 7%, showing signs of slowing vis-a-vis the 7.5% expansion in the quarter before. But the growth was much higher than 6.7% registered in the first quarter of the last fiscal. The Nikkei India Manufacturing PMI (Purchasing Manufacturer’s Index) for the last month stood at 52.3. This was marginally down from July's 52.7. An index reading of above 50 indicates an overall increase in the manufacturing sector, below 50 an overall decrease.
 
On Tuesday, sector-wise, all 12 sub-indices of the BSE ended the day's trade in the red. The S&P BSE banking, automobile, capital goods, consumer durables and healthcare indices came under intense selling pressure.
 
The indices in the Indian stock market did not improve on Wednesday and closed with losses of 1% and higher. The initial gains of over 240 points in the S & P BSE Sensex came on the back of the government's decision that minimum alternate tax (MAT) will not be imposed on foreign portfolio and institutional investors. The bulls could not sustain their buying due to continued weakness in the Asian markets coupled with less-than-expected macro data.
 
On Wednesday, information technology (IT) index rose by 125.83 points, technology, entertainment and media (TECK) index gained by 54.83 points and fast moving consumer goods (FMCG) index rose by 47.82 points.
 
On Thursday, a rebound in global exchanges coupled with notification of the latest reform in the retrospective tax regime buoyed investor sentiments. There was a rally in the Indian stock markets and the major indices gained 1%-2% in Thursday’s trading. Further, a rebound in Asian markets and rupee's relative strengthening had also supported the markets gains, on Thursday.
 
Expectation of an interest rate hike in the US, strengthening crude oil prices and weakening of the rupee value together dented investor sentiments, which led to a severe decline on all the major indices on Friday. Analysts cited the upcoming US non-farm payroll data as the main trigger for the downward trajectory of the markets.  The markets were nervous due to the fact that a strong macro data could influence the US Fed's rate decision expected on September 16-17.  According to the US Bureau of Labour Statistics, the total non-farm payroll employment increased by 215,000 in July – with the unemployment rate at 5.3%. The US Fed is expected to announce its decision to hike interest rates after a decade or so of easy monetary regime with interest rates pegged at near zero levels during its policy meet scheduled on September 16-17.
 
High interest rates in the US are expected to lead away the foreign portfolio investors (FPIs) from emerging markets like India. It is also expected to dent business margins as access to capital from the US will become expensive.
 
Sector-wise, all the 12 sub-indices of the BSE were trading in the red. Intense selling was observed in banking, healthcare, automobile, capital goods and consumer durables stocks on Friday.

 

Out of the 27 main sectors tracked by Moneylife, top five and the bottom five sectors for this week were:

 

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FSDC sub-committee report on mis-selling of financial products invites comments
The government will take a view of the recommendations after public consultation. FSDC report has cited Moneylife Foundation report on mis-selling by banks
 
A committee under the Financial Stability and Development Council (FSDC) was formed to study the prevailing incentive structure among various financial investment products and to suggest measures to prevent mis-selling. The views and recommendations provided by the committee are now open for public comment. Moneylife in the past has often highlighted the rampant mis-selling of financial products. The FSDC report cites Moneylife’s survey on mis-selling by banks where we found that over 90% of consumers reported being mis-sold a financial product or service. The recommendations will be open for public comment till 5 October 2015. Incentive structure and non-disclosures are the main reason for mis-selling and one of the biggest culprits is the insurance industry. We summarise the product-specific recommendations of the committee. 
 

Mutual Funds

  1. Upfront commissions should be totally removed. There is a current cap of 1% that comes from the fund house capital or profits. This too should be removed.
  2. Distribution commissions should only be paid as level or reducing asset under management (AUM) based trail. In the case of lumpsum investment, or upon termination of a systematic investment plan, the trail commission should be declining (or nil after a specified period of time)
  3. The extra commission in B15 (beyond the top 15 cities) should be removed and a level playing field be created in the country
  4. No category of mutual funds should be exempt from the zero upfront
  5. Distributors should not be paid advance commissions by dipping into future expenses, their own profit or capital
  6. Competition has not reduced costs much below the expense ratio that was fixed when the AUM of the industry was much lower. The regulator should lower the cost caps as the AUM rises over time
  7. On no account should sales of new fund offers happen, pitching the product as a “cheap” product that the investor is getting “at par” value of Rs10
  8. Customers should be disclose a range of past returns appropriate to the product tenure and should include returns of last 6 months and annualised returns since inception, and 2 year rests thereafter  
  9. Trail commissions on mutual funds should be disclosed at the time of sale
  10. Customers should be informed that in addition to market risk, the performance is also subject to fund house/manager’s competence
  11. Any change in scheme fund manager should be disclosed to all investors
  12. For retail products, the AUM rankings should be shown only for the retail AUM
 

Insurance: Unit Linked Insurance Plans (ULIPs)

  1. The product should move to a TER model from a Reduction in Yield (RIY). The RIY model, in a closed-end product, causes a problem for insurance companies in managing costs and keeping them within the caps over the years as the market goes up and down. Cost of each function (i.e. insurance, investment and annuity) should be disclosed. An industry standard in costs will help the customer compare similar products across various parts of the marketplace.
  2. Upfront commissions should be allowed only on the mortality part of the premium
  3. There should be no upfronts for the investment part of the premium. The investment part should attract only AUM based trail commissions. The trail commission treatment should be decided with consultations with the lead regulator in the market-linked investment space. These should be level or declining.
  4. Mortality costs should be deducted before the premium is put in the investment fund. Thereafter, all the charges should collapse into one expense charge and there should be no separate (i) premium allocation charge or (ii) admin charge. NAV should be adjusted for this expense charge and customer should be able to take the point to point NAV and compute the growth in fund value.
  5. The costs of surrender from a ULIP should continue to be reasonable. After deduction of costs, the remaining money should belong to the exiting investors. 
  6. The life cover and premium in a bundled product should be disclosed. 
  7. The return benefits should be disclosed keeping basic tenants of finance in mind. 
  8. The current practice of showing future returns benchmarked to four per cent and eight per cent should be discontinued since forecasting of returns is misleading. 
  9. Benefit illustrations in the sales document currently showcase the numbers for one age, premium and sum assured. The seller/advisor should give in writing what the benefit illustration will be for the customer buying the product in a manner that takes into account all the recommendations on disclosure in the report. Both seller and buyer should sign this to ensure that a right sale has been made.
  10. Asset allocation and portfolio disclosure should be made by all companies on their websites for consumers to access and the data feed be given to third party analyst firms to enhance research.
  11. Past net returns should be disclosed to the customer. The current practice of showing gross returns is misleading. Customers should be disclosed a range of past returns appropriate to the product tenure and should include returns of last 6 months and annualised returns since inception, and 2 year rests thereafter.
  12. All insurers should be required to provide online interactive calculators whereby a customer should be able to generate a customised and detailed benefit illustration based on her input of various available plan options.
  13. All insurers should be required to disclose NAV such that a customer is able to easily compute her net investment return by taking the point to point NAV of the fund.
 

Insurance: Traditional Life Insurance Policy

  1. All costs should be bifurcated into two parts - mortality and investment.
  2. Mortality costs should be benchmarked to the mortality tables created by third party actuarial firms.
  3. Investment costs should be capped keeping in view the best practices in the rest of the market.
  4. The costs of surrender should be reasonable. After deduction of costs, the remaining money should continue to belong to the exiting investors.
  5. All charges should collapse into one single charge called the expense charge. This charge should be deducted from the gross yield before crediting the net returns to the customer’s investment account. This charge should be within an annual expense ratio or expense limit specified by the regulator. No charges should be deducted as premium allocation charge or any other charge before allocating the annual premium to investment and mortality.
  6. Upfront commissions should be allowed for the mortality part of the premium. 
  7. Distribution commissions should not be front loaded. In a time-bound manner, the distribution commission should be set at a (i) level percentage of the premium over the tenure of the policy for non-participating products and at (ii) a percentage of asset (as an AUM trail fee) for participating products.
  8. Distributors should not be paid advance commissions by dipping into future expenses, their own profit or capital.
  9. The illegal practice of rebating should be punished harshly by the regulator as it distorts the market.
  10. The current structure of paying upfront commission (which is today pegged at 2 percent of premium) on single premium insurance policies may be continued for the investment component of these policies
  11. The cost of the life cover in a bundled product should be disclosed clearly. For comparison, the cost of a pure life cover as in a term policy for a similar life and tenor should be disclosed alongside such that a customer is able to evaluate the true value of the product.
  12. Returns should be disclosed keeping basic tenants of finance in mind. This means that all returns should be disclosed as a percentage of the investment made by the customer and not as a function of a third number, such as a sum assured or the maturity benefit.
  13. For non-participating plans that carry a guaranteed return, the return should be disclosed as a percentage of the investment made. The IRR should be a disclosure in the benefit illustration. The guaranteed return as a function of the investments made should be disclosed clearly as in a bank deposit. 
  14. For participating plans the current practice of showing future returns benchmarked to four per cent and eight per cent should be discontinued since forecasting of returns is misleading.
  15. Participating plans should show benefits as a function of the invested amount rather than as a function of any other number. An indicative disclosure is: For participating plans, give the net IRR for the previous years in the product benefit illustration of a participating product. 
  16. Benefit illustrations in the sale document currently showcase the numbers for one age, premium and sum assured.
  17. Asset allocation and portfolio disclosure should be made by all companies on their websites for consumers to access and the data feed be given to third party analyst firms to enhance research.
  18. The current industry practice of using the word bonus to indicate return is misleading. Disclosures should use the word net return instead.
  19. Customers should know very clearly the consequence of exiting a closed-end product earlier than maturity. 
  20. Since the space on the suggested disclosure sheet is limited, insurance companies should provide online calculators so that customers can better understand the consequence of exits across each year.
 

Other General Recommendations

  1. The regulators may consider putting additional disclosures requirements on banks where they are explicitly required to disclose (i) the products that originate from their group companies as such and (ii) the comparable products as comparison when selling products originating from their group companies.
  2. All distributors, across regulators, along with their sales employees, should be assigned a unique number so that monitoring, surveillance and enforcement becomes unified and simpler. They should be subjected to detailed regulations incorporating rules, educational qualifications, entrance exams, code of conduct etc
  3. Ultimately, proper product selection would improve and mis-selling would decline if investors become more financially literate. The Government should step up its efforts to improve financial literacy among Indian households. One area of focus should be a powerful, multi-lingual financial education website.
  4. Tax benefits should be given on function and not form. Since the government wants to encourage insurance penetration, tax breaks should be given on pure risk mortality and the treatment of the investment part should be harmonised across the different forms of the product across regulators
  5. Tax benefits should be given on function and not form. Since the government wants to encourage insurance penetration, tax breaks should be given on pure risk mortality and the treatment of the investment part should be harmonised across the different forms of the product across regulators.

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