The Forward Market Commission’s order banning the sub-broker system in commodity exchanges will hurt MCX the most; panicked sub-brokers of MCX seek respite
Commodities market regulator Forward Market Commission (FMC) today ordered exchanges to bring an end to the sub-broker system; allowing members to service clients only through 'authorised persons'. Exchanges have been directed to amend their bye-laws and ensure smooth transition to the new system within 60 days. This ban against sub-brokers will come at a huge cost to the Multi-Commodity Exchange (MCX), which is the only commodity exchange within the country still operating under the 'sub-broker' system.
MCX currently has around 15,000 sub-brokers under its fold, spread across the length and breadth of the country. What has ticked the MCX off is the fact that FMC has only given a window of 60 days for exchanges to comply with the new regulations. This means that MCX will have to arrange for the necessary documentation and compliance procedure within a matter of two months to enable its intermediaries to function on its behalf as 'authorised persons'.
A source close to the development in MCX told Moneylife, "MCX will be the only exchange adversely affected by the new guidelines. It will be next to impossible to shift more than 15,000 sub-brokers to the new system under 60 days. This has unnecessarily created panic among the existing intermediaries as the FMC order has called for stiff eligibility requirements in terms of infrastructure, documentation etc."
Apart from conducting an inspection of the branches where the terminals of the authorised persons are located and records of operations carried by them, exchanges have to maintain a database covering details about the PAN number of the entity, details of the member with whom the entity is registered, locations of the branch assigned to the entity, etc.
Commenting on the FMC order, the MCX official stated that it is an exact replica of the Securities and Exchange Board of India (SEBI) circular on capital markets issued in November last year and that the issue is only of nomenclature. "This FMC circular is a complete replica of the SEBI circular on capital markets, which called for discontinuing the sub-broker system last year. Essentially, there is no difference between a sub-broker and an 'authorised person'. The deliberations have been going on for more than 6 months. We had notified FMC that it is only a matter of a change in nomenclature. So why not have the same requirement for sub-brokers, instead of banning them?" he said.
Several commodity brokers agree with this point of view, saying that it is just a difference in nomenclature and nothing more. Most of the national brokers have a practice of issuing contract notes to the client themselves. "It will impact only those brokers who are issuing contract notes to their clients through their sub-brokers. FMC had to intervene probably because of the practice of some local brokers," said an official from a leading brokerage house.
While MCX describes its market intermediaries under the 'sub-broker' nomenclature, other commodity exchanges use different connotations. NCDEX uses the 'authorised person' nomenclature while some of the others describe the same as 'franchisees'. It is all the more exasperating for the MCX as it already does not allow its sub-brokers to issue contract notes to clients, as required of 'authorised persons' under the new FMC guidelines.
FMC has introduced these guidelines to ensure transparency and efficiency in the commodities derivatives trade. The FMC circular stated, "In order to streamline the regulation of intermediaries in the commodity futures market, commodity derivatives exchanges are directed to discontinue forthwith the system of sub-brokers. The members of national commodity exchanges will be allowed to provide access to their clients only through authorised persons."
Earlier, the members of exchanges appointed sub-brokers. Under the new system, authorised persons will be appointed only with the permission of the exchange. Among other guidelines, the order states that the authorised person shall receive his remuneration from the member only and can't charge the clients for his services. This will probably reduce the incentive for the authorised person to have more clients under his belt.
There is a subtle change in the way mutual funds are being sold
Public sector banks are attracting more investor money into equity funds through their large network of branches, post the ban on entry load. Though private banks still lead in total market share, they are falling behind their public sector counterparts.
According to a Boston Consulting Group (BCG) & Computer Age Management Services (CAMS) study, public sector banks contributed 2% of the total equity fund inflows between January-July 2009. This jumped to 5% in the first quarter of 2010.
On the other hand, gross equity inflows from private banks have remained stagnant at 29% in August-December 2009 and January-March 2010 after having declined from 31% in the January-July 2009 period. The largest share of inflows in the first quarter of this fiscal was still from private banks (29%), followed by large Independent Financial Analysts (IFAs) at 19%, national distributors (11%), distributors with online presence (11%), direct channels (10%), regional distributors (10%) and public sector banks (5%). Medium-sized IFAs and small IFAs contributed 5% and 1% of the equity inflows, respectively.
Public sector banks started selling mutual funds only recently. Many private and foreign banks were already selling mutual funds through their branch networks and relationship managers.
"Distributors are not aggressively promoting mutual fund products. Agents of national distributors have not been incentivised properly. There has been some awareness among investors investing online. State Bank of India (SBI) is aggressively selling mutual funds," said RL Narayanan, vice president - equity & institutional sales, Bonanza Portfolio Ltd.
SBI, India's largest public sector bank, has trained 18,000 employees to pass a mandatory Association of Mutual Funds in India (AMFI) exam, making it one of the largest distributors of mutual funds.
Asset management companies (AMC) which sold funds directly through their offices or from their online channels have seen a marginal increase from 9% in August-December 2009 to 10% in January-March 2010.
Large IFAs - who have AUM (assets under management) exceeding Rs1 crore - pulled in 16% of equity fund investments between January-July 2009 which rose to 19% in August-December 2009. Their pie has remained intact in the first quarter of 2010 at 19%. There are around 1,00,000 IFAs registered with AMFI.
Equity inflows from national distributors have shrunk to 11% in January-March 2010 from 12% between August-December 2009 after market regulator Securities and Exchange Board of India (SEBI) abolished entry loads in August 2009. National and regional distributors have their own sales force, offices and online channels; independent IFAs lack these resources.
The first quarter of 2010 saw the launch of equity funds like Axis Equity Fund, Bharti AXA Focussed Infrastructure Fund, Fidelity India Value Fund and Sundaram BNP Paribas Select Thematic Funds - PSU Opportunities. There were 307 equity schemes in the first quarter of 2010 with AUM of Rs19,063 crore. Equity funds witnessed an inflow of Rs478 crore in the first quarter of this fiscal.
Our long standing target of 18,300 on the Sensex is close but don't bet on the rally to continue much further
The market was up 1% on a weekly basis on the positive global cues. Sentiments also got a boost from 'in-line' corporate earnings reports and positive economic indicators. The market started the week in a subdued manner; however, it gained smartly over the passage of the week. On Friday (23rd July) the Sensex stood at 18,131 and the broader Nifty was at 5,449.
Tata Steel, Hindalco Industries, Bharti Airtel, Sterlite Industries (up 5% each) and Mahindra & Mahindra (M&M) (up 4%) were the top Sensex gainers during the week. Hindustan Unilever, Maruti Suzuki (down 2% each), Cipla, Jaiprakash Associates, and Reliance Infrastructure (R-Infra) (down 1%) were the top losers. In the sectoral space on the BSE, metal jumped 4% and capital goods added 2% while the healthcare index shed 2%.
The Asian Development Bank (ADB) expressed its confidence on the East Asian economy and said that monetary and fiscal stimulus should be gradually withdrawn. The multilateral lending agency noted that a strong first quarter had lifted the region's economies above peak pre-crisis gross domestic product (GDP) levels.
In the US, the National Association of Home Builders/Wells Fargo Housing Market index fell more than expected in July to its lowest level since April 2009 after a popular tax credit for homebuyers expired in April.
The government plans to present in Parliament a bill to implement the goods and services tax (GST). Finance minister Pranab Mukherjee on Wednesday (21st July) proposed a three-rate structure for GST - which will simplify the indirect tax regime - under which goods will attract 20% levy, services 16% and essential items a concessional 12%.
Mr Mukherjee proposed these rates to the state finance ministers at a meeting in New Delhi to evolve consensus over GST that is planned to be implemented from 1st April, next year.
Annual food inflation fell to 12.47% for the week ended 10th July from 12.81% in the previous week on the back of a decline in prices of vegetables, especially potatoes and onions. On a yearly basis, potatoes became cheaper by over 45% and onions by nearly 8%. Overall vegetable prices fell by 9.92%. Prices of pulses, however, were higher by 23.79% during the week under review over the same period last year.
India's annual monsoon rainfall was 17% below normal in the week to 21st July, improving after a 24% deficit in the previous week, the India Meteorological Department (IMD) said. Weekly rainfall in the key crop-planting period was above normal in north India's cane and rice-growing regions, but deficient in soybean-growing areas of central India.
US mortgage applications jumped last week and demand for home refinancing loans hit the highest level in 14 months, according to the Mortgage Bankers Association. The Labor Department reported that new claims for US unemployment benefits rose more than expected last week, after two weeks of sharp declines. Initial jobless claims surged more than 8% to a seasonally adjusted 4,64,000 in the week ending 17th July.
C. Rangarajan, chairman of the Prime Minister's Economic Advisory Council (PMEAC) said that India's economy can expand at 8.5% in the current financial year despite monetary policy tightening. The prime minister's economic advisory panel said that inflation will be at 6.5% by March 2011. As such, the PMEAC's projection of inflation in its Economic Outlook for 2010-11 was a percentage point higher than 5.5% projected by the RBI. Mr Rangarajan attributed this to the impact of fuel price hike on inflation. It is widely expected that the Reserve Bank of India (RBI) in its 27th July monetary policy review will raise short-term key rates - repo and reverse repo - to tame inflation that has been in double digits for a fifth month in a row at 10.55% in June.
India's foreign exchange reserves rose to $281.901 billion as on 16th July, from $279.422 billion a week earlier, the central bank said in its weekly statistical supplement.
As per a UN report released on 22nd July, India was ranked the ninth most attractive investment destination in 2009 with a total foreign direct investment (FDI) inflow of $34.61 billion. The World Investment Report-2010, prepared by the United Nations Conference on Trade and Development (UNCTAD) said that India attracted sizeable overseas investment despite the overall drop in such inflows due to the global financial crisis.