Consumer Issues
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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HC gives tarikh pe tarikh to hear CIC order for bringing Mumbai Airport under RTI
An activist, who has been fighting a lone battle to bring Mumbai International Airport under the RTI Act, continues to be stonewalled by postponements for four years 
 
This is a classic case of how a decision by the Central Information Commission (CIC) is stonewalled by the vested interests, in keeping a public-private-partnership (PPP) with the Ministry of Aviation, outside the ambit of RTI Act. Pune-based RTI activist Sanjay Shirodkar has been knocking at the doors of the Delhi High Court, which has given 13 dates since 2010, the latest seeking submission from the Right to Information (RTI) activist, on 31 August 2015. Shirodkar exasperatedly states, “Tarikh pe tarikh and stay is on. This is my lonely battle as a citizen and taxpayer against a giant. Let us hope the Court gives an order and RTI is implemented in this big PPP.”
 
The ministry of Civil Aviation handed over its profit-making Mumbai International Airport (MIL) to a private company, GVK for modernization in 2006. The initial capital put by Airport Authority of India (AAI) was Rs250 crore. It also gave on lease, land of 2,000 acres worth Rs80,000 crore for a rent of Rs100 a year only and that too for 30 long years. A consortium led by the IDBI has given Rs9,000 crore towards Infrastructure loan and the Government of Maharashtra has waived off stamp duty of Rs250 crore for the project.
 
Further, as mandated by the Government, on 2 March 2006, a special purpose vehicle (SPV) was formed for the Mumbai Airport. On 4 April 2006, Operations Management and Development Agreement (OMDA) were signed. As per the shareholders agreement, 26% shares in the SPV were allotted to AAI and 74% shares allotted to GVK. This implies (as per the CIC order of 30 May 2011 ) that “Mumbai International Airport Ltd is a Joint Venture Company in which 26% shareholding is held by the Airport Authority of India (AAI) and this gives control to the AAI over vital matters which require 3/4th majority.”
 
Pune-based RTI activist, Sanjay Shirodkar, filed a RTI application on 9 January 2008 to the Public Information Officer (PIO) of MIAL demanding transparency under the RTI Act. However, the PIO in his reply on 13 February 2008 stated that MIAL is not public authority, quoting the case of Delhi International Airport Ltd, which does not come under RTI, despite the fact that it was declared Public Authority under the RTI Act on 17 January 2007 by a CIC decision. 
 
Shirodkar then filed a complaint with the Central Information Commission on 20 February 2008. The CIC took cognizance of the complaint and called both the parties for hearing on 11 June 2008. The CIC passed an order, declaring MIAL as public authority under the RTI Act and ordered it to appoint a PIO within 30 days of receipt of the order. 
 
The order stated, “We find no hesitancy in declaring MIAL as a Public Authority under Clauses (d) and (i) respectively, of Section 2(h) of the RTI Act. MIAL shall appoint a CPIO and FAA within 30 days of the receipt of this Order and shall also fulfill the mandate of Section 4(1) disclosure as mandated under the RTI Act, within 2 months of the receipt of this Order.’’
 
CIC Sushma Singh concluded that MIAL is public authority on the basis of the following sections of the RTI Act. Her order states: “The only provision which concerns us is clauses (d) and (i) respectively, of Section 2(h). 
 
Section 2(h) is reproduced here for the sake of clarity: 
 
2. Definitions – In this Act, unless the context otherwise requires,-- (h) "public authority" means any authority or body or institution of self- government established or constituted— (a) by or under the Constitution; (b) by any other law made by Parliament; (c) by any other law made by State Legislature; (d) by notification issued or order made by the appropriate Government, and includes any— (i) body owned, controlled or substantially financed; (ii) non-Government organisation substantially financed, directly or indirectly by funds provided by the appropriate Government; (emphasis added).” 
 

MIAL goes to Court

However, MIAL did not obey CIC order which prompted Shirodkar to file a complaint with the CIC. In the meanwhile, MIAL went to the Delhi High Court which passed an order on 22 November 2010, wherein the CIC order was set aside, “on the ground that no opportunity provided to the MIAL for presenting its case. The High Court further directed the CIC to restore the appeal of Shirodkar and hear both the sides and accordingly, pass a reasoned order thereon.’ Accordingly, the CIC once again held a hearing on 30 May 2011, pronouncing MIAL as public authority.
 
The MIAL, in its submission to the Delhi High Court has stated that it cannot come under the RTI Act because:
(a) The Petitioner No. 1 is an agent or instrumentality of State and therefore “State” within the meaning of Article 12 of the Constitution of India.
 
(b) The Airports Authority of India Act, 1994 had to be amended in the year 2003 to enable private entities to perform the functions of AAI.
 
(c) The Petitioner No. 1 is a lessee of the AAI of the airport land. The said lease has been created by virtue of S.12-A of the Airports Authority of India Act, 1994,’’’
 
Ever since, there have been postponements to Court hearings from the MIAL side.
 
Shirodkar was asked to once again file a submission to the Delhi High Court, which his advocate has done on 31 August 2015. He has made the following points:
i. As per, Ministry of Civil Aviation a Group of Ministers was constituted to examine National Civil Aviation Policy (NCAP) on 27 June 2007. But Mumbai Airport PPP was awarded before that in 2006. 
 
ii. Cabinet Secretariat says, they do not have information regarding GoM – Group of Ministers for Ministry of Civil Aviation, CAG report on Ministry of Civil Aviation.
 
iii. Mega airports of Mumbai and Delhi were transferred to JVC. Govt. of Maharashtra waived off Stamp Duty of Rs250 crores for MIAL.
 
iv. MIAL PPP project is worth more than Rs10,000 crore. Still there is no info with SEBI, BSE, and NSE. Even Ministry of Civil Aviation, Airports Authority of India, DGCA, AERA, PPP Cell of MINFIN, Ministry of External Affairs are unable to provide information on stake transfer worth Rs1,140 crore from the company in Hyderabad India i.e. GVK Airport Holdings Pvt Ltd to a company in Mauritius, i.e. Bid Services Division (Mauritius) Ltd.
 
v. Oil PSUs like HPCL, BPCL, IOC also started using banking norms of fiduciary capacity, and commercial confidence.  HPCL outstanding amount to be recovered from KingFisher Airline is Rs525 crore, Air India Rs581 crore, Paramount Airways Rs19 crore. HPCL, BPCL and IOC give no information regarding bounced cheques and discounts offered to any airline. They term it as Commercial and Trade Secret.
 
vi. AERA listed aeronautical revenues, but could not provide list of non-aeronautical revenues of MIAL PPP.
 
vii. CAG has not done any audit of MIAL PPP, which is a project worth Rs10,000 crore 
 
viii. The Supreme Court of India in its recent Judgment dated 9 August 2011 in the case of CBSE & Anr vs. Aditya Bandopadhyay & Ors’ [C.A. No.6454/2011 arising out of SLP (C) No.7526/2009] has fully acknowledged the regulatory powers exercisable by the CIC under the RTI Act.
 
ix. While deciding a substantial question of law involving interpretation of Section 2 (h) of the RTI Act, the Court may also note that when the Government contributed Rs65 crore, Public Health Foundation of India (PHFI), was declared a public authority. Land was given on concessional rate, hence it was also considered as funding by government. 
 
Hence, this Court may be pleased to dismiss the present petition with direction to the petitioner to comply with the impugned order dated 30/05/2011 of the CIC in full. 
 
 

Why MIAL fits the bill of being a public authority

 

MIAL is a Joint Venture Company in which 26% shareholding is held by the AAI and this gives control to the AAI over vital matters which require 3/4th majority. MIAL had been specially incorporated "inter alia with the objectives of operating, maintaining, developing, designing, constructing, upgrading, modernizing, financing and managing the Airport". Airport is defined in Clause 1.1 of OMDA to mean "the Chhatrapati Shivaji International Airport". MIAL is the lessee of the AAI under Section 12A of the AAI Act, which provides that some of the functions of the AAI may be transferred to the MIAL and that the MIAL shall have all the powers of the AAI in the performance of any such functions in terms of the lease. The operation, maintenance and development of the airport is governed by OMDA executed between the AAI and MIAL. Thus, MIAL is a special purpose joint venture Company formed only because of Section 12A of AAI Act.

 

The restructuring of the Mumbai and Delhi International Airports was to take place only through JV route and the bidders were thus under an obligation to create a special purpose vehicle – one of the forms being a Private Company like MIAL – in order to execute the OMDA. Clause (d) of Section 2(h) of the RTI Act contemplates exactly such kind of situation by using the words “body established or constituted by an order made by the appropriate Government”. A gazette notification of such an Order has not been necessarily mandated by the RTI Act. 15. The relationship between the shareholders is governed by the Shareholders Agreement dated 04/04/2006 entered into between the shareholders of MIAL including AAI. The governmental services to be provided to MIAL is governed by the State Support Agreement dated 26/04/2006 entered into between MIAL and the Government of India. MIAL also entered into a separate State Government Support Agreement with Government of Maharashtra.

 
 
 
(Vinita Deshmukh is consulting editor of Moneylife, and also convener of the Pune Metro Jagruti Abhiyaan. She is the recipient of prestigious awards like the Statesman Award for Rural Reporting which she won twice in 1998 and 2005 and the Chameli Devi Jain award for outstanding media person for her investigation series on Dow Chemicals. She co-authored the book “To The Last Bullet - The Inspiring Story of A Braveheart - Ashok Kamte” with Vinita Kamte and is the author of “The Mighty Fall”.)
 

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COMMENTS

manoharlalsharma

1 year ago

HC gives tarikh pe tarikh to hear CIC order for bringing Mumbai Airport under RTI/ u r lucky enough to have tarikh pe tarikh there r some of us so unlucky that even after having order for final hearings no t a single date.(CAW-1756/2013)@ HC Bombay.

Mr Jitendra

1 year ago

I found this link which says Mumbai Metro was brought under RTI.

http://indianexpress.com/article/cities/...

Mr Jitendra

1 year ago

Is Mumbai Metro coming under RTI? I remember few months back Mr Shailesh Gandhi was behind getting Mumbai Metro under RTI.

murthypgk

1 year ago

State sponsored corruption and nepotism and hence beyond judicial jurisdiction

tikku

1 year ago

It. is a very Democratic way to refuse justice in India. A country which boasts of Democracy. Indian judiciary is ACTUALLY is not let alone. Politics is influencing it that also in favour of those who have money to spare in plenty.

tikku

1 year ago

It. is a very Democratic way to refuse justice in India. A country which boasts of Democracy. Indian judiciary is ACTUALLY is not let alone. Politics is influencing it that also in favour of those who have money to spare in plenty.

Expansion cycle soon, predicts Morgan Stanley
According to Morgan Stanley, India is one of the few EM economies that has already undergone a period of adjustment to improve its macro stability and is making steadfast progress towards improving the growth mix and productivity
 
India's gross domestic product (GDP) growth is likely to accelerate gradually and inflation to remain below 5% over the next two years. According to Morgan Stanley, this will be a longer duration expansion cycle for India with low risks of overheating in the next two years considering the overall policy approach of government and Reserve Bank of India (RBI).
 
Morgan Stanley, in a research note said, "India is one of the few EM economies that has already undergone a period of adjustment to improve its macro stability and is making steadfast progress towards improving the growth mix and productivity dynamic. In our view, India stands out as EM growth is likely to be below its 30-year average and a large number of EM economies are still in adjustment phase. India is also one of the few Asian economies that is not facing a high level of debt and demographics issues."
 
 
Revising India's growth estimates marginally to 7.5% for FY2016 from 7.9% earlier and 8.1% for FY2017 from 8.4% earlier, the report says it is in line with the growth trajectory due to bad weather and weak external environment. "Growth trend is showing initial signs of recovery with pick up in capex and discretionary consumer spending. However, the continued weakness in external demand and slowdown in rural consumption spending with cuts in the government’s redistribution policies are holding back the pace of recovery. Moreover, the recent weakness in rainfall trends has raised concerns on agriculture output growth, with related repercussions for rural consumption," Morgan Stanley said.
 
 
According to the report, over the last three years, India has been taking up macro adjustment policies to improve macro stability and the productivity environment in a sustainable manner. It says, "Policymakers pursued tight fiscal as well as monetary policies. In past cycles, India has had the advantage of managing these adjustment cycles better with support of exports (like in 1998-99 and 2003-04), which helped it to step out of the adjustment phase faster. Hence, we believe that the growth recovery will be slow and largely premised on domestic demand."
 
 
Morgan Stanley expects India's GDP growth recovery to be driven by a pickup in capex, more public than private, urban consumption and stabilization of exports i.e. not continuing to contract. However, the pace of policy actions to revive productivity dynamic, strength of external demand recovery and trend in capital inflows into emerging markets are the factors that will influence the growth outlook, Morgan Stanley warned.
 

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