As we had expected, mutual funds have witnessed a massive outflow of Rs1,365 crore in April. But the problem is not just with the fund industry, or investor behaviour, but with the so-called equity cult itself
Just a week back, we had a CEO of a fund house who estimated that the outflow from equity mutual funds for April would be close to Rs1,500 crore. ‘Equity funds may have suffered large-scale erosion in April’. The official figure we now know is Rs1,365 crore. This huge exit from equity schemes is normally blamed by the regulators and the market players completely on investor behaviour. In fact, this is very likely an excuse they are using for not coming up with a well-thought policy to sustain fund inflows.
Equity mutual funds enjoyed rising inflows from December 2010 to February 2011, with collections peaking at Rs2,495 crore in February. It was after this that the decline started. In March, net inflows were just Rs454 crore, which was mainly due to ELSS schemes which collected Rs578 crore, whereas pure equity saw redemptions amounting to Rs124 crore. April has seen the highest outflow since October 2010. But, whether we can expect to see money return to equity schemes anytime soon is still in doubt.
The real problem is that fund mobilisation by mutual funds from the investing public is weak. Investors still prefer bank fixed deposits and categories other than the stock market in spite of the fact that the market has gone up by more than 20 times. Ever since the Securities and Exchange Board of India (SEBI) put a ban on entry load, equity funds have suffered redemptions.
Distributors have found fund-selling unviable and have been moving out of the business. The penetration of mutual funds is so poor that brokers have little incentive to sell mutual funds. The only option for them, to earn some income, has been to make investors churn their portfolios. This earns them a 1% exit load and while it has been an incentive for brokers to make investors churn more frequently, it is a loss for investors. Along with this, the low incentive to sell mutual funds has led many distributors to sell ULIPs, which is terrible for investors. As it turns out, the regulation by SEBI has done more harm than good.
The regulator needs to address the issue of distributor fees, to make AMCs adopt a better pricing system where the commissions are clear and no other payments to distributors allowed. For such a course correction, SEBI and the mutual fund industry, through the Association of Mutual Funds India (AMFI), have to sit together. So far, AMFI has done a lousy job of putting across the industry’s views, which is one of the main reasons that SEBI took the decision without consulting it.
Recently, SEBI created an alternative: fund sales through stockbrokers. But this hasn’t really got going. The cost of running a large countrywide brokerage business is exorbitant, and fixed. Broking companies have to bear the cost of a large back-office staff, compliance, technology and high capital cost of property (or rent). Then there are costs to acquire new clients. All this eats up into the profits they can muster. Research is another item for which they pay heavily. Unfortunately these reports are guided by companies and investment banks and are rarely based on fundamental calculations.
The other serious issue is that of poor retail participation. Volumes in the cash market have declined to historic lows. In April, the daily average cash market turnover dropped to 11% of the overall volume, compared to 18% in the month a year ago. Official studies have shown a decline in the investor population, during a decade which has been the best period for the markets. This is also because of the fundamental problem with the way the market functions.
So, investors are happy to put their money in bank fixed deposits. Data from the Reserve Bank of India (RBI) shows that 50% of the household savings goes into bank deposits. In 1990, the percentage of savings in shares, debentures and investment in UTI was 14%, and this went down to 13% in 2007-08, even while the market has climbed by 20 times in this period.
There has been no shortage of products and manpower to sell these products either. As we have mentioned in previous articles, there is a multitude of investment products to choose from—over 3,000 actively-traded stocks and 230 diversified equity mutual funds, apart from insurance products, pension schemes, PMS and other financial products. To take these to investors, there are over 20,000 independent financial advisors, not to forget the banks, financial planners and a sea of insurance agents.
The issue here is that financial products have been sold like consumer durables. But consumer products are standardised, while financial products are not. The way they are being sold is equally important. This is why financial products are tightly regulated the world over. Had financial institutions and intermediaries sold these products like they should have, and the regulators had done their duty, the last decade would have brought in larger investor participation. Due to the poor performance of financial products and the hidden costs, and scores of complaints regarding mis-selling, investors have developed an aversion to the stock market and any other equity-linked product or investment product. Even the minor rules and amendments introduced by the regulators from time to time have not benefited investors.
Financial products need to be closely regulated. When it comes to protecting investors and eradicating mis-selling, regulators have fallen short. There has, so far, not been any strict punishment for such serious offences. They’ve taken half-thought out steps, hoping these will work wonders, but have in fact ended up choking the business. They have not seriously pursued investor protection, promoting fair business practices and punishment that would force a fundamental change across the industry.
If the regulators don’t act quickly, it would be a long wait before mutual funds see a sustainable trend of inflows.
Out of the total $4.4 billion, the total value of outbound deals wherein Indian companies acquired businesses overseas in April was $1.91 billion through 21 deals and the total value of inbound deals was $2.28 billion (17 deals)
New Delhi: Foreign companies and their subsidiaries continued to remain bullish on Indian businesses, as inbound transactions worth $2.28 billion were announced in the month of April, taking the total merger and acquisition (M&A) deal value to a whopping $4.4 billion (around Rs19,800 crore), reports PTI.
According to global consultancy firm Grant Thornton, as many as 64 M&A deals worth $4.4 billion were announced in the month of April.
Out of the total $4.4 billion, the total value of outbound deals wherein Indian companies acquired businesses outside India in April was $1.91 billion through 21 deals and the total value of inbound deals was $2.28 billion (17 deals), the report added.
“We are seeing a flood of cross border deals in the market and they comprise almost 95% of the total value of M&A deals for April and 88% for the period January to April 2011. Inbound deals have picked up significantly over outbound,” Harish HV, partner, India Leadership Team at Grant Thornton India said.
The fears of the global recession have gone and corporates are back to looking for deals on a global platform, he added.
Domestic transactions have taken a back seat, as the total value of domestic deals in April this year was $0.21 billion via 26 deals as compared to $1.03 billion through 60 deals.
A sector-wise analysis shows that oil & gas was the most targeted sector accounting for 43% of the total deal value driven by Vedanta’s 11% stake acquisition in Cairn India from Petronas for $1.5 billion.
The other major deals include Genpact’s acquisition of Headstrong Corporation for $550 million, Essar Energy’s acquisition of Royal Dutch Shell’s Stanlow refinery in northwest England for $350 million and the Aditya Birla-Domsjo Fabriker buyout for $340 million.
The top five M&A deals accounted for 69% of the total M&A deal values, Grant Thornton said.
In the private equity segment, the deal values in the month of April amounted to $0.73 billion through (38 deals) as compared to $0.83 billion via 35 deals in the corresponding month last year.
“Private equity (PE) is growing in a steady manner and has touched a three-year high of $2.6 billion with an increase in deal numbers. PEs are looking at spreading themselves quite well by increasing number of transactions and hence average deal sizes have come down,” Mr Harish said.
Jyothy Laboratories had earlier acquired 14.9% stake in Henkel India from the Indian promoter Tamilnadu Petroproducts in March 2011
The board of directors of Jyothy Laboratories (JLL) has approved the buy-out of 50.97% stake in Henkel India (HIL) from Henkel AG & Co KGaA (Henkel AG). JLL had earlier acquired 14.9% stake in HIL from the Indian promoter Tamilnadu Petroproducts in March 2011.
In a deal structured by MAPE Advisory Group, JLL proposes to acquire 59,360,203 equity shares, constituting 50.97% of Henkel India at a price of Rs20/share aggregating Rs118.7 crore.
JLL will refinance the existing debt of HIL as also buy out the redeemable cumulative preference shares in HIL held by Henkel AG. The aggregate debt owed by Henkel India to its lenders is approximately Rs454 crore. JLL will purchase 68 million preference shares in HIL from Henkel AG for Rs43.9 crore, subject to regulatory approvals. The per share equity consideration payable to Henkel AG is subject to customary closing adjustments based on the debt and cash position in HIL.
Further, JLL and Henkel AG have agreed that Henkel AG shall have an option to acquire up to 26% of the equity share capital of Jyothy Laboratories through primary and/or secondary transactions, after five years, subject to the terms and conditions to be mutually agreed.
This acquisition will trigger the mandatory 20% open offer to the public shareholders of HIL as per applicable SEBI regulations. MAPE Advisory Group will be the manager for the public offer.
Both JLL and HIL have strong synergies in various business segments, as both are present in home care, fabric care, dish wash, personal care and household cleaning segments and the acquisition will elevate JLL to amongst the top five FMCG players in India. With its array of well-known brands like Ujala, Exo and Maxo, JLL enjoys a dominant position in all its categories. With this acquisition, JLL will add to its stable internationally renowned brands like Henko, Pril, Fa & Mr White and popular Indian brands like Margo, Chek & Neem.
MP Ramachandran, chairman & managing director, JLL said: “This is a historic and much anticipated move from Jyothy Labs which will help us in strengthening our position in urban India. It will also give us access to any new product launches of Henkel AG & Co KGaA in the future.”
Shares of JLL were trading at around Rs221.90 on the Bombay Stock Exchange in the late afternoon, 0.07% down from the previous close.