IRDA-SEBI row had been on HLCC agenda: RBI

The issue had been on the agenda of the inter-regulatory body on financial markets for a long time, says the central bank

Regulators SEBI and IRDA had agreed to settle the issue of jurisdiction over ULIPs mutually at the High Level Coordination Committee (HLCC)—an inter-regulatory body on financial markets—before the conflict snowballed into a full-blown turf war, the Reserve Bank of India (RBI) disclosed today, reports PTI.

“The HLCC did consider this issue. It has been on the agenda for the last several months,” said RBI governor D Subbarao, who is also the chairman of HLCC, when asked why HLCC has not been able to resolve the overlapping power of regulators.

Mr Subbarao further said that both the regulators—IRDA and SEBI—have agreed that they would settle the issue bilaterally.

HLCC, chaired by the RBI governor, consists of banking, capital markets, insurance & pension regulators, besides representatives from the ministry of finance.

It is a high-level forum for interface among financial sector regulators.

“What turned up is a legal issue. Perhaps there should be an agreement to settle at the legal forum,” he added.

Earlier this month, SEBI banned 14 life insurance companies from raising funds through unit-linked insurance plans (ULIPs). However, IRDA asked the insurance companies to do business as usual.

After SEBI and IRDA came out with conflicting orders, the finance ministry intervened and persuaded the two regulators to agree to seek a legally-binding mandate over their jurisdiction over ULIPs.

Following that, SEBI in a fresh order said that no insurance firm should issue any fresh ULIPs.


Will United Stock Exchange gain currency?

The United Stock Exchange hopes to hit the ground running with its currency futures offering. It would be an uphill battle against two established rivals, MCX and NSE, especially since NSE has made a predatory move in making membership free

Newly established stock exchange, the United Stock Exchange (USE) has received final regulatory approval to commence operations in currency futures. Following this nod from the Securities and Exchange Board of India (SEBI), the Bombay Stock Exchange (BSE), a 15% major shareholder in the USE, has officially suspended its operations in the currency derivatives segment.

While USE has set its sights on the skies, it would do well to be a little circumspect. After all, BSE’s past attempts at floating various derivatives products have turned sour. It has lost out to its rivals, the MCX Stock Exchange (MCX-SX) and the National Stock Exchange (NSE). NSE in particular wants to extend its monopoly over the equity segment to currency as well. It has already made a predatory move, typical of its aggressive mindset, by making membership to its currency derivatives segment free. MCX-SX has appealed to the Competition Commission about this anti-competitive practice. The commission has ordered an investigation. It is quite a messy skirmish USE is entering into.

BSE launched the first exchange-traded Index Derivative Contract on 9 June 2000. Ever since, it has struggled to attract participants, affecting the liquidity on its derivatives platform.

Last year, in an attempt to capture volumes from NSE’s vastly superior derivatives segment, BSE slashed transaction costs for its equity futures and options (F&O) segment. It hoped that the revised fee structures would substantially lower transaction costs for all market participants and improve depth and liquidity in its equity derivatives segment.

In such a scenario, USE will have to usher in some significant changes and innovations in order to attract bigger volumes and liquidity for its currency derivatives product. However, the USE remains quite optimistic about rolling out its currency derivatives offering to the market. It has been on a vigorous membership drive, with over 150 members said to have already submitted their applications. It is expected that most of the members of BSE will join USE in its new venture. The exchange also claims to have garnered keen interest from new members from the banking and broking fraternity.

According to T S Narayanasami, MD & CEO of USE, “USE’s membership drive is in full swing and we are very pleased to see spontaneous response from the banks which are natural partners of USE apart from (the) broking community. Trading membership is initially free with nil transaction charges to begin with. It is envisaged that since almost the entire banking system is a stakeholder, USE will gain significantly by the volumes traded by them on the exchange. USE has tentatively planned to commence operations in June 2010.”

Madhu Kannan, MD and CEO of the BSE added, “The currency derivatives market in India has enormous potential for continued growth in the next few years. We expect USE to compete well in this growing market on the basis of product innovation, the training & development of new participants, and strong leadership.”

The USE has attracted equity investments by both PSUs and the private sector. USE represents the commitment of all 21 Indian public sector banks, some reputed private banks and corporate houses.


Index funds suddenly in favour, but will they be run with greater accountability?

There is a sudden glut of index funds as more and more fund companies come out with their own flavours. But are investors missing out on the real thing?

Index funds seem to be in vogue nowadays. Fund houses are suddenly launching index funds with vigour. IDFC Mutual Fund recently announced the launch of a new scheme IDFC Nifty, benchmarked to the Nifty. IDBI Mutual Fund is awaiting approval for its index fund product from the Securities and Exchange Board of India (SEBI). Motilal Oswal AMC is bringing out a flavoured index product.

This sudden clamour to launch index funds marks a drastic shift from the normal indifference to this superb investment product meant for the masses. Index funds have barely found a space inside the conscience of the average investor here. The response to previously launched funds has been lukewarm at best. Indeed, the total assets under management (AUM) in index funds are a miniscule Rs1,204 crore, including growth and dividend schemes.

An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the S&P CNX Nifty. Investing in an index fund is a form of passive investing. There is no active stock picking involved.

There are various reasons why index funds have failed to take off in this country. Fund companies were earlier reluctant to sell index funds as they considered themselves smarter than the overall market. It was probably beneath them to consider offering a product that only sought to mimic the returns given by the broader markets. The performance of most actively managed equity funds shows, however, that this feeling of superiority is a highly misplaced one.

Another reason why index funds are not so popular is that not all such funds are actually purely passive in nature. Most fund managers try to beat the benchmark index by tweaking the underlying portfolio of the index. Not only does this defeat the very purpose of an index fund, it leads to substantial underperformance relative to the benchmark.

It is this practice of actively managing a passive product that gets index funds into trouble. Funds try their hands at ‘enhanced indexing’ by adapting the actual index (constituents forming a part of the index) underlying the fund as per their whims and fancies. The result—a huge tracking error that puts off investors.

LIC Mutual Fund has a notorious track record when it comes to tracking error. Over the five-year period, three of its funds feature at the bottom of the table comparing their performance to their respective benchmarks. LIC MF Index Fund-Sensex Advantage Plan has an unforgivably high tracking error of 9%, followed by the LIC MF Index Fund-Nifty Plan and LIC MF Index Fund-Sensex Plan, with tracking errors of 7% and 5% respectively. HDFC Index Fund linked to the Nifty and Sensex too run a high tracking error of 3%.

In such a scenario, why would investors want to part with their money when several index funds cannot even manage to mimic the index performance? Investors in these funds only wish to participate in the stock markets without having to deal with the inherent volatility. But the way index funds are managed, most investors don’t get what they have paid for.



Atul Visaria

7 years ago

good article...
would like to know presently which is the good index fund available to Indian investors? & how to evaluate such index fund ?

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