KN Vaidyanathan, an executive director of SEBI, sees mutual fund companies evolving into a changed business model, based on simple products, ethical distribution and technology to reduce costs. This is the third and final story of a series
The Securities and Exchange Board of India is confident that the mutual fund industry will emerge stronger and more investor-oriented following the slew of recent fundamental regulatory changes made that affected the fund industry badly so far. “The changes will force everyone to think hard on how to develop a robust long-term business model,” says KN Vaidyanathan, an executive director of SEBI, in an exclusive interview to Moneylife.
Following the regulatory changes over the last 12 months the business model of mutual funds has been profoundly affected. Fund companies have been losing assets while well-established selling and distribution strategies of fund houses have gone haywire since upfront commissions and the various ways in which intermediaries were being compensated, have been plugged. How does the regulator view these changes, especially since we are witnessing a continuous decline in equity assets over the last few months, since SEBI has a development role to play as well? “The industry will adjust. Maybe the asset size will shrink but that may be good for all, especially the serious players,” says Mr Vaidyanathan. “The industry is full of bright people. I am sure they will put their heads down and work out a better business model. That would be good for all—including the investors.”
SEBI is pushing fund companies to face the new reality which Mr Vaidyanathan goes on to articulate as follows: “The challenge for the fund industry thereafter is to find out where the scale will come from. According to me it will come from simplicity, distribution and technology.” According to him, fund companies must offer simple products with low volatility based on asset allocation, distribute the products through large distributors and ensure that their operations are backed by the best technology, which reduces cost. “That may also mean that those who were not serious would exit.”
Ever since SEBI has changed the business model of the fund companies by changing the way mutual funds are sold, equity funds are losing money. This has led to market speculation that SEBI may partially relax the regulations, allowing for some upfront commissions. “A large number of people (mainly the sponsors) keep checking whether SEBI will revisit the policy of scrapping entry loads because they argue ‘it has not worked’.”
However, when asked, Mr Vaidyanathan asserted with a simple: “No. That is a closed chapter.”
Having changed how the funds are being distributed, SEBI is changing how the funds would be created. In the first couple of decades of growth of mutual funds, fund companies have launched almost similar products, which confuse investors. SEBI is already making some changes in the fund-approval process which will change this. “It is their business, but I guess funds will have to change. One of the things we are asking funds to do is to explain clearly how fund A is different from fund B. This has to be done for all the funds that are being sold today no matter when they were launched. They have to redo their Key Information Memorandum (KIM).”
One of the key issues for the fund industry is that while SEBI has banned upfront commissions for mutual funds, insurance companies were pushing their products, especially Unit-linked Insurance Products (ULIPs) with hefty upfront commissions. The fund industry has been quietly complaining that this has tilted the playing field against them. Since banks and financial institutions make easier money selling other products, why would they sell mutual funds, goes their argument. Mr Vaidyanathan counters this as a myth. “People confuse between upfront and trail. Business models based on upfront will die. Irrespective of how the dispute between ULIPs vs mutual funds works out, the writing on the wall is clear. Upfront commissions and entry loads will become zero. It is a matter of time. Therefore what it leaves us with is trail commissions. There is nothing to match the attractiveness of trail commission of mutual funds because the trail is on the total kitty, not like the upfront commission on a single product. But that means everybody has to think long term, especially after upfront commissions are gone. Until now nobody was thinking long term.”
As we had predicted yesterday, support for the Sensex came in between 16,100-16,300 at 16,187
The market started the day with a deep fall, made a gradual recovery as the session progressed but ended in negative terrain. The Sensex ended at 16,445, lower by 74 points (0.4%) while the Nifty settled at 4,931, lower by 16 points (0.3%). The indices started the day with a low (the Sensex touched an intraday low of 16,187), taking cues from the weak Asian markets. However, they pared their losses soon and traded in a narrow range till the mid-morning session. The market slumped once again, tracking weak European equities. It rebounded in the afternoon session. Volatility was high as traders rolled over positions in the derivatives segment from the May 2010 series to the June 2010 series, ahead of the expiry of the near-month May 2010 contracts next Thursday.
Asian stocks were down on concerns over the eurozone debt crisis and its negative impact on global economies. Key benchmark indices in Indonesia, Singapore, Japan, and Taiwan fell by 2.08% to 2.93%. China’s Shanghai Composite pared initial losses and was up 1.08%. Markets in Hong Kong and South Korea were closed for a public holiday. Markets in Thailand were also closed due to the political unrest.
US stocks were down on Thursday on negative economic data and concerns over the eurozone’s debt crisis. Selling was intense late in the day after the US Senate voted to end the debate on the sweeping overhaul of the financial system, allowing a final vote on the bill. The Dow was down 376 points (3.6%) to 10,068. The S&P 500 was down 43.4 points (3.9%) to 1,071.6. The Nasdaq was down 94.3 points (4.1%) to 2,204. Jobless claims rose again in the US for the first time since early April. Initial claims for state jobless benefits increased by 25,000 last week to 471,000, the highest level in five weeks, the Labor Department said. The index of leading economic indicators slipped last month for the first time since March 2009, while factory activity in the US mid-Atlantic region accelerated less-than-expected in May.
Greece said that the banning of some speculative trading in eurozone debt indicates the determination of eurozone leaders to defend the single currency and protect the economy.
Back home, the Reserve Bank of India (RBI) said that the US dollar will remain a major component of India's foreign exchange reserves as most of the country's overseas trade is denominated in that currency. Foreign Institutional Investors (FIIs) were net sellers of Rs657 crore. Domestic Institutional Investors (DIIs) were net buyers of Rs721 crore.
NIIT Technologies (down 0.1%) has announced a partnership with Adecco SA, a Fortune 500 company and a leader in human resources services. The existing joint venture agreement has been replaced with a comprehensive collaboration agreement whereby NIIT Technologies is designated as a preferred vendor for its IT outsourcing program. Shree Ganesh Jewellery House (down 3%) has taken over Sumit Jewels Pvt Ltd, Kolkata as its wholly-owned subsidiary. Sumit Jewels has an integrated diamond jewellery factory located at Manikanchan SEZ, Kolkata. Punjab National Bank (down 1.2%) will be raising Upper Tier II Bonds as ‘PNB Upper Tier II Bonds Issue Series XII’ through an issue size of Rs500 crore. The proposed date of opening and closing is 24th May. Indraprastha Gas (down 3.4%) is likely to increase gas prices by a record 20%, or close to Rs4.40 per kilogram.
IRB Infrastructure Developers (up 0.8%) has received an official communication from the National Highways Authority of India (NHAI) in which it has been declared as the "selected bidder" for the six-laning of the Tumkur-Chitradurga section in Karnataka. State Bank of India (SBI) (up 0.3%) has decided to curtail its branch expansion plan and is expected to open around 500 branches during the current financial year, as against nearly 1,000 proposed earlier
The industry body has drastically increased the registration and renewal fees for mutual fund distributors across the board
With the mutual fund (MF) industry bogged down by a number of problems, the decision of the Association of Mutual Funds in India (AMFI) to hike AMFI registration number (ARN) renewal fee is likely to prevent new independent financial advisors (IFAs) from entering the market. However, the move is also expected to curb unscrupulous players from obtaining multiple ARN numbers to dodge income-tax (I-T) authorities. AMFI clearly states that no individual should hold more than one ARN card or certificate of registration.
AMFI, in its circular issued on 19 May 2010, has hiked the ARN registration and renewal fees across the board with effect from 1 June 2010.
The ARN number for corporate bodies will be valid for three years. For individuals and corporate employees, the validity period will be computed from the date of receipt of the application till the date of validity of AMFI/NISM certificate.
Obviously, this move has not gone down well with the distributors who feel that the hike is unjustified.
Some IFAs have already approached AMFI and the market regulator Securities and Exchange Board of India (SEBI) opposing the new fee structure.
According to industry sources, the move is likely to prevent firms from getting multiple ARN numbers. Sources indicate that a leading national distributor has received numerous ARN numbers under the same address.
“If a person has four firms he will apply for multiple ARN numbers under different names. Then he divides the business and to get away from I-T liability. Now it will not be viable for such players,” said a distributor who did not wish to be named.
Currently, individuals and corporate employees are required to pay Rs250 as renewal fees. AMFI has drastically increased it to Rs2,500, which is a hike of 900%. However, an individual seeking a new ARN number will now have to shell out Rs5,000 as registration fees.
For banks, non-banking financial companies (NBFCs), public limited companies and institutional distributors, the renewal fee has been raised from Rs7,500 to Rs2,50,000, a jump of a massive 3,233%. Any new player entering the market belonging to this category will have to cough up Rs5,00,000.
The renewal fees for private limited companies has now been increased from Rs3,750 to Rs25,000 while partnership firms and societies and trusts/HUFs will have to shell out Rs12,500 from the earlier Rs2,500.
“AMFI does not have any other source of revenue. IFAs will be hit by this fee hike. Some AMCs may reimburse the fee to IFAs. Earlier they (AMFI) earned money from examination fees but now it has been taken over by the National Institute of Securities Markets (NISM). So AMFI has to find new revenue sources,” said a top official from a leading fund house.
Individuals who pass the AMFI examination are required to register with the entity in order to garner business.
“I don’t understand the rationale behind it.The cost of doing business is going up,” said Vivek Rege, CFP, VR Wealth Advisors Pvt Ltd.