The chief executive of the Association of Mutual Funds in India (AMFI), HN Sinor, in an exclusive interview with Moneylife’s Sanket Dhanorkar and Ravi Samalad. This is the second part of a two-part series
ML: There have been allegations that AMFI is controlled by big fund houses and that all big decisions are taken without the consensus of all the participants.
HNS: I also heard about that but that’s not true. Our board of directors is itself in a way represented by both small and big fund houses. The second thing is that ever since I have come in here, after every board meeting we also have a general membership meeting where CEOs of all members come. So it is not only whatever we discuss at the board that I brief them on, but we also interact on various other issues collectively. So I don’t think anybody has a complaint now that his voice is not heard. Out of 42 members now, generally 30 to 34 members are present. It’s a good number. Normally all our meetings are followed by dinner. So everybody stays back and talks to one another. Yes I heard the murmur when I walked in here, but I don’t hear it now. It’s only 40 and not a very large number. I can understand that if our membership is in hundreds then you have a problem. I have the habit of using my email very regularly. So the CEOs are in the loop all the time.
ML: AMFI had warned some national distributors which also included banks who indulged in unfair investor poaching. Now that the trail commission has been stopped for both new and old distributors, is there any reduction in AUM switch?
HNS: We have seen that between December and March there was a large amount of switches as a result of which we had to take this somewhat hard decision of not paying trail commission to either. The impact of this was that within 10 days switches came down. I have not received complaints thereafter.
ML: The National Institute of Securities Markets is now conducting the examinations for distributors. Apparently AMFI’s curriculum was not updated with the current changes in the mutual fund industry.
HNS: NISM has already revised the syllabus. I came to AMFI just four months back and by that time the decision had already been taken to shift the educational certification to NISM. So I didn’t have much to say that time. It’s a graded examination. Ultimately the distributors have to use this as an advisory more than anything else and if they have to be a financial advisor I think their knowledge level has to be much better.
ML: AMFI has recently raised the ARN renewal fees across the board. You have also raised the new ARN registration fees. This move has drawn some criticism especially from smaller IFAs.
HNS: This had not been revised for the last 10 years. Financial advice is a serious business and we would like serious players to come in. Earlier, unfortunately, we had made various concessions such as for senior citizens, assuming that it is one area for them to earn by way of commission. But today we have so many issues around mis-selling and SEBI has been rapping us on various issues. I think we have to become serious about who is distributing the products.
ML: Can you please share with us the investor education programme that you are conducting?
HNS: This year we have decided to have almost 2,000 programmes across the country largely covering the top 100 city centres. That would mean not only the capital and State capital but district-level centres also. The work is already on. In the first two months we have been able to conduct 96 programmes and these are called ‘AMFI’s investor education programme(s)’, which is not a marketing pitch by any of the fund houses but is essentially to spread education and awareness about the products.
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Merchant power tariffs, which were at a high of Rs14 per unit last year, are expected to stabilise at an average rate of Rs5 per unit for the next couple of years. Jindal Power, Adani Power and Indiabulls Power are companies with large exposure to this volatility of rates
In 2009, merchant power tariffs were ruling at Rs14 per unit. Currently, they are at Rs2-Rs5 per unit. The wide fluctuation in tariffs indicates the volatility in this trade.
With a major part of their respective capacities untied, Jindal Power Ltd, Adani Power Ltd and Indiabulls Power Ltd are the main players with major exposure to these price fluctuations.
Jindal Steel and Power Ltd (JSPL) has been an early and dominant player in the merchant power segment. Jindal Power Ltd (JPL), which is a subsidiary of JSPL, currently has 1,000MW of operational capacity. This 1,000MW is being generated from the Tamnar power plant in Chhattisgarh which has been operational since 2008. Last year, the entire 1,000MW from this plant was sold through short-term power purchase agreements (PPAs).
According to JPL's Draft Red Herring Prospectus (DRHP) filed with the Securities and Exchange Board of India, the company has a total project portfolio of around 15,660MW. Out of this, around 1,000MW is operational, 10,480MW is under implementation and 4,180MW is in the planning stage. The DRHP further states that out of this 11,480MW (the operational and under-implementation capacities), around 2,125MW has already been tied up.
Thus, based on its current operational capacity, almost 100% of the company's capacity is based on short-term sale. Taking the total capacity planned to be added by 2020, around 81% of the planned capacity is still untied.
Adani Power at present has a commissioned power capacity of 660MW, at its first two units of the Mundra Phase-I project, Gujarat. The company plans a total generating capacity of 6,600MW to be operational by 2012. Out of this 6,600MW, 1,757MW or 26% is untied.
Indiabulls Power Ltd plans a total capacity of around 6,615MW. The company plans to have around 25% of this total planned capacity on short-term sale. Thus, the company's total capacity exposure to volatile merchant rates is around 25%.
"The power companies whose performance would be highly volatile are JSPL, along with Adani Power Ltd and Indiabulls Power Ltd to some extent. These three companies have a significant capacity which is untied," said Arun Kumar, research analyst with a broking firm.
Merchant power tariffs were at a high of Rs14 to Rs15 per unit in early-June 2009. Last week, merchant power was traded in the range of Rs2 per unit to Rs5 per unit. Going forward, industry experts expect merchant power rates to stabilise at an average rate of Rs5 per unit for the next couple of years.
JSPL's average price realisation has also moved in tandem with merchant power rates. The company's average price realisation was around Rs2.61 per unit in FY08, which increased to Rs5.91 per unit in FY09. It was highest in Q1FY10, at Rs6.71 per unit.