Mutual fund distributors would be allowed to use stock exchanges' infrastructure to purchase and redeem mutual fund units on behalf of their clients. What benefit is it for investors?
The Securities and Exchange Board of India (SEBI) recently issued a circular to the stock exchanges, clearing corporations and depositories to enable the mutual fund distributors to transact on the stock exchange platform on behalf of their clients. A mutual fund distributor registered with Association of Mutual Funds in India (AMFI), would be able to use a recognised stock exchanges' infrastructure for purchases and redemptions of mutual fund units directly from the fund houses or asset management company (AMC) on behalf of an investor. At present, this facility is available for stock brokers and clearing members only. Though this service was introduced in November 2010, it found few takers as an investor would have to bear additional costs.
Mutual funds are sold through large nationwide distributors like banks and also small independent financial advisors. Most distributors log in applications for redemption and purchase requests through the registrar and transfer agent (R&TA) of a fund house. The stock exchange platform would open up a new route for transactions. However, the mutual fund distributor just enables the transaction, with the units credited and debited directly from the demat account of investors. Therefore, it would be necessary for an investor to open a demat account if they do not have one already.
There could be other issues as well. According to Ramesh Bhat, former president of IFA Galaxy, an association of over 10,000 independent financial advisors, “How the exchange will take the money from the client account? Even if the money is taken out of the account will he get the same day NAV? An investor should not lose a single paisa on this deal. Pay in is the major issue (From client account to exchange). Let us wait for the amendment in their existing byelaws, rules and regulations.”
Uday Dhoot, deputy CEO, International Money Matters, a financial planning-cum-investment advisory organisation mentions that, “The stock exchange route brings in a different process of transaction execution. In a normal account where there is no client—distributor power of attorney (POA) involved, the client still has to give a written instruction for a transaction to be processed, which is equivalent to signing of a transaction slip/ form. If there is a POA setup the distributor still needs to keep records of client confirmations of transactions on email or recorded phone lines.”
He further says that, “The stock exchange merely provides an order routing system with the above processed getting added. Some clients would prefer signing a POA, some may not and others are comfortable signing transaction slips. All this means additional processes and costs for the distributor to cater to all kinds of clients.”
There are also liquidity concerns. Mr Dhoot mentions that there is a possibility that one might want to sell some units and there may not be buyers for the same. In such a situation, you are then compelled to go back to the old system of signing a form and submitting it to the AMC or R&TA.
SEBI’s move to get investors to buy mutual funds through the stock exchanges has failed to work in the past and the regulator seems to be looping in mutual fund distributors to enable investors to transact in mutual funds through the stock exchanges. One can't assume that there are large numbers of eager investors who would want to invest through a demat account. If they don't yet have a demat account, it means that they simply don't want to invest in markets or do not wish to go through the hassle of paperwork and the burden of poor grievance redressal.
In his email reply, Mr Bhat expressed his concern that, “More than 40 % of the clients (in Tier-1 City) have a demat account, and yet 60 % do not have maybe due the annual charges levied by the demat service providers. These demat service providers must charge only ONE TIME FEE for these accounts to increase its reach across all investor class. Clients having demat MF units may be less than 5% in Tier-1 cities and may be 1% or less in Tier-2 and Tier-3 cities”
Mutual fund units are already offered by fund companies in electronic form as there is no physical certificate for MF units. Why would anyone want to demat something that already exists in electronic form? Mr Dhoot mentions that, “Opening of a demat account requires further paper work in addition to the mutual fund KYC. Moreover, holding units in a demat account involves additional costs charged by the depository participant. Investors already have an option to buy/sell units online. There are also some third party platforms that allow distributors to buy/sell units for the clients which are cheaper, involve less processes and paper work.”
A demat account may consolidate all of one's holdings and allow a view of investments in a single snapshot. Buying and selling in dematerialised units is supposed to be faster and simpler, but this would come with a transaction costs as well. SEBI's decision to continuously push the demat route shows that the regulator has lost touch with what is happening on the ground. Taking this route has not added benefits and will continue to keep investors away.
There are several layers of costs associated with holding mutual fund units in demat form. One would have to pay a charge to open the demat account, as well as the annual demat fees. Sales of units would also involve a charge on each occasion. This charge varies from DP to DP.
Leading registrar and transfer agents, CAMS and Karvy, both of which service almost the entire industry, have a system to provide consolidated statements across all mutual funds to investors. AMFI is also in the process of developing a platform to enable mutual fund transactions online. With this in place, what need it is for the regulator to ask exchanges to amend their infrastructure to enable mutual fund distributors to transact through the stocks exchange when it has no additional benefit for investors.
SEBI mentions that this would allow MF distributors to improve their reach. But would this move benefit distributors? Mr Bhat says, “Provided there is no complicated registration procedure and clear route for the transfer of money from the clients’ account to the AMC account and issue of proper allotment of units in clients demat account on time. This will be definitely a boon for distributors in Tier-2 and Tier-3 cities to expand their business. However, more clarity is needed on the operating guidelines”
Mr Dhoot says “We do not think that the stock exchange route for mutual fund transactions would benefit a large section of distributors as it involves a lot of added and some parallel processes which mean extra costs. This makes it a viable option only for very large distributors. This also requires distributors to register with the stock exchange or have tie ups with registered broking houses there by giving up their own title as the primary distributor. There is also no significant advantage to hold mutual fund units in a demat account.” He adds that, “AMFI is anyways planning a MF wide platform for order routing therefore we would not like to take up the stock exchange platform.”
While agreeing to give urgent hearing in the Aadhaar matter, the apex court refused to modify its earlier order
The union government and state-run oil marketing companies on Tuesday failed to get any relief from the Supreme Court over the unique identification (UID) or Aadhaar number. The apex court, while agreeing to give urgent hearing in the matter refused to modify its earlier order.
On 23rd September, the Supreme Court ruled that Aadhaar is not mandatory to avail essential services from the government. While hearing a public interest litigation (PIL) filed by retired Karnataka High Court judge Justice KS Puttaswamy and advocate Parvesh Khanna questioning the legal sanctity of Aadhaar, the apex court said, "The centre and state governments must not insist on Aadhaar from citizens before providing them essential services."
The apex court will hear the matter on 22nd October.
Meanwhile, the Cabinet clears National Identification Authority of India Bill to provide statutory status to Unique Identification Authority of India (UIDAI) and legal backing to Aadhaar.
If the two neighbours are serious, they must restart the talks and get on with actions
Last week, Pakistan experienced a massive blackout, very similar to the one that India felt last year, due to a fault at HUDCO power plant (1,200 MW capacity). This had a domino effect, tripping off Tarbela and Mangala stations, resulting in total darkness for a few hours in many areas.
Most principal cities like Karachi, Hyderabad, Naswabsha Peshawar, Lahore, Multan, Rawalpindi and Quetta experienced this outage and it took a team of engineers several hours to bring the national grid to normalcy. There were a number other cities and towns that too were affected, with power being restored gradually.
While the power outage was on, there was a great hope and interest being built that the Prime Ministers of India and Pakistan would meet on the sidelines of UN General Assembly. Nawaz Sharif and Manmohan Singh did meet and the talks centred on the urgent and imperative need to reduce tension in the border. Manmohan Singh is reported have sought Nawaz Sharif's assurance that he will take steps to reduce the activities of terror outfits if not eliminate them altogether. In the past, Pakistan had always contended that these were "freedom" fighters. Sharif, being a well established industrialist would do everything he can to promote trade and commerce between the two countries.
It is of interest to note that Nawaz Sharif has the distinction of being the first person in Pakistan to be elected as Prime Minister for the third time. After being extended the Most Favoured Nation (MFN) status to Pakistan, couple of decades ago, India has been waiting for this reciprocity, but Pakistan has so far dilly-dallied on this issue. It is hoped that this time around, Nawaz Sharif will not fail to extend the MFN status to India if he is truly keen to promote trade and industry.
Soon after his take over, at the request of Pakistan, a team of experts from the Indian power ministry travelled to Pakistan to study the possibility for setting up a 220 kV link to supply 500 MW of electricity and gradually increase it to 2,000 MW. In the discussion held in Pakistan, a proposal to set up a grid in two steps was mooted.
Initially, a 220 kV interconnection between Pakistan and India's northern grid be set up for power exchange around 500 MW and in the second phase this could be increased to 2,000 MW upon the operational experience and Pakistani needs.
Regrettably, this interesting development could not move forward due to the lack of spontaneous response from Pakistan and the sudden cancellation of the Pakistani
delegation’s visit to discuss the modalities. Had the delegation visited India as planned, price consideration and the necessary technicalities could have been
cleared and the basic spade work done to move forward.
Apparently, Pakistan called off the visit due to the unexpected tension in the border and no new dates have been proposed, with hardship being experienced by industries and homes in that country.
If the Pakistan delegation had arrived for talks, it would have helped to kill two birds with one stone! NTPC (National Thermal Power Company) which is not producing power to the full capacity because of lack of interest shown by the power industry in India, would have been able to supply the much needed power to the homes and industries in Pakistan. Even now, if expeditiously handled, the 200kV link connecting India's northern grid to Pakistan would enable them to heave a sigh of relief. In other words, Pakistan has given a shock treatment by switching off the power talks, even before it started!
While the Indo-Pak Power trade has not even got off ground, history was being made on Saturday (5 October 2013), when electric power was officially exported to Bangladesh, with Bherama, a remote village, bordering Murshidabad district of West Bengal, receiving the electric power from NTPC the exporter.
Initially, this export trade in electricity will involve supply of 250 MW at a fixed tariff, and Bangladesh has the option to buy 250 MW more from open market in India. A joint venture proposal in setting up a 1,320 MW thermal power plant at Khula is also envisaged.
This event was through video conferencing, with Prime Ministers Manmohan Singh and Sheikha Hasina in Bherama.
It may be recalled that India has invested in Bhutan and also will be importing power from that country.
Digressing for a moment, when the onion prices hit the ceiling in India, and new crops were expected to reach the market by mid September, there was a proposal to obtain a quick supply of onions, from both Pakistan and China. It was hoped that this stop gap arrangement would help stabilise the Indian market and this could be got across the border in truck loads.
Perhaps, the Sino-Pak axis played a small role coupled with hesitancy on the importer's side, and onions from both countries have not come in so far. At least there are no media reports confirming the arrival of onions, and prices reaching dizzy heights! Whatever be the reasons, the ‘onion diplomacy’ with Pakistan appears to have failed.
All these would make one wonder if this sort of mutual mistrust is getting anyone anywhere. If the two neighbours are serious, they must restart the talks and get on with actions.
We have had enough of shock treatments and no tears left for lack of onions to cry.
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)