Except for one month, mutual fund subscriptions since August last year have been consistently beaten by redemptions, which is indicative of the turbulence being witnessed in the industry
The series of game-changing initiatives taken up by the Securities and Exchange Board of India (SEBI) in August last year to spruce up the mutual fund industry have largely blown up in the face of the beleaguered sector. Ever since SEBI changed the face of the industry last year, outflows have far outstripped inflows into various schemes of mutual fund houses.
According to data available with Moneylife from a leading registrar and transfer agent, redemptions in non-NFO (new fund offer), non-SIP (systematic investment plan) open-ended equity funds have shown a remarkable trend of steady haemorrhage of cash. Except for the month of February 2010, every month from August 2010 has seen outflows exceeding inflows into mutual funds.
In March 2010, redemptions touched a high of Rs4,200 crore, compared to around Rs1,700 crore in the month of February. Normally, the month of March witnesses huge inflows into equity-linked savings schemes (ELSS) due to the tax benefit offered by these products. However, the current upheavals in the industry have overshadowed this phenomenon to show a deviation from the normal.
Moneylife has previously written (http://www.moneylife.in/article/81/3115.html) about how fund companies have been struggling with massive redemptions despite a surge in equity markets. As mutual funds normally benefit from a rising market, this steady drain of funds is even more galling for the industry.
After the ban on entry loads that came into play from 1 August 2009, outflow of money from fund schemes accelerated since most financial advisors could not get incentive to sell and service funds. The ban has dried up the distributors’ revenues and they are now asking investors to consider unit-linked insurance plans (ULIPs) and company fixed deposits as the next best investment opportunity.
SEBI's move may have been well intentioned, but it tripped badly in failing to assess the ground realities and the consequences of its actions. It failed to visualise that sharply higher commissions paid by the insurance industry will suck money out of MFs. It also failed to ensure the availability of inexpensive alternative distribution channels.
The insurance watchdog does not seem to have any regulation in its arsenal to crack down on multi-level marketing schemes which are being peddled by corporate agents
A life insurance policy is being openly peddled as a marketing tool under the eyes of the Insurance Regulatory and Development Authority (IRDA). Corporate agents of State-run behemoth Life Insurance Corporation of India (LIC) are running a pyramid scheme in one of its life insurance schemes.
Swarg (which is a corporate agent for LIC), is running a multi-level marketing scheme in LIC’s ‘Jeevan Saral Policy’.
Swarg states in its website that it has its headquarters at Dadar, central Mumbai. It claims that it has 45 showrooms selling jewellery and gems. According to its portal, Swarg is “planning another 1,000 showrooms as soon as possible.”
The company claims that it has “various concepts and insurance plans for you, which will give you tremendous attractive features like security, investments, tax benefits and above all an additional income source. With our membership, you can promote our insurance plans and earn a sizeable income which might be comparatively higher than the salary drawn by you.”
The plan works in the following way—in the company’s own words—“We have launched a scheme through which by taking a Jeevan Saral Policy from our company of yearly premium of Rs6,005 you can earn an extra income up to Rs4,46,976 approximately within 2 years period.” (These are the exact words of the company as they appear on the website; no grammatical changes have been done).
Three additional members have to be roped in at the first stage, after you cough up the initial premium of Rs6,005 for the Jeevan Saral Policy. Apparently, Swarg’s telemarketing team will then get into the act and then convince these three members to go in for the same policy. That’s when you will start to ‘benefit.’
As any typical pyramid scheme operates, these three new members will have to rope in three additional members each, thereby attracting a net total of nine members (we are at the second stage of the pyramid now).
And so it goes on and on, and at the eighth stage, if Lady Luck favours you and everything falls into place, you’ll have a total of 6,561 members—and your promised ‘net rewards’ work out to Rs4,00,937. There is a caveat, though. Each member has to rope in three more members within three months for the whole multi-level marketing scheme to remain operational.
When Moneylife contacted the company to ask whether it is mandatory to get more clients if one buys a policy, the sales executive said, “It’s not mandatory but it’s for your benefit. It’s good if you can get clients directly but if you are not able to do it then we would help you to convince your friends or relatives.”
“We don’t encourage multi-level marketing,” said a senior official from IRDA, preferring anonymity. The official also admitted that there are no rules to regulate such schemes and also said that he had no knowledge as to when such rules to curb multi-level marketing schemes will come about.
This seems odd, because a few weeks back, IRDA member S Kannan said that the insurance regulator is planning to introduce regulations to crack down on pyramid schemes.
“Multi-level marketing is not allowed for selling life insurance. If anyone is doing it, action will be initiated. It is not permissible,” said another LIC official.
Moneylife tried calling both LIC and Swarg, but no replies were forthcoming. Emails sent to both these entities remained unanswered at the time of writing this story.
SEBI proposes to reduce the time between public issue closure and listing to 12 days from 1st May
Market regulator Securities and Exchange Board of India (SEBI) has said that it proposes to reduce the time between public issue closure and listing to 12 days from the existing (up to) 22 days. This will be applicable to public issues opening on or after 1 May 2010, SEBI said in a release.
The market regulator said that the new process would require syndicate members to capture all data relevant for the purposes of finalising the basis of allotment while uploading bid data in the electronic bidding system of the stock exchanges. To ensure that the data so captured is accurate, syndicate members would be permitted an additional day to modify some of the data fields entered by them in the electronic bidding system, it said.
The registrar to the issue is required to validate the bids and finalise the basis of allotment only on the basis of the final electronic bid file provided by the stock exchanges, SEBI said.
The market regulator said that the lead managers and their agents would be responsible for the accuracy of data entry and for resolving investor grievances. Further, the application supported by blocked amount (ASBA) process would also undergo suitable modification to make it consistent with these timelines, SEBI added.