Regulations
Public shareholding: 87 companies yet to comply with revised norms
Around 75 private and 12 PSU companies are yet to comply with the revised minimum public shareholding norms. Over the next few days, promoters of these 75 would have to sell shares worth about $1.9 billion
 
Even as the deadline to increase public shareholding to 25% (for private companies it is 3 June 2013) and 10% (for public sector units-PSUs it is 9 August 2013) nearing, there are still 87 listed companies that have yet to comply with the revised guidelines issued by the finance ministry on 4 June 2010.
 
As reported earlier by Moneylife, most companies are yet to increase their free float to the requisite level, and compliance may entail significant stake sales by promoters, which could depress share prices in the near term.
 
However, the fact is that share prices are falling even as the deadline nears. This only means neither the companies nor the stock market players give a damn about the Securities and Exchange Board of India (SEBI) diktat, which has been around for over seven years now. SEBI has had three chairpersons during this period.
 
So far, the market has seen 44 offer for sale (OFSs) and eight institutional placement program (IPPs) worth $9 billion. Other private companies are hurrying to comply with the minimum public shareholding (MPS) norms before the June 2013 deadline (for public companies the deadline is August 2013). SEBI has allowed companies to take either one of the routes—follow-on public offer (FPOs), OFS, IPP or bonus, rights issues—to comply with the revised norms. A company wanting to take any other route must take SEBI's permission before doing so.  
 
“We estimate a further sale of around $1.9 billion over the next few days (by 3rd June 2013) as 75 private sector companies have yet to comply with the 25% MPS norm. Another 12 PSUs have to comply with the MPS requirement of 10% by 9th August and we estimate the sale amount at $680 million at current prices,” said Kotak Institutional Equities Research in a report. 
 
 
According to media reports, SEBI is working on penalties for companies that may be unable to meet the revised MPS norms, but would be lenient with companies that made an effort to meet them. The regulator also stated it would try to ensure that any action taken would not harm the interests of minority shareholders.
 
On 4 June 2010, the finance ministry amended the Securities Contracts (Regulation) Rules, 1957 (SCRR), raising the MPS requirement to 25% for listed companies or those that proposed to list. Listed companies that did not meet the MPS norm would be required to increase public shareholding by at least 5% a year until they met the norm. On 9 August 2010, the SCRR was amended again to revise public-sector companies' MPS norms to 10% (from 25%) within three years from August 2010.
 

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COMMENTS

Naresh Nayak

4 years ago

Forced public shareholding? What a harebrained scheme is this? Instead of forcing unlisted subsidiaries of listed companies to list which are known to transfer profitable businesses to unlisted companies (like Siemens India) by offering first right of refusal to existing shareholders who have been robbed as minority shareholders, they are forcing all LISTED companies to dilute their shareholding. What about the UNLISTED companies. Why aren't you making the field level and listing them?

Dear SEBI, You are a bunch of bureaucrats who have no inkling of the laws of the land, or capital flows or preservation of corporate wealth which can be used to invest in the nation. You cannot tell Premji what he can or cannot do with the vested shares in the trust. The irrevocable trust can sell shares after 2 years or after 100 years and SEBI can't dictate that. I am sure some other regulator is feeling his toes are stepped upon… and you get no prizes for guessing it is the Charitable Trust Commissioner. Azim Premji is going to be Poor Premji because if the Trust commissioner makes noises, he is going to be a shuttle cock making rounds to Delhi and Bandra Kurla Complex only because he wanted to help the education sector with a part of his wealth. I hope he drops his idea of charity and keeps the money to himself. The Indians don't want his money and develop the national cause. Did someone say India is unattractive because of too many regulators and too much conflicting regulation? No prizes for guessing that too and it is the Foreign Investors who are not touching India with a barge pole except for hot FII money!

http://nareshnayak.wordpress.com

Why don’t funds promote trail commissions instead of upfront commissions?
The reason is they are beholden to large distributors to sell their schemes. And these distributors are more interested in churning and therefore upfront commissions. They have no interest in promoting long-term investment in equities and earning from trail commissions
 
Upfront commission paid out by mutual fund houses to distributors has always been a bone of contention. Last year, industry body Association of Mutual Funds in India (AMFI) scrapped the plan to ban upfront commission. Last year, after the market regulator brought out a slew of reforms to ‘revive’ the fund industry, we mentioned that independent financial advisors (IFAs) contribute the most to new equity fund inflows especially from beyond 15 cities and yet the regulator chooses to ignore this ‘small’ distributor community by coming up with regulations that harm their business, allege smaller distributors (Read: Mutual fund regulations: Who contributes the most to equity inflows is overlooked). Trail commissions, though lower than the one-time upfront commission, support their business model as they establish long-term relationships with their clients. Distributors, on the other hand, look to earn higher in the form of upfront commissions through excessive churning of their clients’ portfolio. This practice in not only damaging for the client but affects the industry as a whole.
 
Chilukuri KRL Rao, a small distributor from Hyderabad, has drawn our attention to the ground-level practices that hurt investors and smaller distributors. He says, “Small distributors who cater mainly to the small retail investors are willing to work even with low trail commissions due to their cost efficient business model. But, the main hindrance to the growth of the industry seems to be the way these incentives are being paid to a distributor.”
 
A number of independent financial advisors (IFAs) also support a ban in upfront commission. “High upfront commissions lead to the practice of excessive churning by unscrupulous mutual fund distributors in order to earn themselves a higher commission. This practice of fund houses offering a higher upfront commission and lower trail commission is detrimental to many honest distributors who promote investing in mutual funds for the long-term. They lose out as because of the upfront commission they earn lower in trail commission,“ points out Rao.
 
Trail commission is beneficial to distributors who are able to keep their clients invested in a particular scheme for the long-term. In the table show below, Mr Rao shows how small distributors benefit in the long run with just trail commission. The table portrays a trail only model of Franklin Templeton Mutual Fund where in they pay a trail of 1.1% perpetually. Distributors lose out on earning a higher commission from the second year onwards when they earn a high upfront commission.
 
Many other IFAs support this “trail only” model by Franklin Templeton MF. In a discussion forum on wealthforumezine.net many IFAs have voiced their opinion on the “trail only” commission model. Vikas Gupta, a distributor from Rohtak says, “I am of the firm opinion that upfront brokerage must be banned in MF industry to curb all types of mis-selling and trail commissions might be increased accordingly to boost ethical selling.”
 
Another IFA from Mumbai, H Manohar Shenoy, says “Trail model is the best method, as one is required to sell the right product in a right way. This will enable an investor to remain invested longer. It is in the interest of IFAs and the mutual fund Industry. Upfront commission, as we all know, encourages bad practices.”
 
For retail investors as well, this would be beneficial as distributors will not be lured to offer them schemes having a high upfront commission and/or ask them to churn their mutual fund portfolio on a regular basis. Moneylife has written several times in the past on this unscrupulous practice. Recently we saw certain fund houses paying an upfront commission as high a 6% to distributors for their RGESS (Rajiv Gandhi Equity Savings Scheme) eligible mutual fund schemes.. Hence, to earn a higher income, distributors would naturally pitch the schemes. These schemes saw applications as high as Rs10 lakh coming in from HNI clients. (Read: High value applications perverting RGESS, while SEBI remains mum)
 
We had earlier reported on how fund houses were paying upfront commissions for ELSS (Equity Linked Saving Schemes) and other schemes to garner assets. (Read: Upfront commission being granted for ELSS schemes and MIPs become attractive for distributors due to upfront commissions) Upfront commission as high as 3% was being paid for ELSSs and 1%-1.5% in the case of MIPs (Monthly income Plans). 
 
Banks have also been accused of excessive churning of client portfolios. We had highlighted this in November 2010, (Read: Now, banks blamed for continuous equity mutual fund outflows!) where banks were excessively churning mutual fund portfolios to earn commissions. But even then neither the fund companies nor the regulator seemed concerned.
 
Why don’t large distributors support the ban on upfront commissions?
Fund houses usually pay 0.70 to 6.5% as upfront commission to distributors to push their equity schemes. This is an additional amount of money which AMCs pay from their own pockets to distributors. Apart from this fund companies pay a trail commission as well which ranges from 0.4% to 0.6%. This huge difference in commissions makes larger distributors resort to excessive churning in order to earn higher in the form of upfront commissions.
 
According to Mr Rao in his letter, “Trail only model benefits investors and small distributors whose assets are known to be for a longer term. Influential distributors get a far higher upfront commission than what a small distributor gets and hence, this is one of the main reasons for not doing away with upfront commissions.”
 
Supporting this fact, Subhash Chander, a distributor from Rohtak in a discussion forum on wealthforumezine.net says, “National distributors get lot more than IFAs as upfront brokerage, contests, overseas trips, gold, movie tickets, pizza parties & more trail while IFAs have to be satisfied with lesser trails second year onwards.”
 
Mr Rao also mentions that top fund houses which can afford to pay huge upfront commissions to promote their schemes may not go in for the “only trail” model and increase the trail commissions, as paying of trail commissions would reduce the profitability of the fund house. Also, there is lack of transparency in the upfront commissions paid to distributors. Therefore, some unscrupulous elements would use this to their benefit. “Trail commission is well published and transparent; hence, the scope for such manipulations is almost nil and is not a very profitable option for such unscrupulous elements,” says Mr Rao.
 
Even KN Vaidyanathan, an executive director of SEBI, in an exclusive interview to Moneylife in May 2010, on the ban on upfront commission in the form of entry load, spoke about the benefit of a trail only model saying, “People confuse between upfront and trail. Business models based on upfront will die. Irrespective of how the dispute between ULIPs versus 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” (Read: “Upfront commissions were making everybody think short-term. They will think long-term now”) 
 

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COMMENTS

Nilesh KAMERKAR

4 years ago

One of the distributors has written (an email). He has urged other fellow distributors to comment in favour of only trail model.

Fixing seems to be the flavour of the season ...

kolliparabharatkumar

4 years ago

Upfront commissions are root cause of almost all the ills of the Mutual Fund industry and I have no doubt that as long as there are upfront commissions honest/small distributors and investors will be at a dis-advantage and the industry can not inspire the kind of trust required for mass participation of investors. Hence I request the regulator to Ban upfront commissions.
Trail only model should be encouraged to give a stable & reliable income for distributors so as to increase their confidence about their livelihood. Once the industry can instill that confidence number of active distributors will increase (from the current 5000-10000) which in turn helps the growth of the industry.

Vikas Gupta

4 years ago

A very god article from IFAs, Investors & Ethical selling point of view. Upfront commission must be totally banned to curb maximum types of misselling.

Ramakrishna K

4 years ago

I agree to the Trail only model Where regular stream of income flows. The upfront keeps us always on the race and prompts us for ill / wrong practices, as the big institutions are following. As commented by few its the regulator which needs to choose the way it wants, to curb the churning, take care of the distributors / retain them and healthy growth of mutual funds promotion.

MUPPURI SUBRAHMANYM

4 years ago

Whoever entering the Mutual Fund industry as a distributor fully understands that it will be impossible to survive distributing only mutual funds in the initial phases and it becomes compulsory that we distribute other financial products like Health, Motor, life insurance etc., to survive the initial phase. So, it becomes a question of how quickly we new distributors break even in this business (meeting expenses-both family and business)and turn it profitable.



I have started my business in upfront model about Two years ago and I am still not breaking even because of the low commissions from the second year on wards. Had it been a Trail only model we can reach break even point in about 3 years. But with upfront model the break even point will be after 5 years only and that too is dependent on the regulator as he may cancel all commissions if irritated by churning that happens due to upfront commissions.



Moreover, if monthly lower income(in trail only model) is an issue then having no income at all due to claw back for months together(due to claw back, many distributors are getting zero brokerages/negative brokerages) is even worse. Upfront commissions take certainty out of our income streams and don’t let us plan our own finances in a proper manner.As long as upfront commissions are there small distributors/honest distributors will be paid low Trail commissions, hence I request the regulator to ban upfront commissions and encourage honesty.

DB DESAI

4 years ago

I am in favour of upfront plus trail model. The problems generated out of higher upfront should be dealt with some other innovative measures rather than banning upfront and depriving of the small distributor from getting his rightful remuneration for introducing a new investor or new investment to mutual funds. There is definitely a case for upfront commission. Do we have a doctor who takes money only after the patient is cured? Any advocate taking fees only when the case is settled and the client wins? Any builder, architect, travel company, school, tutuion class, magazine subscription takes money only after buying their product or service and only when the customer is satisfied? You are satisfied or not there is some cost involved before manufacturing or providing the service which should be recouped? And in all cases of any product or services the end user has to pay. Does the Govt. collects tax after providing the civic amenities from the citizens? Whatever is offered free is said to be dangerous by experts. Why only mutual fund distributors are singled out to work for free and wait for their dues. What if there is subsequent switch, change of broker, redemptions, change of rules, end of mutual fund industry or anything unknown comes into existence? Who will then pay the distributor? This idea is coming only because nobody is able to think of any other way of curbing the malpractices. I am fully in support of eliminating such bad practices from the industry but not at the cost of the small retail individual distributor and more so for those who are working in remote area where noboday has dreamt of reaching. Commission is not extracted from the AMCs by the distributors. Big distributors are paid by AMCs then action should be there against such AMCs and not against the distributors. There should not be any relation of industry growth at the cost quality of growth. I hope someone will see the issue in right perspective and put forth the arguments.

REPLY

DEEPAK KHEMANI

In Reply to DB DESAI 4 years ago

Very well said fully support your arguments/points raised by you.

Thomas Verghese

4 years ago

Trail commissions would help in minimizing the churning of Portfolios. It would also help the investor as the Distributor would give honest advice instead of being tempted by additional upfront commissions each time a change in portfolio happens.

Rajiv Jhaveri

4 years ago

Churning is done only to get higher payout of First year. It is beneficial only if higher payout is paid in first year. These activity can traced easily by calculating life of assets of all distributors. Amount is redeemed after one year & then invested in other scheme to earn one more higher payout of first year. Automatically life of assets of those distributors(churners) will be low. Even in the only trail structure shown above churning is beneficial in B-15 areas, as they are offered 2.6% in first year & later on 1%. So the only best solution is uniform rate for all years. It is the need of the hour to implement uniform rate of commission for all years not only in MF industry but also in Insurance products.

T KUMARA SWAMY

4 years ago

It is obvious that the kind of obscene upfront commissions that are paid to some big distributors are not sustainable especially when one considers the fact that some of these distributors may be churners too.
To pay these high upfront commissions for these un-scrupulous elements, small / honest distributors are being short changed. This un-ethical practice will stop only when upfront commissions are banned. Request the regulator to ban upfront commissions to remove the corruption associated with the industry once and for all.

Suiketu Shah

4 years ago

The mutual funds industry rules,regulations,etc are so so anti-customer that it is best to stay away from this product.Invest in govt bank FD's or shares as suggested by moneylife only.(not anyone else)

It is basically these fraud and cheat wealth management companies like HDFC Bank Investment banking division in Lower Parel(headed by sodapop Parimal Shah),etc who have ruined the mutual fund market and any remedial actions at this stage is too little too late.

ashok sen

4 years ago

I just dont understand the distributors.
They exist because the client is there.Just because most clients understand little of the commission bit,does not mean the distributors take them for a ride.
Dont the distributors understand that following the trailing commission method, will make the customer earn better returns,as the distributor will not simply make him invest in a fund and run away,having earned his commisssion.
If the customer gets good returns,he will invest more,and inform others to do so.

Vaibhav Dhoka

4 years ago

It is AMC oriented payouts.Those with bank connection give upfront and therefore churning is high in such cases.

DEEPAK KHEMANI

4 years ago

There is really no real solution to this problem.
All distributors/advisors are not the same, some may have just started some may be in this Business for many years, it differs for a newcomer something in the hand upfront after spending time and effort will be worthwhile for others asset stickiness may be fine, I think all MF's should have a twin model in which the Advisor decides what is OK for him and then takes it forward.
For large distributors and Banks it is a different story altogether.

Nilesh KAMERKAR

4 years ago

Disagree.

How long can new entrants survive with an only trail model? ( Only trail will be one more entry barrier )

Will fund houses apply the same logic to remunerate their fund managers & other key personnel too?

How many of us will be willing to accept such an arrangement for our own selves? (sweating already at just the thought of it...)

R Balakrishnan

4 years ago

Very valid observations. Even as an AMC, one has to fall in line. Change has to start from the big boys- HDFC, RIL, Templeton, Reliance etc. If they move to full trail, others will.

US immigration bill would disrupt the Indian IT business model
According to Nomura, the US immigration bill, if passed, would place the Indian IT business model at competitive disadvantage compared with MNCs and depress margins irrevocably
 
The overriding factor in the information technology (IT) sector currently remains the overhang due to the US immigration bill, which has damaging provisions for Indian IT. These provisions have the potential to flatten sector earnings over FY13-16F or take them to negative territory as well in certain cases if one of the clauses related to outplacement debarment of H1B employees passes, says Nomura in a research paper.
 
This is a bipartisan bill (backed by four Democrat and four Republican senators) and was tabled in the US Senate recently. The bill focuses on comprehensive immigration reform encompassing a wide range of issues like border security, immigrant/non-immigrant visas, and citizenship paths for illegal immigrants and employment verification. The bigger pieces of the bill are focused on what happens to the 11 million illegal immigrants in the US, while H-1B reform is a smaller part of the bill, although more relevant from an Indian IT perspective.
 
According to Nomura, there are four key proposals in the bill that are most damaging for Indian IT companies. These are outplacement debarment of H1-B workers at client sites, increase in visa fees, increase in local proportions to 50% by 2016 and increase in H1B mandated salary levels. 
 
Outplacement debarment of H-1B resources on client sites by H-1B-dependent 
employers 
According to the bill, “an H-1B-dependent employer may not place, outsource, lease, or otherwise contract for the services or placement of an H-1B non-immigrant employee”. 
 
Nomura says, this means that employees on H-1B visas will be restricted from working at the customer sites, although they can work from global delivery centres. Since all Indian IT companies are classified as H-1B-dependent employers, this provision would restrict them from placing their staff on H-1B visas (work visas) at customer sites. H-1B dependent employers are those companies, which have at least 15% of their US staff on H-1B visas. 
 
Typically, Indian IT companies place people onsite for interfacing with clients, coordinating with the offshore teams and for critical development/support related work at client sites. Majority of IT services staff in the US are typically posted at customer sites. Therefore, the debarment provision would disrupt this arrangement and would mandate placing only local employees at client sites. 
 
“We believe it is difficult to quantify the impact of the severest of all provisions in the US immigration bill, which is ‘Debarment of outplacement of H-1B employees at customer sites’, as it will hit existing business, existing margins, business models and future growth. This provision will impact all tier-1 IT companies severely if passed in its current form. TCS could have lower disruption initially as it has historically been more dependent on L1 visas (company transfers), compared to peers who have been more H-1B dependent, but nevertheless the troubles would be industry-wide,” Nomura said.
 
Increase in visa fees 
If a company has between 30-50% of its US staff on H-1B or L1 visas, the bill proposes to charge $5,000 extra for additional people above the 30% norm. If, on the other hand, a company has more than 50% of its US staff on H-1B or L1 visas, the bill proposes to charge $10,000 extra for every additional person above the 50% norm. 
 
Local headcount proportions of 50% by 2016 
The bill mandates that companies should have at least 25% of staff as locals by 2014, 35% by 2015 and 50% by 2016. If these conditions are not met, the companies would not be able to apply for further visas (H-1B and L1). 
 
Increase in H-1B mandated salaries 
Currently, H-1B visa salaries are mandated by USCIS, depending on the geographical area, skill or experience level that a person has, with which companies need to comply with by paying at least the same or higher salaries. What the bill proposes to do is to increase mandated salaries for H-1B visa holders, given the view held by the framers of this bill that H-1B visas are being used by Indian IT companies to undercut American employees. The quantum of the increase to the mandated salaries has not been mentioned.
 

“We expect 150-400 basis point impact on margins for tier-1 IT companies on account of three of the four provisions (ie, excluding the outplacement debarment of H1B clause). This essentially has the potential to flatten sector earnings with a reduction in earnings per share (EPS) compounded annual growth rates (CAGRs) by 4-9% across companies under various scenarios. Though some of the cost escalation could be passed to clients, we believe the impact is still likely to be substantial. The impact is likely to be severest for TCS and Cognizant Technology Solutions Corp, followed by Infosys, Wipro and HCL Technologies,” said Nomura. 

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COMMENTS

Kiran R Bhagwat

4 years ago

I don't think it will be easy for the US to meet the objective of increasing local employment for the following reasons:
1. The talent availability in the US is a major problem. Even with the Indian companies placing their people on site, there are thousands of positions open in large IT companies in the US even today! The problem would be worse after restrictions are put in place!
2. The pressure on off-shoring the work will increase - and that may in fact indirectly benefit the Indian companies and take even more work away from the US!
3. There will be some shifting of local workforce across IT services companies and also movement of people on H1 back to India in order to get the balance right. This may mean that the increase in new employment will not be to the extent the numbers suggest!

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