Charges fund companies with launching too many schemes but having very little connect with investors
Securities and Exchange Board of India (SEBI) chairman CB Bhave has spoken on why the mutual fund industry finds itself in its current mess. Speaking at the CII Mutual Fund Summit yesterday, he said, "The rationale of this industry as professional fund managers and aggregators of savings is to provide better returns through expertise and cost reduction. So why is it that we have difficulty in convincing investors that they can get better returns? Is something lacking in our delivery? Unless this fundamental issue is addressed, we cannot move forward.
Unless it is carried through to the investors with all the conviction that it is in their interest, they will not come. We need to focus on why is it that the communication is not going through and where do we have difficulty in communicating."
Mr Bhave also highlighted that various incentive structures in place in different institutions are posing a lot of problems for the industry. "Such incentive structures tend to drive institutions away from addressing customers' needs. This focus on short-term incentives ultimately results in a loss to investors."
He also pointed out the frivolity in launching a slew of products in the name of innovation. "Between the few mutual fund companies in the country, we have a few thousand schemes. I have no idea which scheme is good for me. Are these schemes really so different from each other? How much innovation is real and how much is driven by the tendency to look at short-term benefit?"
About 60% of schemes in the market today are suboptimal, pointed out Mr Bhave. "Investments in such schemes will not allow you to justify your claim that you are giving the benefit of aggregation of savings. The basic argument of why this industry exists is that we are able to aggregate savings on such a large scale that our costs of operating the portfolios are much less than what the individual's cost will be. And if that is not right, then who are we serving? Unless we ask these questions to ourselves, we will not find the right answers for long-term growth."
In a rare outburst, heads of various mutual funds express displeasure with the regulator at an industry summit; also admit that rethinking is required about their own business
Five days after the law ministry and finance ministry took the wind out of the sails of the Securities and Exchange Board of India (SEBI) on the issue of regulating Unit-linked Insurance Plans (ULIPs), the heads of mutual funds have probably started seeing their regulator in a different light and are emboldened to call a spade a spade. While the mutual fund industry has been limping over rocky terrain after the slew of regulatory changes introduced in July last year, fund companies were conspicuous by their silence on the extent of the impact felt by the industry.
However, during a summit discussion on challenges being faced by the industry yesterday, the chiefs of various asset management companies (AMCs) openly admitted to weakness in the industry's functioning and put the blame squarely on market regulator SEBI.
HN Sinor, CEO of AMFI (Association of Mutual Funds in India) set the tone by admitting that the industry has lost momentum post the changes. The newly elected chief of AMFI pointed out that there is a need for policy rework for the industry and that a roadmap should be drawn for the next five years to set things in order.
Speaking about the entry load ban and other initiatives taken by SEBI since last August, Mr Sinor said, "Commission payouts are an integral part of this industry.
A fresh review is needed in this regard. Such attempts (at regulatory change) could disturb the industry." Mr Sinor also suggested setting up of an ombudsman for the industry. The CEO's Interactive Roundtable at the CII Mutual Fund Summit 2010 that followed witnessed an even more frank discussion about the mess that the industry currently finds itself in.
UK Sinha, chairman and managing director of UTI Asset Management Co Ltd, commented that the mutual fund industry is becoming a 'shock absorber', what with all the changes being brought upon it. "The de-growth in assets under management is a worrying issue. The environment is not at all conducive or friendly," admitted Mr Sinha.
Ashu Suyash, managing director and country head, FIL Fund Management Pvt Ltd, pointed out that the industry players should have been given a reasonable time to adjust to the regulatory changes. "It has had a negative medium-term impact on the industry. The focus of AMCs has now changed from growth to survival," she said.
Sandeep Sikka, CEO of Reliance Capital Asset Management Ltd, was also critical of the developments in the industry. Commenting on the regulatory involvement post the financial crisis, he said, "We have now moved from the point of less regulation to over-regulation in the industry."
Vivek Kudva, managing director, Franklin Templeton Asset Management India Pvt Ltd, pointed out that mutual fund products are sold, not bought. "The financial crisis has shown us that there is a role for advisors." Asking customers to cut a separate cheque as commission to the advisor is an inhibitor for this industry, said Mr Kudva. He pointed out that people do not do the same while buying electronic goods-a cheque is not made out to the manufacturer and dealer separately.
Not all brickbats were directed at the regulator, though. There were rare moments of introspection too. Mr Sikka, while addressing the issue of product innovation, made it clear that there is actually a need for the industry to be simple, instead of innovative. "The industry has innovated itself beyond its own understanding," he quipped. This is a rare admission. In the 2005-2008 period, AMCs were manufacturing and hard-selling mutual funds as if these were variants of soaps and shampoos. Distributors were offered lucrative incentives to sell new funds who in turn encouraged gullible investors to switch from existing units to new ones, deceiving them with the argument that the new units were cheaper because these were priced at Rs10. This glaring mis-selling is not talked of anymore but is one of the principal reasons for the poor fund performance and therefore the consequent disillusionment of retail investors with funds. It is quite intriguing to see CEOs of fund companies raising the issue of simplicity after having foisted complexity all these years.
Maharashtra Electricity Regulatory Commission (MERC) is the nodal body for regulations in the power sector in the State. MERC chairman VP Raja speaks to Moneylife’s Amritha Pillay on the key issues that the State faces on the electricity front
Amritha Pillay (ML): Industries in Maharashtra are currently not allowed to trade on the power exchange. By when can we see a change in this? Wouldn't allowing industries to trade on the exchange help Maharashtra access more power at competitive rates?
VP Raja (VP): What you are saying is true; one can say there is reluctance on the part of MAHADISCOM (Maharashtra State Electricity Distribution Co Ltd) to allow open access. But the law clearly provides a provision for open access. The reluctance perhaps comes from the fact that MAHADISCOM has a lot of social responsibility and there is a huge amount of cross-subsidy, which is a historical legacy of taking power to agriculture and residential customers at lower rates. The law mandates that we have to progressively bring down subsidies. Historical realities cannot be written off overnight. We are trying to bring down the subsidies.
However, open access has been allowed to certain people, who have pursued the case. There are industries that have appealed and got an approval. If someone comes to us with a petition, we will look into it.
ML: Given that MERC is aware of this issue, what steps are being taken to solve the problem?
VP: Yes, there is a provision for open access; people are welcome on that front. We agree that there are certain issues; we are looking into it to try to expedite the open access process for people with 1 megawatt (MW) or more power. We have tasked ICRA to find out at the generic level what can be done. The law is clear-it is a question on how to transform the law into reality.
ML: Isn't a change in the cross-subsidy (which is zero at present) another alternative that can be considered? Aren't certain modifications planned in the policy?
VP: The cross-subsidy has been kept at zero, because there is a shortage of power, so any additional power that comes in is welcome and we would like to encourage more power coming into the State. There is a good logic supporting the zero surcharges. However, certain representations have been made to us to revisit this matter.
ML: What is your view on the current power shortage situation in the State?
VP: Today, the State is facing a power shortage because the investments that ought to have taken place in the public sector did not take place. These investments went wrong from around ten years back-with the start of the Enron episode. There was hype that with the private sector taking up the power-generation task, public sector investments could be directed towards social issues like rural development, health, education, social welfare, etc. Both the Centre-through the National Thermal Power Corporation (NTPC) and MAHAGENCO (Maharashtra State Power Generation Co), failed to undertake investments that were required. The effect of these mistakes is now being experienced ten years down the line. But now having learnt that lesson, investments are taking place in the public sector also, in addition to the private sector.
ML: What changes do you expect in the State's power situation in the next three to five years?
VP: Today we have the national grid. Electricity can flow from one place to the other. In the 11th Five Year Plan the target is to generate more than 78,000MW ofpower. The country may end up with more than 55,000MW or 60,000MW. In the 12th Five Year Plan, the target is to have around 1 lakh MW of generation, around 60% of this is expected to come from private generation.
In Maharashtra, private sector plants are coming up. There is one by JSW Energy in Ratnagiri, which is on schedule. There are power plants by Adani Power coming up at Gondia district. The company has managed coal linkages for this project. Indiabulls Power Ltd plans to put up facilities at Nashik and Amravati. These are the three major private players. All these will certainly have some power purchase agreements signed with Maharashtra. In the next year, Adani's two power units will be ready (660MW each); the first unit will come up really soon.
ML: What about the public sector power generation plans in Maharashtra?
VP: On the public sector side again, there are a lot of generation capacities planned. NTPC has put up a power plant in Solapur, for instance. MAHAGENCO is putting up new generation units at its existing power plants.
ML: According to you, when is Maharashtra likely to turn self-sufficient in its power requirements?
VP: For the State to become power sufficient, there are enough projects on the table at present, but the original ground-level issues like land acquisitions are a concern. Everybody wants power, but nobody wants a power plant in their backyard. These kinds of contradictions exist. You cannot put up a power plant without land. There are a lot of projects on the shelf, but how many of them fructify (is to be seen).
ML: The Central Electricity Act (2003) favours competition. However, MERC is currently caught in the crossfire between two competitive utilities-RInfra and Tata Power. What seems to be the way forward to encourage competition in the consumer interest? Is there lack of clarity in the process and rules involved?
VP: That (competition) is natural; the sector is turning really dynamic. But there is now a choice given to customers. They can now choose amongst utilities. Competition is good, because it gives choice to customers. With the power to choose, all competing providers will have to look inwards (as to) what is the cheapest method of procuring power.
ML: Then, don't you think State intervention could be something which is uncalled for?
VP: No, I don't think that (State intervention) is killing competition. The State has certain social responsibilities. It cannot be a silent spectator. A distinction needs to be drawn between electricity as a necessity and as a commodity.
ML: What is your view on this whole power fight?
VP: This whole thing is happening because of the following issue-the fact that tariff is dependent on two important factors, the power purchase cost and the consumer mix, both are different for the three utilities in question. At the end it is the consumer's choice. Once somebody starts losing customers, they start looking for cheaper power. There are various options available for procuring cheaper power. The transition from a monopoly to a duopoly is what has taken place. We will be quite happy to have many more (players).
ML: What kind of thrust has been given for renewable energy sources?
VP: A considerable amount is expected to come up in renewables, where Maharashtra is doing really well. After Tamil Nadu, Maharashtra has the highest investments in renewable energy. We do expect some generation from bagasse from sugar factories. We have given fairly attractive tariffs, so investments have taken place in a number of sugar factories on a co-generation basis. It is a similar case with biomass. On the solar power side, 1MW has already come up. There are a large number of such projects in the pipeline. However, solar energy projects will take some time to stabilise.