The market regulator’s meeting with banks to discuss strategies to boost volumes on online MF platforms has failed to achieve a breakthrough
As it stands now, the market watchdog's pitch to the bankers for using their distribution network to boost sales on the struggling mutual fund platforms on the stock exchanges has failed to elicit a healthy response from the banking community.
The Securities and Exchange Board of India (SEBI), in its high-level meeting with bank sponsored AMCs (asset management companies) and their respective retail banking heads, made a passionate case for tapping the banks' existing infrastructure and consumer reach to boost volumes on the Bombay Stock Exchange's (BSE) StAR MF platform and National Stock Exchange's (NSE) NEAT Mutual Fund Service System (MFSS). However, this meeting, which lasted for more than an hour, has not gone the way of the regulator.
The meeting was attended by senior officials from both the stock exchanges, namely, NSE's deputy MD Chitra Ramakrishna and BSE's deputy CEO Ashish Chauhan. The banking community was also represented by some banks like Union Bank of India, State Bank of India, HSBC, Canara Bank and others. Surprisingly, however, a lot of senior level management from the banks and AMCs were not present for the meeting, despite SEBI's push for a high-level participation.
In the meeting, SEBI tried to persuade the participants to take the stock market route to funds by asking them to look at the long-term opportunity for the mutual fund industry, one which has seen an unfortunate reversal in fortunes since the regulator's controversial alterations in the structure of the industry. Pitching the stock market route as an attractive option, SEBI argued that since most of the KYC (know your customer) procedures were already done, there would be no further need for it.
Sources have revealed to Moneylife that most bank AMCs listened patiently but kept quiet throughout. An official representing one of the banks argued that if banks were to accept applications and process them (currently being handled by the registrar and transfer agents CAMS and Karvy), it would entail extra responsibility upon the bankers while offering little opportunity for remuneration.
One of the participating bankers told Moneylife that the meeting ended like any other called by SEBI in the recent past, adding that no breakthrough was achieved. Surprisingly, none of the stock brokers who actually use the NSE and BSE systems were present for the meeting. A source within the industry confided to us, "It is like asking road builders to drive on the road and not the car-owners for whom it is actually meant."
Moneylife had earlier written (http://www.moneylife.in/article/81/5841.html) how this plan to enlist banks to help boost sales of mutual fund schemes is unlikely to work. And so far it has not.
Distributors are keen to push MIPs due to upfront commissions offered by fund houses and the investor’s appetite for regular income
After market watchdog Securities and Exchange Board of India (SEBI) cracked down on upfront commissions, mutual funds (MFs) have started pushing monthly income plans (MIPs). Income funds recorded a huge Rs1.77 lakh crore of inflows in the month of April 2010 while equity schemes saw an outflow of Rs1,333 crore.
MIPs guarantee a regular flow of monthly income with minimal exposure towards equity. These schemes carry 1% exit load if redeemed before one year. These funds have 70%-90% exposure towards debt and 10%-30% in equity.
According to sources, fund houses are offering 1%-1.5% upfront commission under MIPs.
"There is an appetite for it. Since the equity markets have turned choppy there was a need for regular income products. There is a demand for such funds. So there is a pull factor. Commission is not an only factor. Even ELSS schemes offered as high as 2.50% commission but if you see the sale of ELSS schemes of all MFs it won't be more than Rs150 crore," said a top official from a leading fund house.
Fund houses were offering 2%-4% upfront commission under equity-linked saving schemes (ELSS). ELSS schemes usually have a lock-in period of three years. In the belief that an investor would stay invested in the fund for the entire period, fund houses were passing on the commission in advance.
Earlier, equity schemes offered 2.25% upfront commission and 0.25% was deducted as service tax.
Sources indicate that distributors are not offering any pass-backs to investors under MIPs. The reasoning is that there is no upfront commission granted now.
"Many distributors have sold MIPs from the last six to eight months very aggressively. Investors sometime compare MIPs to post office schemes but the returns can sometime be negative," said a Mumbai-based financial advisor.
The regulator had banned entry loads in August 2009. But fund houses had the leeway to offer commission from their own profit & loss accounts. SEBI in its circular dated 15 March 2010 had mandated fund houses not to deduct commissions from fund expenses. MIPs are currently allowed to charge a maximum of 2.5% as annual recurring expenses. AMCs were paying upfront commissions which included trail of either one to three years or after negotiating the terms with the distributor.
India Infoline had issued two different recommendations on Punj Lloyd to its clients on the same day
Have you ever come in contact with someone who advises you to buy and sell the same thing at the same time? No, then welcome to the world of Indian retail brokerages. One such brokerage, India Infoline, has come out with two different reports on Punj Lloyd Ltd on the same day but with opposite recommendations.
Both the reports, whose copies are with Moneylife, were published on 31 May 2010. In one report, India Infoline wanted institutional investors to 'sell' (which according to its recommendation structure meant, "Absolute-stock expected to fall by more than 10% over a 1-year horizon") shares of Punj Lloyd. It also gave a 12-month target price of Rs97 or 29% lower than the current trading price of Rs137 as on 28th May.
On the other hand, India Infoline's second report, issued on the same date and on the same company for its private client group recommended to 'buy' Punj Lloyd shares with a target price of Rs158 as against the closing price at the end of 28th May of Rs137. There was no time frame or limit mentioned for the target price in this report. According to India Infoline's recommendations parameters mentioned in this report, a 'buy' meant absolute return of over +10% (no time frame or limit mentioned).
For its private client group, the brokerage advised: "With a robust order book, the company is well covered for the next couple of years. The company does not have any legacy orders remaining to be executed and Punj Lloyd is shifting projects from Simon Carves to the parent entity. We expect the company's PBT to witness 74% CAGR over FY09-12E. We reduce our target price to Rs158 per share from Rs198 per share earlier to reflect concerns on extended period of non-billing its client and slow execution rate. However the recent correction in the price provides room for upside, hence we recommend high-risk investors to take exposure in the stock."
When contacted, Harshad Apte, India Infoline's vice president for corporate communications, said, "Both these reports are in fact, targeted and sent to two separate set of customers and also both these recommendations are for differing time horizons. One of the recommendations (IIFL Private Client Group) is for the retail clients and carries a shorter time horizon while the other one is meant for institutional clients and is for a longer time horizon."
There is no period mentioned in the report for the private client group. However, it is assumed that all brokerages use 12 months as standard period for target price.
So, the question still remains as to why the brokerage wants one group of its clients to sell and other to buy Punj Lloyd shares? Maybe the brokerage-and its clients-knew better.