The proposed fee (Rs100-Rs150 on investments above Rs10,000) might be too little to help agents—who find peddling ULIPs more lucrative
The Securities and Exchange Board of India (SEBI) plans to impose a transaction fee of Rs100-Rs150 on investments above Rs10,000 in mutual funds to incentivise brokers to sell schemes to investors. This transaction fee is another form of entry load which was banned by the earlier SEBI chief CB Bhave in August 2009. Since then there has been an exodus of nearly Rs20,000 crore from equity funds and a decline of nearly 22 lakh equity-oriented mutual fund accounts.
But could the ban on entry load be a major cause of such a huge outflow? For sure, there have been other factors which led investors to exit from participating in the market. Among some of the other factors that deter retail investors from putting money in the markets are the unexplained volatility in the market, manipulation of IPOs (initial public offerings), poor performance of 40% of funds, several counts of mis-selling, lethargic complaint redressal and lack of financial awareness.
A majority of the population, therefore, finds it safer to keep cash lying in savings accounts or fixed deposits. In 1990-91, 32% of household savings was invested in bank deposits. Now that figure has climbed to 51%.
The regulator has failed to look into the other factors for poor retail participation. Without adequate research, survey or discussions with investors, is SEBI making the same mistake all over again?
The entry load for mutual funds was banned in order to make it fairer. "The investor is more important to the market than the distributor," said Mr Bhave at the announcement of the ban on entry loads. This decision never went down well with the fund industry. Distributors found fund-selling unviable and have been moving out of the business. The penetration of mutual funds is so poor that brokers had little incentive to sell mutual funds. The zero entry load was not motivating enough either for the investor to go in for mutual funds on their own.
SEBI chairman UK Sinha said that the transaction fee paid to distributors would help mutual funds penetrate the retail segment in smaller towns. But would it benefit agents, who, after the ban on entry load, opted for selling products like ULIPs (unit-linked insurance plans) which earned themselves higher commissions? The commission earned on ULIPs is still much higher than the measly Rs100, so will agents actively push mutual funds to customers? Investment in ULIPs start at around Rs10,000, therefore a customer having the finance would be pushed by the agent to go for a ULIP where "he will get a life insurance benefit as well".
This would earn the agent a higher commission and would defeat the purpose of the transaction fee planned to be introduced by the SEBI chief.
What about agents who don't sell ULIPs? During the time of entry load, there were numerous cases of distributor's hard selling mutual funds to hapless investors. The transaction fee may lead to the same practice distributors were following earlier.
The other changes SEBI has proposed-like simplifying the IPO form and providing a new format for opening a trading account that will require the investor to make only a single signature compared to the 50-odd signatures earlier, will allow investors to participate with ease. However, SEBI has overlooked the main problem of getting investors to participate in the market.
Market regulator wants funds to give investors reliable and more information about available schemes, performance and investments. Introduces due diligence for distributors, agents
Mumbai: The Securities and Exchange Board of India (SEBI) has asked mutual funds to bring in more transparency in their dealings with investors and agents, while allowing them to charge a fresh transaction fee.
At a board meeting on Thursday, the market regulator heeded the long-pending request of mutual funds to help them contain the losses suffered due to the abolition of entry charge on investors.
SEBI also allowed them to manage and advise pooled assets, such as offshore funds and pension funds, provided there was no conflict of interest due to a differential fee structure.
However, the regulator asked the industry to become more transparent in the information given to investors through advertisements and other channels, PTI reports.
"Guidelines for advertisements will be suitably modified to include point-to-point return on a standard investment of Rs10,000 and other performance-related disclosures."
Besides, mutual funds would be required to give more granular disclosure of their assets under management (AUM) figures, giving the break-up of debt/equity/balanced and also geography-wise disclosures.
"The scheme's performance will have to be disclosed against the Sensex or Nifty, or Government of India debt paper, in addition to benchmark of the scheme. The performance of fund managers across all schemes managed by the same fund manager will have to be disclosed," SEBI said.
SEBI also took the first steps towards regulating mutual fund distributors or agents. "Selected distributors will be regulated through asset management companies (AMCs) by putting in place the due diligence process to be conducted by AMCs," it said.
The due diligence process will be initially applicable for those distributors having multiple-point presence in more than 20 locations, having raised assets of over Rs100 crore across the industry from non-institutional investors and high networth individuals (HNIs).
The distributors, having received the commission of over Rs1 crore per annum across industry, and of over Rs50 lakh from a single mutual fund, would also be covered in the initial phase. "It is estimated that this measure will cover distributors handling about half of the total AUM in the industry," SEBI said.
It also asked mutual funds to disclose the commissions paid to distributors and said that the mutual fund industry body AMFI would disclose the aggregate amount of commissions paid to such distributors by the industry.
SEBI said all operations of a mutual fund would be required to be located in India. "All the operations of a mutual fund, including trading desks, unit holder servicing, and investment operations shall be based in India."
"Mutual funds having any of their operations abroad, will be required to immediately confirm that they shall wind up the same and bring them onshore within a period of one year from the notification of amending the regulations. The period is extendable by another one year on SEBI's discretion," it said.
In another move that should be helpful to investors, SEBI said one common account statement would be dispatched every month for investors who have transacted in any of his/her folios across the mutual funds.
"The statement shall also contain the disclosure related to the transaction charge paid to the distributor. One common account statement will be dispatched to the investor every half-year for all non-transacted folios." And in an initiative to reduce the use of paper, the regulator advised that unit holders, who have registered emails, would be sent the annual reports by email.
Activists are urging the PM to immediately stop the UID or Aadhaar number scheme due to invasion and misuse of privacy, saying that it is against the Constitution. They want the funds diverted towards more productive projects
Already under heavy criticism, the UID (Unique Identification Number), or Aadhaar as it is called now, has more flak coming its way. Human rights activists, led by advocate and activist Kamayani Bali Mahabal, have started petitioning Prime Minister Dr Manmohan Singh against Aadhaar, since they believe it is a gross violation of individual privacy. Their petition states that collection of highly sensitive personal data of the population without following Parliamentary procedure is unacceptable and outright violation of Article (21) of the Constitution. (No person shall be deprived of his life or personal liberty except according to procedure established by law).
Ms Mahabal, who is petitioning online and creating awareness about this issue told Moneylife, "Parliament has not yet approved the project. The UIDAI (Unique Identification Authority of India) has no authority to collect sensitive data and what they are doing is actually without the authority of law. There is no protocol for data protection that has been built into the law yet."
Rejecting the Aadhaar scheme completely, activists are appealing to the government to shut it down with immediate effect and divert the allocated humongous funds towards productive and needful projects.
They are arguing that the State cannot pass a law that allows invasion of privacy of its citizens. Article 13(2) supports this, "The State shall not make any law which takes away or abridges the rights conferred by this Part and any law made in contravention of this clause shall, to the extent of the contravention, be void."
The data collected and information stored in the card can lead to misuse at unimaginable levels, serving purposes exceeding its original intent. They believe it can be used to profile citizens in a country and initiate a process of racial/ethnic cleansing, on the lines of the genocide in Rwanda in 1995. Ms Mahabal argues, "Privacy law is still being made, and till it is in place, the UIDAI should not be doing what it is, and it certainly cannot be allowed to share information as it proposes to do under the 'information consent' clause in its form."
Although, the Constitution doesn't explicitly specify privacy rights, the Apex Court of India said in a landmark judgement (Unni Krishnan, J.P & Ors. Etc., versus State of Andhra Pradesh & Ors,) on 4 February 1993, had ruled that "This Court has held that several un-enumerated rights fall within Article (21) since personal liberty is of widest amplitude."
Introduced in the 1930s in the USA, as a way to track individuals for taxation purposes, Social Security numbers were never designed to be used for authentication—moreover, these cards don't carry biometric data. Over time, however, private and public institutions began keeping tabs on consumers using these numbers, requiring people to present them as proof of identity, such as when applying for loans, fresh employment, or health insurance. The Aadhaar whitepaper itself says, "Since it is likely that increasingly the UID will be used by several service providers (government agencies, private institutions and NGOs), it is important for a resident to be able to remember it in the absence of a token such as a card."
Condemning the wasteful expenditure spent on Aadhaar, activists are saying, "We do not want our tax money to be spent on building trade infrastructure for the undue benefit of domestic or foreign corporations taking away the bargaining power of customers." There is no reason to disbelieve that the centralised database of citizens could be misused to profile citizens in undesirable and dangerous ways.
The US, UK and Australia have shelved their proposed public ID cards after public protests. Even China withdrew the clause to have biometric data stored in its cards. A London School of Economics report has noted that "Identity systems may create a range of new and unforeseen problems. These include the failure of systems, unforeseen financial costs, increased security threats and unacceptable imposition on citizens."
Ms Mahabal concludes, "The possession of a UID can at best serve only as proof of a "unique and singular" identity and does not guarantee either citizenship or benefits. This being the case, it is strange that this scheme is touted as a step for good governance."