Mumbai: Capital markets regulator Securities and Exchange Board of India (SEBI) on Friday cautioned against the “increasing incestuous relationship” that mutual fund (MF) players are developing with their rating agencies and called for maintaining an “arms-length relationship” with these agencies in larger interest.
“What worries me is the increasing incestuous relationship between the mutual fund players and their rating agencies. The MF industry has to evolve a policy to maintain am arms-length relationship with fund rating agencies,” SEBI executive director KN Vaidyanathan told reporters here.
“The fund rating as we see today are more relationship-based and not driven by the fundamentals of the product,” Mr Vaidyanathan, who looks after mutual funds at SEBI, said while addressing the India Investment Conference organised by the Chartered Financial Analyst (CFA) Institute and the Indian Institute of Securities Markets here.
“The least the industry can do is not to get their funds and rated corporate papers rated by the same agency,” he said and added that it is time that the industry came together and raised the bar for themselves.
He also urged fund managers to worry more about the NAV (net asset value) of their equity traded products and not their margins alone. “The excessive dependence on the window-dressing by the fund managers should end,” he said.
Pointing out that fund managers are increasingly doing more of self-serving functions, he said without properly protecting NAV, a fund manager cannot carry out his fiduciary functions properly and effectively.
Later speaking on the sidelines, he said SEBI prefers the entire industry follow “a brain-dead benchmark” like the Nifty or Sensex which some fund houses are already using. “I think seven or eight funds are already using the Nifty or the Sensex as a consistent benchmark, and we think this is a good thing. We hope the competitive pressure will drive everybody to adopt the idea.”
On whether there will be more regulations on the MF front, he said in time, the entire MF industry will be regulated by SEBI.
On the product regulation front, he said first the watchdog is trying to see if it can get some standardisation on the product before going into the selling side. “We are working on product labelling simplification and then (will) try to bring down the variables where there can be mis-selling. I think we are halfway there.”
He went on to add that, “what is a matter of concern to us is whether investors’ interest is being very badly compromised because of the skewed nature of incentive to the seller, the manufacturer or the relationship manager. It’s not specific to an individual product. If you were to get into mis-selling, you need to understand the incentive structure.”
When pointed out that the industry has of late been bleeding as it entered the new regulatory environment, he said, “I am satisfied that the changes have been accepted.
The industry has done an outstanding job in adapting to the new regulatory environment.”
He also said SEBI is satisfied that MF houses are consciously investing time, energy and resources in training sales force, in bringing distributors and are putting in place a technology framework that can help scale the business through the stock exchange platform. The results will happen with time.
“I think over the next one or two years, as savings increase, I believe that the MF industry will be very well- positioned in getting a larger allocation of savings,” he said.
He further explained that one should look at three numbers when it comes to MF performance—the NFO (new fund offer) inflows, existing scheme inflows and outflows.
Outflow is a function of multiple factors. That is not driven exclusively by the AMC or even the distributor. NFO is something SEBI does not want unless there is a good reason. In so far as inflows into existing schemes are concerned it has gone up from Rs4,000 crore to Rs5,500 crore per month, he explained.
“The decreasing number of portfolios is a wrong way of looking at it. The right way to look at it is the number of unique customers and our data says that there has been no change in that,” he concluded.
SEBI has stopped Rose Valley from accepting deposits, but it is just one of the several dubious conglomerates flourishing in the communist-ruled states of West Bengal and Tripura, thanks to a combination of financial illiteracy and political protection
It was more ubiquitous than Coca-Cola and Pepsi and could almost vie with the ruling party's logo. Over the past five years, if you looked at hoardings and watched TV channels, you could not have spent more than a few minutes without coming across the name Rose Valley. As sponsors of prime time news, at every major event and finally as the promoter of a brand new channel, Rose Valley was in your face. Now it has got into the national media for the wrong reasons. Suddenly this week, the market regulator Securities and Exchange Board of India (SEBI) clamped down on Rose Valley Real Estates and Construction Limited for raising funds from the public, without a registration certificate for 'collective investment schemes'.
But Rose Valley is just one. In the last couple of years, West Bengal has seen the emergence of quite a few chain-marketing companies and homegrown business conglomerates. Amazingly, these groups are all Bengali-owned, but they're hardly an example of Bengali entrepreneurship of any kind.
Among them, Rose Valley, Icore Group MPS Group and Saradha group are the most visible. They are all about a decade old and claim to be highly diversified conglomerates today. Collectively, chain-marketing schemes are whispered to have raised over Rs10,000 crores, mostly from lower-middle class people in West Bengal and Tripura, both communist-ruled states. With that money they have bought media space and acquired legitimacy. Rose Valley has been a big advertiser with Ananda Bazar Patrika (ABP) group. ABP has gone out of its way to promote them and celebrate their "entrepreneurship".
MPS Greenery Developers Limited, the flagship company of the MPS group, is based in Jhargram, and deals in agro-products and food processing. Rose Valley started as some kind of insurance and small-savings scheme, but it has now expanded into a long list of sectors such as hotels (Hotel Rose Valley), foods (Taste Me), amusement parks (at Agartala and Kolkata), resorts, media (Ruposhi Bangla, a Bengali entertainment channel, and News Time, a news channel) and garments (RV Fashions). Rose Valley's representatives claim that the company has 10,000 acres of land all over India, 14 regional offices, 500 branch offices, 5,000 employees, and so on. Rose Valley claims it is setting up many housing projects, hotels and hospitals. But its website is down since SEBI clamped down on its schemes.
Nobody knew exactly where the money was coming from for these companies, but everybody suspected that it was some kind of a pyramid marketing scheme, made infamous 30 years ago by the failed Sanchaita Investments. SEBI says, Rose Valley does not have the required registration and appears to be raising funds through collective investment scheme(CIS), by collecting money from people on the promise of land. As the SEBI order points out, Rose Valley's application was rejected in 2003, and the company was unable to produce the required documents about deals with customers.
The CID and state finance department officials had once raided Rose Valley's office in Tripura, but to everyone's surprise no arrests were made. Many people have attributed the outcome to the group's soy relations with the Left Front.
In internet complaints forums, many people have raised questions about the company's credibility and asked for financial details, which its representatives have ignored. Interestingly, one of the agents claimed that Rose Valley has all the required certificates, including a SEBI registration.
Under its 'Ashirvad' scheme, Rose Valley mobilised Rs1,207 crore by selling 508,792 plots, but handed over only 9,045 plots. While the company claims to have a land bank in several upcoming and industrial areas of West Bengal, the question is, how did they get access to all those vast stretches of land that are traditionally used for agriculture?
As Moneylife has reported earlier, Rose Valley Chain Marketing System Ltd, which is a corporate agent for LIC since 2002, has openly violated rules of the Insurance Regulatory and Development Authority. As for the company's insurance business, there is no answer to the question about who will be responsible to the investors if the company collapses. Their media connections have ensured that no details are leaked out about their goings-on. Rose Valley group is not rated by a credit rating agency either.
Let's look at the other 'big' company, MPS (Multi Purpose Scheme - the name is self explanatory). MPS's website features praises by several Left Front ministers for its Jhargram-based fisheries/hatcheries/piggery, etc. Among these government figures are land and land reforms minister Abdul Rezzak Mollah, environment minister Shailen Sarkar and food and civil supplies minister Paresh Adhikari. It also lists a number of certificates, some of them ISO certificates.
What it does not list is a SEBI certificate for any collective investment scheme. According to SEBI, the application of MPS Greenery Developers Private Limited was rejected in 2003 (simultaneously with that of Rose Valley) and a wind-up order was issued. As is apparent from their flourishing business and their 'impressive work in Jhargram' (courtesy Mr Mollah), they have carried on pretty well despite these hurdles. So here is a huge company, collecting money without SEBI registration, which the Left Front government is endorsing. The MPS project and plantation in Jhargram did not make any headlines, but the importance of the location cannot be overlooked. It is in the very heart of a Maoist-controlled stretch in West Bengal and adivasis claim it as their inheritance.
Now, the Icore group, whose source of funds is a mystery to onlookers, as is its meteoric rise. It has declared that it will invest Rs5,000 crore in a steel plant and a cement unit in Orissa. Even insiders are clueless about the source of the cash. Its website lists garments and jewellery, cement, e-services and steel as its businesses. Nobody is certain about the real status of these businesses. The key question that remains is where does the money come from?
The same goes for Rose Valley, whose resorts have bookings, but it's nothing phenomenal. And the media business is certainly losing money. Prayas, a newcomer in this area, is becoming increasingly prominent, with equally dubious resources.
Finally, there is the Saradha group, which is not seen to be a collective investment scheme but has seen a meteoric rise over the past decade. In just 12 years it has got into sectors such as cement, chemicals, wires and cables, snacks, wool and carpets. The group also owns The Bengal Post and Sokalbela, two news dailies, and a news channel called Channel 10. What is not so well known is that the owners were once booked for selling used disposable syringes and medicines past the expiry date.
The West Bengal government has tried to attract investments from large and reputed companies, but the only thing that has flourished in the state is a peculiar brand of pyramid schemes and real estate schemes backed by state power. These groups have also rapidly 'diversified' their businesses, even entering media, to acquire legitimacy. It would be interesting to see whether they can also cosy up to Mamata Banerjee if and when she comes to power.
New Delhi: The government is likely to plug loopholes in international taxation to swell its kitty, since it does not have too many options to raise taxes in the upcoming budget due to proposed rates in new direct and indirect tax regimes and high inflation, reports PTI.
Rising inflation is not only hitting the common man, but will also make the task of the government to increase its tax-GDP ratio difficult, sources said.
Facing this difficult task, the government may try to strengthen its international taxation rules like Mutual Agreement Procedures (MAP), transfer pricing, revision in double taxation avoidance agreements to make its exchequer richer in 2011-12.
This will also be done because the government is also not expected to get windfall from non-tax revenue next fiscal, as it received this fiscal from the sale of spectrum for high speed mobile and broadband services. The Centre received Rs75,000 crore more than the budget estimates on this count.
With a target to bring down fiscal deficit to 4.8% of the gross domestic product (GDP) during 2011-12 from the estimated 5.5% this fiscal, the government has to see for more revenues or cut its expenditure.
On revenue front, the hands of the government are tied since it has already proposed new tax slabs in the Direct Taxes Code (DTC) bill, currently with the standing committee of Parliament.
In the DTC bill, introduced by Union finance minister Pranab Mukherjee last year, the government seeks to widen tax slabs to levy 10% rate on income between Rs2 lakh and Rs5 lakh, 20% on Rs5-Rs10 lakh and 30% above Rs10 lakh.
Currently, income between Rs1.6-Rs5 lakh attracts 10% tax; Rs5-Rs8 lakh 20% and beyond Rs8 lakh 30%.
The government is likely to retain these rates and wait for DTC Act to come into force from 1 April 2012. However, it may tinker with threshold limit, sources said.
Since it is also in talks with states to bring Goods and Services Tax (GST) from the same date, the government might also not change indirect tax rates.
The Centre has proposed higher 10% tax on goods (each from the Union and state governments’ side) and lower 6% tax. Besides, it suggested that services should attract 8% rate by the Centre and states each. All these rates are suggested to move to 10% over a three-year period.
Though not much breakthrough is happening on negotiations with states on GST, the government is likely to keep indirect taxes unchanged to give a signal about its commitment to the new indirect tax regime, sources said.
However, it should be noted here that GST would not replace customs duty. Here also the government is likely to refrain from raising the rate because of high inflation.
In fact, most food items already have nil customs duty, the source said. The government has recently removed 5% customs duty and 4% countervailing duty on onions after its retail prices skyrocketed to Rs75-Rs80 across the country. Since then, prices have eased a bit.
High inflation is also likely to send the government plans to increase its tax-GDP ratio into a tailspin.
This is because the tax-GDP ratio is calculated on nominal size of the economy. It means that if the economy grows by say 9% and inflation by 10%, the nominal GDP would be 19%, making it difficult to raise the tax-GDP ratio.
The sources said rising GDP would not yield so much on taxes front to raise tax-GDP, if inflation continues to be at high levels.
The tax-GDP ratio had risen to over 11% during 2007-08 from 8.2% in 2001-02, but has since then declined to about 10% last fiscal.
As such, the government will try to settle more cases under MAP, seek consultations from those who have specific knowledge of transfer pricing and revise double taxation avoidance agreement with countries to seek details of money evasion, the sources said.
MAP refers to a dispute settlement mechanism of MNCs having offices in India.
The sources said more than Rs7,000 crore was received under MAP in the last one year, and this amount may increase manifold in the coming years.
Recently, India and the United States signed a memorandum of understanding for resolving cases under MAP.
The resolution of disputes under MAP basically relates to transfer pricing rules. Transfer pricing rules refers to calculation of taxes of MNCs in different countries.
The sources also said India is currently renegotiating 65 double taxation avoidance agreements out of total 79 to revise secrecy clause, so that tax evasion could be checked.
DTC also has proposals like controlled foreign corporates and general anti-avoidance rule (GAAR) to plug in loopholes in international taxation.