SEBI plans to enlist banks to help boost sales of mutual fund schemes, especially the schemes of mutual funds sponsored by banks. However, this move may not work
The much-hyped online mutual fund platforms on the Bombay Stock Exchange and the National Stock Exchange have mostly turned out to be a no-show. Now, the Securities and Exchange Board of India (SEBI) is making another attempt at boosting the flagging sales of mutual funds by this route. It is trying to rope in banks to give a fillip to the volumes on the online platforms. But this may not work due to a rule by the Reserve Bank of India.
As reported by Moneylife yesterday, the market watchdog has called a high-level meeting with bank-sponsored MFs and their respective retail product heads of the banks. The meeting is expected to be attended by the retail product heads of banks like IDBI Bank, HSBC Bank, Kotak Mahindra Bank, ICICI Bank, HDFC Bank and Axis Bank which also have asset management companies which may be represented by their CEOs. At the meeting, SEBI is likely to pressure banks into selling mutual fund products by a variety of means, including using the exchange platform. All these groups have their own large stock-broking firms.
But the current Reserve Bank of India (RBI) guidelines do not allow banks to set up broker terminals inside their premises. This was confirmed by a source from ICICI Bank. Most importantly, SEBI has no jurisdiction in the banking space and it is unlikely that banks will heed its call without the go-ahead from the regulator, RBI. Therefore, SEBI's attempts at having banks push fund sales through the broker terminal route may turn out to be infructuous.
The SEBI move makes sense on paper. Banks have the widest and deepest distribution network of financial products and if any segment can ensure large nationwide distribution it is the banks. Speaking about the development, a spokesperson from the Indian Banks' Association (IBA) said, "Many banks already have the systems and distribution platforms in place. It will be another business opportunity for the bank. If they find it worthwhile they will do it." Another senior official from IBA said, "As banks have a wider reach SEBI might be planning to use that channel to increase the turnover. Banks already have a system of cross-selling of financial products." But having a network is one thing. Making it work for a particular product is another matter.
By dialling banks' helpline, the market regulator is now signalling that it is ready to explore every avenue to push fund sales after net inflows into equity funds started falling from August 2009 when as part of a series of regulatory changes SEBI banned entry load and upfront commissions. This effectively eliminated the well-entrenched incentive-based distribution system of selling mutual funds. With commissions eradicated, mutual funds have found distributors deserting their products in favour of better revenue-yielding products like Unit-linked Insurance Plans (ULIPs).
When fund sales flagged, SEBI probably felt that it needed to take innovative initiatives to push mutual fund sales. One of its brainwaves was offering a system of buying and selling mutual funds through broker terminals. This resulted in the creation of the Bombay Stock Exchange's (BSE) StAR MF platform and National Stock Exchange's (NSE) NEAT Mutual Fund Service System (MFSS) late last year. This was again a logical move because stockbrokers have a wide network. But there is a fundamental flaw in the idea of getting stockbrokers to sell mutual funds. Brokers make money by getting customers to trade frequently and have little interest in selling mutual funds, the sales of which do not fetch large volumes. Not surprisingly, both platforms have struggled to make any significant inroads, as Moneylife had previously reported. (Read here: http://www.moneylife.in/article/8/3193.html).
Now SEBI has come out with one more trick by getting banks to push mutual fund products especially those of funds belonging to the same group. If the stockbroker network for banks does not work, SEBI will have to get national distributors to try other means to sell funds.
A break in the 17,300-16,800 band will determine the direction
The market ended higher today; however, confusion exists in the street about the long-term sustainability of the rally as the crisis in the eurozone is yet to be resolved. The Sensex ended 95 points (0.5%) higher at 17,117 while the Nifty ended 25 points (0.5%) higher at 5,135. The indices started the day on a weak note taking cues from the Asian markets. The market started recovering in the early afternoon session and gained momentum on a strong start in European indices.
Asian indices settled mixed today. Key benchmark indices in China, South Korea, Singapore and Indonesia were up by 0.08% to 0.89% while markets in Hong Kong and Taiwan were down by 0.03% to 0.21%. In Japan, the Nikkei 225 average was down 0.13% after the country's ruling party selected finance minister Naoto Kan as Japan's new prime minister.
US stocks were up on Thursday, supported by a late-day rise in technology shares. The Dow was up 5.7 points (0.06%) at 10,255. The S&P 500 added 4.4 points (0.4%) to 1,103. The Nasdaq was up 22 points (0.9%) to 2,303. The US private sector created more jobs in May and the services sector increased payrolls for the first time in more than two years. In a separate report, the Labour Department said that US non-farm productivity grew at a 2.8% annual rate between January and March, the smallest advance in a year.
Back home, the monsoon activity is expected to regain next week after it was weakened by a cyclone. The monsoon rainfall was at 16.7 millimetres for the week ended 2nd June, down 11% from the normal weekly average of 18.8 millimetres.
India is likely to allow large consumers to keep larger stocks of sugar as prices keep dropping and supplies are likely to rise. The government had banned huge stocking by large consumers in February on poor domestic supply.
Foreign institutional investors were net buyers, purchasing stocks worth Rs406 crore on Thursday. Domestic institutional investors bought stocks worth Rs79 crore.
Bhandari Consultancy & Finance (down 4.9%) said that the Delhi High Court has directed that a meeting of the equity shareholders be convened on 10 June 2010, for the purpose of considering the Scheme of Arrangement between Sindhu Trade Links, Sindhu Holdings, Garuda Imaging and Diagnostic Pvt Ltd, Uttaranchal Finance, Parnami Habitat Developers, Suvidha Stock Broking Services Pvt Ltd, Reward Vinimay Pvt Ltd and Bhandari Consultancy & Finance along with their respective shareholders and creditors.
Modern India Ltd (up 0.2%) said that pursuant to the Bombay High Court order, Indian Institute of Jewellery Ltd, a wholly-owned subsidiary of the company, has been amalgamated with Modern India. Consequently, Indian Institute of Jewellery has been dissolved without being wound up on 3 June 2010.
Ceat (down 0.2%), which currently holds 54.84% stake in its Sri Lankan investment arm Associated Ceat Holdings Company Pvt Ltd, Colombo, has acquired the remaining 45,15,789 equity shares of the company. Consequently, ACHL has become a wholly-owned subsidiary of the company. ACHL holds 50% stake in Ceat Kelani Associated Holdings Pvt Ltd (CKAH), Colombo, a joint venture between ACHL and its Sri Lankan Partner, Kelani Tyres Ltd.
CKAH has three wholly-owned subsidiaries, which are engaged in manufacturing of tyres under the 'Ceat' brand.
Four retailers will be approaching various High Courts across the country to seek a stay order on service tax on commercial rentals
Four retailers will be approaching various High Courts across the country to seek a stay order on the service tax on commercial rentals that was imposed in this year’s Budget by finance minister Pranab Mukherjee. According to industry sources, the four retailers are Shopper’s Stop, Lifestyle, More and Reliance Retail Ltd.
The Delhi High Court had granted a stay in April 2010 in favour of Home Solutions Retail India Ltd on recovery of service tax under the newly amended Section 65 (105) (zzzz) under “Renting of Immovable Property Service”, of which the amendment was made retrospective with effect from 1 June 2006 by the Finance Act, 2010.
This ruling has encouraged other retailers also to follow the same procedure to relax the service tax on commercial rentals.
The “activity of renting itself is a taxable service,” Mr Mukherjee had said while announcing the 10% tax, the second attempt to impose the levy. It had first been introduced by then finance minister P Chidambaram in his 2007-08 budget proposal when he imposed a 12% service tax on commercial rentals.
“We haven’t approach a High Court as yet but we are contemplating it. In the next few weeks we will be approaching a High Court where our operations are impacted the most,” said Thomas Varghese, chief executive officer, Aditya Birla Retail Ltd.
While granting a stay on service tax for Home Solutions Retail India, the Delhi HC said that service tax is a tax on value addition provided by a service provider. If there is no value addition, there is no service. Renting of immovable property, by itself, does not entail any value addition and therefore cannot be regarded as a service. If there is some other service provided along with renting of immovable property, then any such other service would be covered under Section 65 (105) (zzzz).
The Retailers Association of India (RAI) will help these retailers to file the litigation. “RAI is helping its members to take the cases to court. The service tax impacts retail more than anyone else. Currently retailers pay 10%-12% of the turnover as rentals and the service tax is affecting them by 10.2%. On total turnover, the retailers might pay 1%-1.2% as service tax. Most retailers make a profit between 2%-4%. The government will take away half of the profit,” said Kumar Rajagopalan, chief executive officer, RAI.
He further added, “It was fine if goods and services tax (GST) was implemented in the country—then the service tax can be set off against sales tax. Retailers are already paying value-added tax (VAT). Most retail outlets are on leased spaces, they have to pay service tax. It is difficult for retailers to survive. Retailers are affected by VAT and service tax because the government is still not able to implement GST and retailers are landing in trouble.”
Reliance Retail declined to comment on any such development while Shopper’s Stop is planning to move court. “All the retailers are planning a similar action,” said Govind Shrikhande, president and CEO, Shopper’s Stop.