If the Nifty closes below 6,175, the index may head lower
Ahead of the February futures and options expiry the Indian market on Tuesday witnessed a highly volatile session. The indices opened in the green however soon started giving up gains and by the beginning of the noon session entered the negative zone. However after about an hour of effort to revive, the benchmarks could finally manage staying in the green and close in the positive for the third consecutive session. On Monday, we had mentioned that the indices may continue to head higher and level of 6,145 on the Nifty may act as support. The index managed sustaining itself above the level.
The BSE 30-share Sensex opened at 20,878 and moved in the range of 20,778 and 20,913 and closed at 20,852 (up 41 points or 0.20%) while NSE Nifty opened at 6,206 and moved between 6,177 and 6,217 and closed at 6,200 (up 14 points or 0.23%). The NSE recorded a volume of 50.02 crore shares.
The Bimal Jalan panel, which scrutinised applications for new bank licences, on Tuesday submitted its report along with shortlisted entities to the Reserve Bank of India (RBI). RBI had constituted the Jalan committee to examine the fit-and-proper criteria, business plans, corporate governance practices, etc, of applicants.
After finance minister P Chidambaram last week expressed disapproval about the RBI focusing more on fighting inflation, the central bank governor Raghuram Rajan in a television interview, which was broadcast on Monday, said "It's not as if the government is on a different page on what we've been doing on inflation thus far. They may have different views on what they would like to see done, but there is a process, there is a conversation. I think there is fair amount of coordination at the highest level". Rajan said the central bank panel report on inflation was consistent with the government's stance. "We have a committee which has suggested a target, which is also by the way, consistent with the process the finance ministry's committee has suggested, so there is no disagreement about the broader need to get a framework in place. I think in terms of how I see the process, is really that the government sets the objective, and the central bank delivers on that objective," Rajan said.
Petroleum Minister Veerappa Moily on Tuesday refused to answer queries on the FIR filed against him and industrialist Mukesh Ambani in Delhi in connection with the pricing of natural gas. He was speaking on the sidelines of a function to inaugurate the new building to house the Environment Ministry. Former Delhi Chief Minister Arvind Kejriwal took the step of ordering the state's anti-corruption wing to register a case against Mukesh Ambani and Veerappa Moily, accusing India's richest man and the oil minister of colluding to deliver a windfall to Reliance Industries by doubling natural gas prices.
US indices closed in the positive on Monday. US default risk has fallen to about half of what it was four months ago, trading near Germany’s level as the American economy outperforms that of the European nation. The cost to protect US debt against non-payment through credit-default swaps was 26.5 basis points, falling from 46 basis points in October. Germany’s was 25 basis points.
The latest data showed the Chicago Fed National Activity index fell to -0.39 in January from 0.16 in December while financial data firm Markit's preliminary February reading on the services sector fell to 52.7 from 56.7.
Among the Asian indices, four indices closed in the positive while five closed in the negative. Nikkei 225 (up 1.44%) was the top gainer while Shanghai Composite (down 2.04%) was the top loser.
European indices were trading in the red while US Futures were trading marginally lower.
Mutual Funds continue to pay huge commissions to large distributors to promote their schemes. Is SEBI turning a blind eye to this practice? If so, why
The Securities and Exchange Board of India (SEBI) continues to propose policy changes to achieve sustainable growth of the mutual fund industry, but many of these changes seem to benefit large fund houses. Large fund houses are able to promote their schemes by paying high upfront commissions. In order to earn a higher income, distributors would prefer to promote these schemes than schemes of other new fund houses or smaller fund houses which may have a better track record of performance. If this continues, large fund houses would continue to gain assets, while smaller fund houses would probably go out of business.
A distributor has highlighted to us how FundsIndiaAdvisor.com, an online distributor, is offering commissions to its sub-brokers that are around 2% or more (which is almost equivalent or even more than the expense ratio of these funds) to promote different schemes of large fund houses. Advisors would need to bring in funds totalling Rs1 crore or more to qualify for the commissions. The commissions earned would be subject to claw back in case an investor redeems his investment before one year. See a screenshot of the offering below:
We contacted FundsIndiaAdvisor.com to know the rationale for paying such high commissions to their advisors and the actual commissions being earned from the fund house. They refused to comment. Fundadvisor.com is part of FundIndia.com a platform that offers investors the chance to invest mutual funds online.
The payment of such high upfront commissions by large fund houses is not new. There have also been cases where mutual fund brokers were offering pass back to investors. (Read: Edelweiss attracting investors by offering passbacks. Is SEBI watching?) Closed-end funds can incentivise distributors with hefty upfront commissions. A reason why Rajiv Gandhi Equity Savings Schemes, schemes specifically for first-time equity investors which was launched last year, was bringing in funds from existing investors and high networth individuals. (Read: High value applications perverting RGESS, while SEBI remains mum) This is probably a reason why we have seen so many close-ended schemes being launched this year as well. These schemes do not have a track record, thus it is easier for distributors to promote these schemes by citing other top performing schemes of the fund house.
Fund houses form an agreement with big institutional distributors such as banks and national broker’s offering them huge commissions if they meet specified targets. AMCs pay anywhere between 2%-5% in upfront commissions from their own pockets. Established larger fund houses, with their deep pockets, can afford to pay such high upfront commissions to push their products, while smaller fund houses struggle to survive. Most distributors push these products because it is in their interest and not that of the clients. But does the payment of high upfront commission ensure inflow of fresh assets into the industry?
Chilukuri KRL Rao, a distributor explains that the payment of high upfront commission leads to churning. It is a matter of transferring assets to a fund house that is paying a higher commission. “As long as upfront commissions are there it will be a game of moving assets from one bidder to the second bidder and the focus will never be on bringing in new assets and sustaining them,” says Mr Rao.
While the fund companies are running a business and would try every trick to gather assets by offering as much incentive as possible, what is the role of regulator in keeping an eye on such practices that lead to adverse selection? Well, the regulator possibly does not know the practices on the ground because it does not engage with investors. Instead, it is caught up in “promoting” mutual funds with harebrained ideas such as adoption of districts by mutual fund companies while allowing false product advertisements in the name of investor education.
Nomura remains positive on Cadila Healthcare, as it expects US approvals accompanied by business consolidation to help improve margins and profitability, in a research note on the pharma company
Cadila Healthcare won a favourable Appeals court decision on Prevacid ODT, which could be an interesting low-competition opportunity, reports Nomura in a research note based on management interaction. The company expects to gain approval for Prevacid ODT over the next 12 months, and Nomura believes the product could contribute up to Rs18/sh share annually in the initial period. The other low-competition launches that are possible over the next 12 months include Toprol XL, Asacol HD, Lialda (contingent on litigation outcome), nasal sprays (Azelastine, Desmopressin Acetate), transdermals (clonidine, estradiol weekly) and one Nesher product.
Nomura remains positive on Cadila Healthcare, as it expects US approvals accompanied by business consolidation to help improve margins and profitability. Business consolidation could include moving out of non profitable territories and lowering capex.
The pharma company’s management expects growth to revive in India formulation, consumer and JV businesses in FY15.
According to the Nomura forecast, the 12-month share price target is adjusted to Rs1,103/sh (18x one-year forward EPS of Rs58.6 + Rs47 for Asacol HD exclusivity). The current stock price is supported by expectation of earnings growth in FY16. The stock trades at 21x Nomura’s FY15 EPS estimate and only 13.2x Nomura’s FY16 estimate.
The company’s performance and forecast is captured in the following table: