Restrictions on property rights and inconsistent government action based on short-term political considerations not only hurt a country’s home food market, but also can boomerang
The black earth region is an area southeast of Moscow. It is some of the most fertile soil in the world. It is so fertile that the yields have propelled Russia into the third-largest wheat exporting country. The summer's drought may have changed all that. The drought has devastated at least one-quarter of Russia's grain crops. Now the winter wheat crop is threatened. To plant winter wheat the soil needs enough moisture to germinate before the frosts start in October. But moisture and frosts are not the main problem.
The farmers' real problem has to do with government regulations. Most sophisticated farmers above the subsistence level can deal with problems including floods, droughts, locusts and disease. These problems are an expected part of the cycle and risks of farming. These risks can be lowered by crop insurance or hedging on commodities markets. Investors all over the world are happy to help hedge these risks, bear the losses and reap the rewards. What is unexpected and what truly distorts the markets is government action.
When Russia imposed its export ban in August it was simply following a course of action that has been common throughout the world. During the last "food shortage" about 12 countries including India, Vietnam, Serbia and Ukraine imposed export taxes or quotas. Worse, over 20 countries imposed food price controls. The only thing that these controls did and the only thing that the present Russian ban will do, will be to make the process of growing more food to satisfy a larger demand less profitable, more difficult, more volatile and less attractive.
What is more ironic is that although governments have no compunction on restricting export markets, they seem to feel offended when foreign restrictions hurt them. For example, during the problems in 2008, countries were not only banning exports, they slashed tariffs on imports to zero. Of course such incentives were useless in the face of export bans around the world.
One egregious example is Argentina. With exports banned from Russia the price of wheat over the summer of course spiked. This normally would've been wonderful for Argentine farmers except that they have no incentive to plant. The amount of acreage in production in Argentina has fallen to a 111-year low and exports have been halved over the past five years.
The reason for this cutback is obvious. President Cristina Fernandez to satisfy her urban working-class constituency has placed export limits and a 23% export tax on wheat. So Argentina produces only 10 million tonnes of wheat instead of a potential of 17 million.
The idea that we can and you can't, create a lack of reciprocity in world trade that has created some bizarre assumptions. For example, many companies in more developed, but land-poor countries are buying or leasing property in Third World countries. A Korean company tried to contract with the government of Madagascar to lease almost half the country's arable land, to produce corn for South Korea. While an Abu Dhabi-based investment company has purchased big tracts of farmland in Morocco and Algeria, and was closing in on purchases in Pakistan, Syria, Vietnam, Thailand, Sudan and India. The idea behind these purchases is of course that the owners' home country will have property rights that supersede the local populations' need for food, which is absurd.
There is nothing wrong with investing in another country's agriculture. It has been very successful specifically in Argentina and the United States since the 19th century. It has helped local agriculture make spectacular increases in yields by introducing modern methods. Still for investment in agriculture to be successful, the process has to involve reciprocity between governments which is the basis for any successful trade.
Restrictions on property rights and inconsistent government action based on short-term political considerations not only hurt a country's home market, but also can boomerang. For example the Chinese attempts to purchase New Zealand dairy farmland were prevented because New Zealand investors do not enjoy the same property rights in China. The Chinese state owned company Sinochem's interest in mounting a bid for the Canadian company Potash Corporation would no doubt be subject to increased scrutiny and potentially prohibition by the Canadian government because of China's restrictions on rare earth exports to Japan during the recent diplomatic spat.
For investors, making money in food commodities or anything related to food commodities becomes exceptionally difficult. It is easier to predict the weather or even climate change than the timing or extent of government intervention. For consumers, especially in poor countries the problems are worse. Food makes up a very small percentage of the income of people in wealthier countries. So the increased prices caused by government restrictions will be absorbed. It is not quite so easy for people who eat only what they can spend.
The domestic market is likely to witness a gap-up opening on hopes that central banks across the globe will do more to prop up their economies. The lead was given by the Japanese central bank that cut key interest rates to near-zero levels and reiterated its move to buy additional assets to boost the economy. US Federal Reserve also said earlier that it would take additional steps to spur the economy. The US markets ended higher overnight as service industries grew higher-than-expected to 53.2 in September from 51.5 earlier. The Asian markets were trading on a higher note this morning, boosted by the Bank of Japan’s initiatives to aid the economic growth. The SGX Nifty was 46.50 points higher at 6,221.50 compared to its previous close of 6,175.
The market started on a soft note on negative global cues on Tuesday. Fluctuating between the red and green, it ended near the lowest point of the day. Cautiousness prevailed ahead of the quarterly earnings season, set to begin next week. The market was in a narrow range at noon below the neutral line and tumbled sharply to end near the day's low. However, the benchmarks were above their crucial levels of 20,400 and 6,100 respectively.
The Sensex ended 68.02 points (0.33%) lower at 20,407. The index touched a high of 20,560 and a low of 20,383 during the session. The Nifty shed 13.65 points (0.22%) to close at 6,145. It touched an intraday high-low of 6,188 and 6,118, respectively.
The US market ended higher on Tuesday on higher than expected services industries data and hopes that the Federal Reserve, like the Japanese and Australian central banks, will take new steps to boost the economy. The ISM index rose to 53.2 in September from 51.5 earlier. Investors’ confidence was also boosted by the Bank of Japan’s move on Monday.
The Dow rose 193.45 points (1.80%) to 10,944. The S&P 500 rose 23.72 points (2.09%) to 1,160. The Nasdaq rose 55.31 points (2.36%) to 2,399.
Markets in Asia were trading in the green on the Bank of Japan’s economy-boosting measures announced on Tuesday and the Australian central bank’s move to keep interest rates steady.
The Hang Seng was up 1.41%, Jakarta Composite was up 0.83%, KLSE Composite was up 0.46%, Nikkei 225 was up 1.29%, Straits Times was up 1.06% and Taiwan weighted was up 0.91%. The Chinese market is closed for the entire week.
The Institute of Chartered Accountants of India (ICAI), on Tuesday said it is seeking power to take action against erring firms.
This is the first time, the ICAI has decided to recommend the Union government that power to act against firm be given to the institute after necessary amendments in the Act.
SEBI’s knockout punch to mutual fund distributors in August 2009 has left a trail of tribulation across all intermediaries in the mutual fund industry. We put together the actions and their impact to highlight why even a raging bull market has failed to enthuse the fund industry
The Securities and Exchange Board of India (SEBI) abolished entry loads in August 2009, in what it thought was an investor-friendly move. But consider how a slew of thoughtless actions that followed this move have bludgeoned the mutual fund industry and every one of its intermediaries until assets under management are dwindling rapidly.
The starting point was of course, the distributors who were suddenly left without a business. Without fees, it made no sense for them to dish out free advice, while investors, who were unused to paying for advice, weren’t willing to start now. SEBI couldn’t care less, beyond regulators loftily pronouncing that “distributors must charge customers” and “investors must learn to pay”.
When a few hundred crore rupees began to be pulled out, SEBI swung into action to make the situation worse. It started its infamous turf battle with the insurance regulator to stop mutual fund assets flowing to unit-linked-insurance products. The result: legislation that put the finance ministry in charge of sorting out squabbles between regulators. Also, hundreds of distributors have shut shop and are looking for alternative business avenues.
In July 2009, just before the ban on entry loads, SEBI exempted micro SIP investments upto Rs50,000 from having to submit PAN numbers. This translated into higher volumes under SIP without any significant addition to the overall Assets Under Management (AUM) of fund companies. An unintended consquence was that Registrar & Transfer Agents (RTA) were burdened with additional work and no commensurate increase in income.
In December 2009 came a circular asking for stricter and more detailed Know Your Customer (KYC) documentation for “prevention of money laundering”. This happened when SEBI realised that some mutual funds did not even know their customer and were entirely dependent on distributors not even RTAs.
This triggered huge documentation efforts between RTAs and channel distributors — the top 20 distributors account for 4.78 lakh unique investors with a minimum of three documents (a/c opening, KYC, PAN ) consisting of 65–180 pages each (4.78 crore records). While the process was being completed, commissions to the tune of Rs100 crore were withheld, angering the distributor community even further.
Interestingly, all this was left to a few RTAs to handle — it is interesting that the entire capital market boom since 1990 has not led to increased competition in the RTA segment — Karvy remains the dominant player, with three or four others picking up the rest. SEBI has never tried to find out why this business does not attract more participants.
Incidentally, SEBI’s fatwa meant that to comply with KYC norms, old and inadequate customer data, with older funds such as UTI Mutual Fund had to be obtained afresh, with identification (photo, phone and address) and put in a standard format for easy access. We learn that RTAs coped with this by procuring third-party screening software to aid in this process.
In March 2010 SEBI decided to attack trail commissions and permit investors to change distributors without a no-objection certificate. It decided that in case of any change in the broker code, no trail commission would be paid to both brokers — the one who lost a customer as well as the one who gained a customer. This immediately triggered a virtual war to grab customers by hook or by crook — it only led to RTAs being choked by reams of paper requesting a change in broker code. The apparent lack of clarity between SEBI and the industry body Association of Mutual Funds in India (AMFI) didn’t help matters either. The misinterpretation of the rule unleashed trading in customer data. Only after AMFI issued a subsequent clarification did the volumes subside.
Many other proposals introduced by SEBI, such as shrinking of NFO allotment time from 30 days to five days or extending the ASBA facility to mutual funds, although for the benefit of investors, led to confusion because the industry and intermediaries were never given enough time to set up robust implementation processes.
One example is SEBI’s decision in June 2010 to switch from AMFI certification for mutual fund distributors to certification by the National Institute of Securities Management (NISM) which has been set up by SEBI and is now scouting for revenue opportunities. The certification leads to the issue of a certification number or code. Since older IFAs (independent financial advisors) are unlikely to get an NISM code, it has created an additional process for fund intermediaries to manage NSIM and AMFI codes.
In August 2010, SEBI asked all fund houses to facilitate smoother shift of mutual fund units between two demat accounts. This not only meant that AMCs would have to shoulder additional costs, but it would also increase activity at the RTA’s end. Various participants have pointed out discrepancies in this system, with several intermediaries submitting their own challenges in dealing with the requirement in its current form. Similarly, in order to check fraudulent activities by some distributors, SEBI asked fund houses not to accept third party cheques for mutual fund subscriptions. This is under implementation, requiring fund branches to track investor applications with investor cheques to corroborate the investment.
SEBI followed this with a killer blow to the distributor community, when it introduced tedious and intrusive know your distributor (KYD) norms. These didn’t go down well at all with some distributors, who felt they were being treated like common criminals, particularly questioning the extent of verification as demanded by SEBI. Moneylife’s article on this matter (see here: http://www.moneylife.in/article/78/9202.html) generated significant interest from the distributor community.
The problem is that each time SEBI introduced a change, without enough thought or discussion, the industry began to invest in systems and processes, only to have the regulator move on to another change. Or worse, the investment was wasted because investors were unimpressed by the change.
One good thing that has come out of all this mess is the facility of consolidated account statements on a monthly basis. This service provides the investor with the ability to track his mutual fund investments across all fund houses under a single roof. This may also reduce the costs and efforts at the RTAs’ end as it will eliminate the need for daily confirmations.
With SEBI mulling more regulatory changes for the industry, any move without involving the industry participants will only create more headaches for all the players in the industry.