Bonds, Currencies & Commodities
The visible hand and the spikes in ‘soft’ commodities

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 writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).
 

User

Wednesday’s Market Preview: Gap-up opening likely. Watch 20700

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.

User

SEBI’s whirlwind regulatory changes leave a messy trail

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.

User

COMMENTS

a

7 years ago

one man's ego(mr Bhave's) is kiling mf industry..

market has grwon from 8000 to 20000.and MF industry AUM has decreased...........

Hari Baldawa

7 years ago

ITS PURE NONSENSE the way Bhave thinks of MF business and it is PURE INSULT the way DNA Money editor ( I didn't care to get this guy's name) has published, on Oct 9th, the interview of Mini Menon of Bloomberg UTV. These two guys will get their pants wet with dirty smell, if they take guts to get a new small investor into Mutual funds. These guys don't have the noble idea behind MFs, which can benefit each and every person, rather than talking and publishing big nonsense figures.

If the SEBI was capable of controlling properly, then the investment figure should have been at least double of what has been printed big in DNA money and number of investors should have be more than 5 times. Collecting 65000 crores is ashaming with the investable wealth available with HNIs, NRIs, Wealth Mangers, FIIs etc.. who were directly benefited. This wealthy investing circle is well knowledgeable, organised and have excellent tools and resources to access Mutual funds. What about others? Can Bhave give the comparative report and justify how many small and fresh investors have entered into mutual fund investments? What is the use of making impractical policies, just to prove that they are too smart and they know all. IFAs, distributors and AMCs are not nikmaas or fools to raise unnecessary issues.

It is easy to think of big figures and big blahs.. blahs ..... sitting in AC office with materialistic and wealthy environment and take decisions to please them, but who is there for small and uninitiated investors. Please note, IFAs and DISTRIBUTORS ARE ENTREPRENEURS ON FOOT, who are serving noble purpose to broaden investment reach by taking financial, mental and physical risks. The foolish power misusing leaders sitting in AC offices should properly understand the long term importance of these guts and challenges for the benefit our country and citizens.

There are so many important issues which needs to be simplified at the earliest. One of the most urgent issue is making common applications, formalities and routine matters in simple format to serve all all funds. The organised distributors serving wealthy and regular investors get compensated for this complexities, but others drag this heavy burden in silence.

Mobiles and so many common utility products are reached every person, then what is short in mutual funds to acheive this. Does Bhave and his team have ever overdriven their brains to understands this missing link? Mr. Gopal tried to fight for this and SEBI has made him behave like untouchable.

REPLY

Madhusudan Thakkar

In Reply to Hari Baldawa 7 years ago

During same period ULIPs of Life Insurance companies have shown BIG growth at the cost of mutual funds.Why our policy makers are silent on Lakhs of Crores remaining IDLE in savings bank account.

Paressh

7 years ago

There are number of investors currently investing in mfs through distributors way.And AMCs have to pay something them.Its indirectly affecting their revenue.They have to maintain ihe required infrastructure,salaries to there staffs and so on.....If they can't provide sufficient resources it will definitely affect the returns and in turn harm the investors more than that of current entry load of 2.25%.

Paressh

7 years ago

I think Mr. Bhave is carring some bad mutual funds,may be advised by any of the advisor.

Madhusudan Thakkar

7 years ago

During recent interview with Mini Menon of Bloomberg UTV[The excerpts of this is published in today's DNA] Bhave has also once again justified ban on entry loads by giving frivolous arguments. There appears to severe disconnect between people like him and Media[Except Money Life] and people who are at ground Zero. .Why are MPs silent on this issue? why there is no serious discussion in Parliament?.When we talk of "retail participation" in India's growth story. How will common man participate without distributor.Earning 1-2% commission is CRIME in our country.

Roopsingh

7 years ago

http://bit.ly/9i3Pa2
This link of economic times article clearly states what SEBI official Mr VAidhyanathan thinks about IFAs-he quoted them as BARKING DOGS-
he is man who looks to matters concerned to MF and FII investments-so we can guess what is cooked in SEBI by such people who try to be dearer to FII by easing norms for their dollors and treat their country brothers as barking dogs-

Roopsingh

7 years ago



If Mr Vaidhyanathan sitting in AC ofice and calling IFAs and its upporters as dogs-then he must be sent to get applications directly from MF investors and his salary should be banned-
the new law shaould be that he will get his FEES from invetsors on business procured by him-even if this looks funny-then he should be incentivised for AUM accumulated in all amc'x every month-the month in which fund outflow is more then inflow-he should not be paid a penny-If this type of rule is formulated for all concerned officials who are MIS regulating the MF industry-then ONLY HE AND HIS COORDINATES will realise the real situation-
If he is so confident of his IDEALOGY-he should accept this challenge -IF HE CANT ACCEPT_HE SHOULD APPOLOGISE for calling IFAS as DOGS-
To read this-pl visit recent interview of Mr Vaidhyanathan published in ECONOMIC TIMES where he quoted IFAs as barking dogs-

sameer

7 years ago

What is to be said or done SEBI / AMFI are here to stay as a manager / damager only to make things easy for investors. If all the distributor paid STT(sebi transaction tax) out of the brokerage / incentive we all could by peace with sebi / amfi. We all must understand that there is more than meets the eye.There is something that we all are not aware of for sudden measure for mutual fund and insurance industry.We all cannot take this sudden change and were thing will end up, as financial products are sold not purchased in India.

sunnny

7 years ago

Now a days if investor comes to me who is not willing to pay fees or less than my threshhold,
I gave them name and address of Mr.Bhave stating that he is your maseeha and willing to help you going out of way.
The extent of direct damage he has done to distributors is really bad but more so indirect damage he has done to retail investors is very big. the impact will be really bad.
No one is willing to service them as there is no compensation left for him.
Mr. Bhave please read basic economics or a book called WORLD IS FLAT.... Any way no point in breaking head on stone who is not going to listen.

Madhusudan Thakkar

7 years ago

According to today's "Mint" C B Bhave has written to finance ministry that asking to appoint his his successor a MONTH BEFORE he steps down.One of the potential candidate is U.K Sinha,chairman of UTI.Past experience shows that people from UTI & LIC are pragmatic and understand ground reality.Damodaran and G.Bajpai were from UTI and LIC and under them mutual fund industry grew by leaps and bounds. LET US HOPE FOR THE BEST.

REPLY

sunnny

In Reply to Madhusudan Thakkar 7 years ago

Mr. MT--- Dont forget the root of the whole problem is damodaran and not bhave.
He is the one without too much thinking given a no load invesment option to the investor who wants to go direct.
what a stupidity if distributor wants to discount his copensation then it is ill legal and called as passbacks or kickbacks and the same investor can go to mf and buy without any price. very funny...
I think damodaran should be blamed for the problem.
And funniest part is now he is now on the ING board which is a amc itself

Deepak R khemani

In Reply to Madhusudan Thakkar 7 years ago

I don't think that is possible as Mr. Sinha has already been appointed as chairman of SEBI although if it were to happen then it would be great for the IFA Community and the mutual fund industry as a whole

Madhusudan Thakkar

In Reply to Deepak R khemani 7 years ago

Deepak Ji is high time that AMFI is dismantled.It has remained silent on" EMOTIONAL ATYACHAR" of distributors.

Deepak R Khemani

In Reply to Deepak R khemani 7 years ago

Sorry guys typo, it should read CHAIRMAN OF AMFI in the above para and not chairman of SEBI, sorry again

sunny

7 years ago

exceelent very good

RAMESHKUMAR GP

7 years ago

THERE IS LOT OF SIMILARITY B/W MR BHAVE &MR KALMADI ,BOTH ARE EGOISTIC ,CORRUPT ,SELFISH PERSONS ,THEY HAVE DONE EVERYING FOR THEIR SELF INTEREST BY MISUSING &MISGUIDING INVESTOR/PUBLIC.ITS A CURSE THAT WE ARE VICTIMS OF THESE BUROCRATES&POLITICIANS.

sameer

7 years ago

Its time the finances ministry needs to get a new think tank for SEBI.. Every new person as SEBI head only wants to out perfome the other.

REPLY

RAMESHKUMARGP

In Reply to sameer 7 years ago

sameer its one fool wants to out perform other fool in this we all victims .

fundResearch

7 years ago

Please go through this link

http://economictimes.indiatimes.com/opin...

REPLY

Roopsingh

In Reply to fundResearch 7 years ago

Mr Fundresearch-i know what kind of news are highlighted in economic times-they fully ""EDIT" the comment and dont put it if that does not suit them-they put only those comments which are favourable to them-they are a sold out magazine to Ad agencies and vested interest-i have several times tried to put comments in economictimes-but my all hard efforts to put my emotions get evoparated because my comment does not suit to editor-it is like SARKARI MEDIA-it is never comparable with MONEYLIFE_so pl dont dare to paste such useless links-

Madhusudan Thakkar

In Reply to Roopsingh 7 years ago

Media has spared no efforts to paint entire distributor community as villains. Like word "Secular" the word Distributor is twisted by media in showing that they are on side of people.I agree with Roopsingh Ji that Moneylife is the only journal/site which understands ground reality.Please inform other friends to visit this site for "TRUE PICTURE"

nishi rotkar

In Reply to fundResearch 7 years ago

i think some of the comments on this article are sponsored by SEBI.

fundresarch, i dont know what kind of research u have done on mutual funds.
the link u have given is from economic times. i have posted a comment on that article, but they have no guts to post it.

3 fold rise in AMCs profit is due to exploitation of unorganised distributor community. if u cut the salary / wages of employees in any company by 1/3 or 1/4 ur profits is going to rise by many folds.

but the rise in profit of the AMCs does not indicate that ALL IS WELL.

monil daru

7 years ago

IFA MUST DEMAND FOR THE UP FRONT BROKERAGE AGAIN & MUST FIGHT FOR IT WITH A UNIQUE WAY.PLEASE DECLARE THE MF INDUSTRY AUM BEFORE & AFTER AUGUST 2009 & TILL AUGUST 2010.

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