Single 'know your customer' window for capital markets on anvil

MUMBAI: Securities & Exchange Board of India Chairman UK Sinha said he would make investing hassle free for retail investors by moving to a single know-your customer clearance for all capital market functions, and signaled at measures to revive the fortunes of mutual funds. The plan, though not finalised yet, may have a sweep in the financial markets similar to what the government is aiming with the unique identification number, or Aadhaar, project to plug the loopholes in delivering social welfare schemes. "Once it is implemented, this will be one activity which will have far-reaching consequences," Sinha said at the 7th mutual fund conference of the Confederation of Indian Industry. "It will have a consequence which is as basic and fundamental as dematerialisation when it was introduced in the country," he said referring to the mandate to hold shares in electronic form that eliminated hundreds of crores of losses due to legal problems with physical shares. Sinha joins Reserve Bank of India Governor Duvvuri Subbarao in calling for simplification of procedures and documentation for financial services in a country where millions live without even birth and school certificates. The government's drive in the past to raise revenues and prevent misuse of institutions has led to a mountain of obstacles that put off people from seeking financial services. There are at least six separate sets of KYC norms that one must meet to benefit from the capital markets , though all are regulated by a single entity. "It will ease a lot of procedural challenges an investor faces," said Chitra Ramakrishna , joint managing director at the National Stock Exchange. Among other things, to open an account with a stock broker, the power of attorney and applications require more than 50 signatures that even lead to disqualification when the signatures differ. Even for mutual fund investments under the depository, an investor has to produce certificates everytime he walks into a new fund company. "I was not aware till I entered Sebi that even within the entities regulated by Sebi, there are different KYC requirements," said Sinha. "Our attempt is to remove those irritants. KYC is one such irritant." The regulator, previously chief of UTI Asset Management , also held out hope for the mutual fund industry, which has been seeking the revival of entry load on investors that were banned by the previous chairman. Sinha has ruled out rolling back his predecessor's decision, but is open to incentive schemes. "Sebi has taken note of the fact that the number of folios and assets under management have declined and so it is looking at some way to incentivise the distributor in a manner it is not very costly for investors," said Sinha. "We feel specially for those retail investors who may be entering the market first time, unless some incentive is given it will be difficult to increase penetration of the industry."

MFs chase only rich in cities, ignore smaller towns: Subir Gokarn, Deputy Governor, RBI
MUMBAI: The mutual fund industry has not lived up to expectations in promotion of savings and financial inclusion in the country despite their success in other parts of the world as they chase the affluent in cities ignoring smaller towns, Subir Gokarn , deputy governor, Reserve Bank of India, said. "The role of mutual funds to promote savings continues to be insignificant, with mutual funds contributing less than 10% of the Indian GDP, despite its popularity the world-over," Gokarn said at the 7th Mutual Fund Conference of the Confederation of Indian Industry (CII). "One major reason is that mutual fund penetration in rural areas is small and there is a perception that they are only for middle and high income groups. For the mutual fund sector to grow fast, we have to device appropriate schemes to attract the rural populace and find ways of financial inclusion for low income household." Gokarn is among many regulators, including former chairmen of the Securities & Exchange Board of India CB Bhave and M Damodaran , who believe that the mutual fund industry has been chasing easy money by selling to clients only in cities such as Mumbai, ignoring the hinterland. Regulators stopped many practices that were against the interests of investors, including entry loads that were seen as unfair. A Price Waterhouse study of the industry's assets under management shows that around 80 of the resource mobilisation is coming from top 10 cities, leaving tier 2 and 3 cities unexplored. "It is imperative to strengthen the distribution network beyond the obvious tier 1 and tier 2 cities," says Price Waterhouse in a report. The central bank is also worried about mutual funds involvement in sensitive sectors like real estate and wants a closer scrutiny on their involvement, he said. The deputy governor said that the central bank is planning to introduce interest rate futures ( IRF )) contracts on 2-, and 5-year government securities to develop IRFs in India.

Sebi chief says planning incentives for distributors

Business Standard 23rd June 2011

Just a week before the Securities and Exchange Board of India (Sebi) board is slated to meet, chairman U K Sinha made a strong case for incentivising mutual fund distributors. Speaking at the CII Mutual Fund Summit here on Wednesday, Sinha said, With the number of folios declining and small town sales reducing, there is a need to incentivise the distributor. Unless it is given to distributors, it is difficult to increase the penetration of the market. Sebi is looking at ways to incentivise distributors. However, Sinha added the regulator would also focus on the accountability of distributors. There has been a lot of speculation whether entry load, banned by former chairman C B Bhave, in August 2009, would be re-introduced under a different format. While clarifying the intention was not to bring back entry loads, Sinha said, I dont think bringing back entry load is a solution. The direction which Sebi is looking at is how to take MFs to the remote corners of the country. WHAT SINHA WANTS No entry load, but incentives for distributors Regulation of distributors Advertisement code for mutual funds Break-up of institutional and retail money Common KYC norms across Sebi domain

But while the entry load may not come back directly, there are other models under consideration. Sinha set up a seven-member mutual fund panel to recommend steps for organised and sustainable growth of the mutual fund industry. The panel has already given its report, which is likely to be one of the key discussion points in the board meeting on June 30. According to reports, the panel has suggested a load of around Rs 100-150 per transaction. Also, to ensure distributors do not encourage investors to move from one scheme to another in a hurry, one suggestion is to raise the trail commission by 20-25 bps. That is, if the investor stays in a particular scheme for say, six months, the distributor could earn a higher commission. Similarly, there could be higher incentives for attracting new investors for long tenures. Prior to the ban, asset management companies (AMCs) used to charge an upfront fee or entry load of 2.25 per cent on equity funds from retail investors. A couple of months back, H N Sinor, CEO of Association of Mutual Funds of India and a member of the seven-member panel, had sent an email to the industry, saying the panel would look into problems like transaction costs and dual cheque system. The Sebi chiefs rationale for incentivising distributors stems from the continued slowdown in mutual fund sales in small towns. Since the implementation of the ban, sales through independent financial advisors (IFAs) have gone down by 7 per cent. Direct sales, on the other hand, grew 2 per cent. While keen to incentivise, Sinha stressed the need to regulate distributors who have regularly been alleged to be responsible for mis-selling and churning of MF portfolios. Sebi is seriously looking into distributor regulations, but it will not be in a disruptive manner, he said, adding it will be for a limited number of large distributors and will be a disclosure-based system. If we set the rules of the game and apply them uniformly, it will help the industry, he added. The Sebi chairman also asked fund houses to disclose the components of their assets under management (AUM) in terms of retail and institutional money. He also asked AMCs to disclose the record of fund managers while marketing new schemes, which would help investors take better decisions. Citing the example of the US fund industry, where a significant share of the investing community route their funds to pension funds managed by various AMCs , he asked the industry to offer more pension products to investors.

MFs hail their knight in shining armour

N Sundaresha Subramanian / Mumbai June 23, 2011, 0:25 IST Distributors came to the CII Mutual Fund Summit with expectations, and they were given a lot to smile about. Mutual funds complained of image battering bad language, but they got some music to their ears. Even the usually insatiable media ran out of questions when met with patient, detailed answers. Welcome to Sebi and the art of keeping everyone happy, now playing in Indias Rs 6-trillion fund industry. He is our man. Whatever he does will only be good for us, said V Kasinathan, a Salem-based financial advisor after Sebi chairman UK Sinha completed his key note address. Independent financial advisors (IFAs) like Kasinathan have lost seven per cent market share to banks and organised distributors since Sebi banned entry loads in 2009. But Sinha on Wednesday hinted that Sebi would provide incentives for the middlemen. It is very encouraging, said Shirish Patel, CEO, Prudent Corporate Advisory Services Ltd. We had moved to an advisory model. But, the model does not work when the market is not supportive. If the market is falling and schemes are not doing well, investors are not too keen to pay advisory. While distributors are happy to hear that creating an incentive structure for them is high on Sebis agenda, funds are happy with the change in the language and tenor of the speech itself. The regulator is not negative (about the industry). That is a big positive, said NK Garg, CEO, Sahara Mutual Fund. Earlier, it didnt take long for the accumulated angst of the past couple of years to burst when the funds saw in the new Sebi chief one of their own. Amfi chairman Milind Bharve, who spoke before Sinha, explained how painful it was to see the industrys image being tarnished in this manner. Hardly a good word is said. Every small detail is exaggerated and whatever good we do is completely ignored, he bemoaned. We were made to feel like a bunch of no-good people. Successive Sebi chiefs have chosen past MF summits to drive home their messages for the industry. The messages were usually bitter medicine, sans the sugar-coating for Mfs. At the MF summit in 2007, M Damodaran, the then Sebi chairman, said the industry was fast becoming one of the distributors, by the distributors and for the distributors. Over the next three years, his successor, C B Bhave went about making structural changes to make it one with investor interests at its centre. Bhave and his lieutenant, K N Vaidyanathan banished all requests for a breather from the industry at last years summit. What is good for investors would ultimately be good for the industry, they professed. But Sinha underlined that protecting the investors could not come at the cost of development of the market. Protection of investors, development of the market and regulation all three are important to Sebi. One need not come at the cost of the other,, the Sebi chief said. K Ramesh Bhat, CEO, IFA Galaxy, an association of over 10,000 IFAs, says, The tier II towns have severe operational issues as the banks are not co-operative. They charge Rs 100 to initiate an auto debit. They do not accept cheques in small towns. Many people in small towns dont use cheques. Taking MFs to small towns needs a coordinated effort from fund houses, banks, Sebi and RBI, said A K Narayanan, president of Tamil Nadu Investors Association. Some veterans at the summit also felt, expectations were running ahead of what was possible realistically. With Sinha assuming charge, expectations have gone up tremendously. Some AMCs are even fanning these expectations. That may not be good, said Prem Khatri, CEO, Cafe Mutual, a portal for distributors. Khatri was in the industry for two decades before moving out. A member of the panel on loads said, Because Sinha is the chairman, there are some unnecessary expectations. All of it may not come true. Earlier you had nothing. Now you have something. You should be happy about that, he said.