Fragility of Reluctant Reform

Dichotomy of reform and progressivism represents the India’s policy maneuvering since 1991. Long way back, then Indian sensed a “déjà vu” to move for a “remodeled tryst with destiny” which was essentially bounded to delinking Nehruvian ties and ushering herself into a new world of unrestricted and aligned competency. Its first major impact on macro economy was felt in terms of multipolar evolution of economic interests…no longer, prioritization of national economy remained a trend. The inbound competency that came with the reluctant liberalisation programme didn’t create niche for the healthy operation of government, public and private sectors. Instead it given leeway for mushrooming of “clicks supremacy “and forced a “Democratic, Secular, Socialist” state as hub of crony capitalism. Underneath the swift processing of forward capitalist agenda, India produced the record numbers of billionaires {both in rupees and dollar terms} and worst positional status in Human Development Index {HDI}, which is ofcourse any longer averses a thinking mind to be in good humour!

The second big casualty after the misplaced wave of reform is the, state of reform? Until few years back, India’s regulatory institutions with their cautions approaches were doing great services by maintaining normalcy in business. Its effects led India to avoid the bubble burst like scenario during the peak of traumatic recession and when banks were falling on Wall Street, our Mint Street was still keeping jubilant mood. Alas, same friendly atmosphere is no longer persists now…RBI, which holds the pulses of Indian economy seemingly losing its earlier touch in market intervention and taking forward the growth of Indian financial sector.

In last few quarters, RBI has failed to control the spiraling inflation and its policy responses as interest hikes leaving extra adverseness on the anticipated growth agenda. Here, contradiction between market sentiment which is naturally consumerist now and policy stances are looming large and enforcing uncertainty. Sidelining the ideological convictions and routing through the same reform debates, it disappoints to note that the gulf between finance ministry and nation’s central bank was never so wide. In the last Union Budget, declaration was made by the finance minister for further opening of Indian banking that was a long due since 2003 but under the new unwarranted redtapism of RBI-licensing of few new banks are taking too long and perilously injuring the sentiments of near about stagnant financial market. Under the uniform set of regulations, RBI must shoe its trust to allow atleast six new banks to join the fray besides focusing more on compliance to the nuanced recommendations of Basel-III norms.

It appears a paradox that new Indian corporate private sector banks, Regional Rural Banks {RRBs} are in better shape with their standard quality of assets than the peers of leading Public Sector banks, turmoil Co-operative banks and narrowly motivated foreign banks. In such case, policy framing must enable these existing banks and prospective banks for pursuing the advanced banking in the days ahead. Withstanding the truth of global financial condition, RBI must lend unwavering support to the prospective banks and should keep the profile of global integration on equilibrium. Today, another haunting challenge is of financial inclusion, still majority of Indians are not banking…here, strict adherence to compliances shall be streamlined for making rural and untapped area as priority zone for every banks operating in India.

Capital markets in India often cited as dynamic and sound out of confused euphoria, which is completely false as Indian equity market is one of the most crisis ridden in the world. Insider trading is frequent here and still surprises to not get a Galleon type case like in U.S or finding few spoiled icons like Raj Rajaratnam or Raj Gupta. Years back, Harshad Mehta and Ketan Parikh rocked the party here and got bad tip from regulators but since then SEBI seized to be angry and moralistic institution. SEBI’s second hammering fallen on rapidly growing Indian mutual fund industry which through bad regulatory step {scrapping of entry load etc.}, left it in hibernated state and in comparison of the past, we find it only as shadow. The weak confidence among the top management of SEBI is another matter of grave concern…things have still little changed with its new chief, U.K.Sinha. Finance ministry and RBI must end their slumbering and India’s capital market is on the verge being a show piece.

It remains a silent convention to priorities Public Sector entities by the regulators but recent stances of IRDA is awkwardly mimicking on those soft forgone traditions. Atleast two Chairmen of Public Sector insurers have recently expressed their anguish over the partiality of IRDA-that’s shocking and henceforth unsustainable as well. Questions arises, in last twenty years what made regulation a stodgy business? And do the true spirits of reform could ever touch the Indian commerce and trade?

The only conclusion could be drawn from the last two decades that the shape of Indian economy has indeed grown up in mid years with making selective few obscene rich, few crores of population as empowered consuming/middle class and rest the paupers. And big dilemma is, we even today can’t figure out the exact numbers of poors in India, leave alone any over expectation of level playing approaches from authorities.

More or less, similar are the cases of regulatory mismanagement in every sector. The last and most vicious happened with the opening of single brand retail for hundred percent FDI and multi brand retail to 51%from existing 26% without making any strict clause which could assured the certain percentage of procurement from Indian domestic market. That could have helped better to farmers, SMEs by cutting their overhead cost and appropriate inventory management. Unfortunately in present frame, it’s unreliable to expect anything positive from this legislation and chances would be likely of Indian market as the junk box of cheap Chinese manufacturing. Opposition is doing series of ridiculous acts by logjamming Parliament instead channelizing proper debate to alter this horrific FDI arrival in retail. At this juncture, regulation is maintaining its fragility and people will be forced to lead a Walmartian life with deep holes and no money in their market..!
Atul Kumar Thakur
Wednesday, November 30, 2011, New Delhi
Email: summertickets@gmail.com

Online Platform: Tech Edge for Mutual Funds

Technologies has many specialties and liabilities to evolve, nurture and grown up the happy means to deliver utmost simplification in day-to-day life. Indeed the Security Exchange Board of India (SEBI) would have been sensed the similar feelings before executing the online trading platform for Mutual funds with aim to reduce its operational costs and address the issue of pan-Indian penetration.The online Mutual fund trading platform would probably do to the Mutual fund space what dematerialization of shares has done for the traders and investors in the equity market.
It will be an online arrangement where Mutual fund schemes can be transacted through the click of mouse; payment directly debited from the bank account and units purchased or sold will be credited or debited to the investors dematerialized account just like the way the shares are traded today; with similar convenience, redemption order will be accepted at a click of the mouse.

Overall the upcoming online platform which start to perform in new financial year (After March 2010) would provide the investors a consolidated view of all their Mutual fund holdings, apart from that platform will bring in simplicity and cost efficiency for investors and will help industry to expand its reach. An another impact of this move would be visible on achieving the goal of financial inclusion since internet as a medium has revolutionary binding over the awareness level; so many frills will be left out for the investors and friendly transaction with many new economy sized Mutual fund products would fuelled incentive for their participation.
Some apprehension regarding the inevitability of demat account for being in transaction have also sorted out as this new portal is not restricted to demat account holders alone; indeed no-frills approach of online trading would increase the transaction and transparency that further fuelled competition and price war between brokerage which eventually would led to highly competitive commissions.

Anyhow some confusion persists on the role of brokers and Independent Financial Advisors(IFA’s) who hitherto have been playing very crucial role in mobilizing around sixty percent of the financial investments in Indian Mutual fund businesses through their channels of recommendations. New platform will be linked to the demat account of the shareholder and the commission payable on every transaction shall be mutually determined between investor and their respective brokers, who will have to be a Depository Participant (DP).
Depository Participants are now present in more than thousand of Indian cities albeit they are hardly in touch to look after the future and just role of small brokers and IFA’S; so it would be better to let brokers manage Mutual fund online trading platforms, as separate infrastructure will defeat the purpose.

Likewise giving artificial support to small Mutual fund agents is hardly compatible in middle to long term perspective as competitive regime is required to infuse constructive morale of these small agents instead to compel them to survive on complementary bucks.
In the wake of SEBI’s move to scraping the entry load, small agents and distributors are facing outright erosion of their identity besides they left with very few options as Insurance sector has introduced D.Swaroop commission meanwhile, which are equally adverse to these middlemen’s. Presently only one lakh AMFI certified agents are in the field with comparison of twenty five lakh insurance agents, so there can be visualize a deep mismatch between demand and supply of effective financial councilors.

So, the present change in the landscape of Mutual fund businesses needs at least a relooking on the plights of consultancy complication since financial awareness level in our country is strikingly lower than counterparts in western and other advanced economies.
It’s worthwhile to note here that despite very high resilience of their economy, western financial regulators still trust and conferred better commission to these financial consultants; even before the scrapping of entry loads in India, there was margin of around four percent of brokerage from western economies. My concern here is not to imitate the western model but to cite the huge potential loss of employment in the wake of new regulatory changes in India…we definitely must go through the all intricacies of pros and cons of its potential outcomes.
Nevertheless, I heartily admire this new technological innovation because its effectiveness lies in many implicit and explicit forms as we have seen previously in the case of Banking and Telecommunication sector in last few years in our country.
Technology both at individual and collective level plays very formative role in preparing the humane psyche to adjust with high end targets; being a very resilient and swiftly emerging economy, Indian economy is indeed ready to upfront with such large scale innovation to achieve the goal of impressive financial literacy as well as financial inclusion. Looking through the technological experiments in past, we can be sanguine about its meticulous performance at Mutual fund arena and further becoming a source for such other innovation in the domains of Indian financial sector.

Atul Kumar Thakur
November29th2009, New Delhi
atul_mdb@rediffmail.com

Dooming Provisions before Indian Mutual Fund /Insurance Industry

Financial reform generally intends for a turnaround story with some fresh provisions although these provisions left different implications for diversely segmented components of industry.
A closer view on modus operandai of Mutual fund/ Insurance industry reveals the segmented interest of its components vis-à-vis the recently introduced regulatory provisions which try to demystify the role of intermediaries by simply cutting their edge of incentives from core of business.

Some fortnight back Security Exchange Board of India (SEBI) came out with a move to end the entry load regime in the pretext of investors welfare albeit that initiative was from reality since the prevailing nature of Mutual fund industry primarily influenced and shaped through bulk investment instead of petty investment.
So, investors are hardly going to benefited as they still have to bear the alternative charges that substituted in further course like, trail fees and entry load etc. In such scenario, the huge distribution network including of Independent Financial Advisors (IFAs) have caught in demure backdrop as their hitherto role are not going to proceed in future time, but this fallout is unlikely to be an universal quotient as the Asset Management Company (AMC) being the third pillar of Mutual fund businesses will surely avail the huge margin in current regulatory framework.

However, for the time being it’s seems daunting for AMC to cope with the emerging consequences from unconventional shifting of distribution pattern; so some temporary arrangement have been made although that is not suffice for raising the morale of persons involved in Mutual fond distribution.
Whatever would be the future shift on these matters; at least it’s an arch reality that again the interests of labour forces especially of unorganized sector have been compromised in the name of reforms.

By following same bandwagon for Insurance sector, meanwhile government have appointed a panel on investor protection and awareness under the Chairmanship of PFRDA Chairman D Swarup whose recommendations till now struggling for a consensus for investment advisors and agents selling financial products to usher them in changed regulatory framework. The apparent mandate of D Swarup committee is to synchronize the level playing field for investment advisors who hitherto have been championing for the great growth stories of Insurance businesses in India.
Proposal to remove commission on products such as ULIPS and allow investors to negotiate fees is acutely dampening for lakhs of advisors and their conventional bond (of employer-employees) with Insurance companies. Other plan to set up Financial Well Being Board of India (Finweb), an agency to write rules on the common minimum standards for sellers of financial products, and supervise a Self Regulatory Organization (SRO) of agents and financial advisors.
The mandate for Finweb seems exhaustive as every financial advisors needs to be registered with it; apart from that, establishment of an SRO on the line of ICAI is another move that creates complexities since advisors already have SROs to look after their businesses.
Regulatory changes are indeed essential but it needs to structured in proper sense and complete canopisation of all components plights; financial sector reform is inevitable but it’s implementation would required due diligence to cover all the core quarters.

It’s again a coincidence that marginal forces (Intermediaries) are being victimized from this new regulatory ruling that’s not at par with peoples expectations. Government must ensure the regulatory changes with following the proper care of mass welfare otherwise it would start to visualize as artificial attire with feeble original appeal.
Indeed economic activities without employment generation are nothing but futility especially when the claim of transparency stands lofty high.
Atul Kumar Thakur
November10th2009, New Delhi
atul_mdb@rediffmail.com

Bumpy Quivering In Indian Mutual Fund Industry

As on July end, the Indian Mutual fund industry manages an asset base of RS 6, 86,946 crore which seems quite impressive in first impression but an in-depth introspection reveals this performances as below of actual potential of presently existing thirty six fund houses. It’s not less surprising that top five Mutual funds houses accounting for over fifty present of the total asset base, so there is huge scopes persist for entry of new players in Mutual fund industry.
According to a recent report of The Economic Times, twenty six funds waiting for approval of business before SEBI (Security and Exchange Board of India); expected potential for more players foraying into the Mutual fund space may lead this industry for stronger consolidation.Mutual fund industry despite having an existence of fifteen years has yet to secure its position as a formidable player in the domain of financial services.

Now the going away of entry load will leave greater obstacles before industry players in attracting the investors. Scrapping entry loads has apparently put Mutual funds at a disadvantage vis-à-vis viable products like ULIPS at the distribution end. Before August 1st, Mutual funds were charging an entry load of 2-2.5% and paying a commission of around 3% to their distributors that mean fund houses had to burn around the cost of 50 to 100 basis point. Such proportion of cost for Asset Management Company was quite low which now they wouldn’t longer afford in the wake of new SEBI ruling.
Even though withering of entry load by SEBI is logical for the sake of investor’s interest as previously availing with fixed nature of commission hardly compelled distributors and Independent Financial Advisors for better consultancy to investors. In absence of adequate information generally investors couldn’t secure there intended benefits from investment.

Now the Mutual fund distribution set to become more demand based rather than sales push, so the time is ripe for investors to be more careful as distributors might push other products such as ULIPS more at least in short term. Indeed the new ruling will lead market towards stiff competitive regime in which the investor will have greater voice although that would require a better financial literacy scenario which at present is quite unsatisfactory in India.
On the other end new SEBI ruling will adversely affect the Mutual fund industry as the overall distribution network is going to face severe challenges; risk has arises of small distributors losing their business and large distributors getting consolidated. Even before the implantation of new ruling Mutual fund industry lacked the distribution network to cover the entire country in a meaningful manner; some plans are in the air for establishing the grand distribution and trading platforms.

Such materialization would of course mitigate the long pending sluggishness of proper distribution network but that must not oust the IFA’s role; they must have to co-exist for further deliberation.In the new set of condition it would be quite imperative to have a triangular interface amidst the Mutual fund , investors and distributors with a consensus based settlement of commission and various other impetus; certainly it would be require disclosure norms more tightened and transparent. There must be a definite set of rules that apply equally to similar products irrespective of seller’s identity.
Apart from the challenges of new directives from SEBI, existences of some non-serious players in the business are equally posing serious concern over the maximization of its reach in financial market.

It seems quite astonishing after passing through the facts regarding very low requirements (Rs 10 crore) to start a Mutual fund unlike the Banking or Insurance business. Despite such hassle free monetary norms; leaders in Mutual fund couldn’t visualize the need for its pan Indian presence like the counterpart’s Bank and Insurance. Presently majority of Mutual funds business comes from corporate (around 70%); here the Mutual funds business urgently needed for some stringent regulatory mandate like rural penetration of business like the counterparts in financial services.
As per a survey of Value research ( An independent research and analysis institution), the industry’s present penetration is estimated at 4.5% as against 10-15% of Insurance business; there are around 3 million agents for Insurance products and just 80,000 distributors for Mutual funds. Indeed both have their own strength and weakness of business but at the moment Mutual fund industry required a tectonic shift in their products distribution in enhanced innovation and co-operation with Banks and Insurance sector.

Mutual fund industry by remodeling many products can leverage upon Insurance’s distribution networks since both are ‘push’ products. Structural changes in selling practices and better offers of reward in distribution network would be a crucial impetus in sustaining and rising of falling esteems in this business.
Today Mutual fund industry is standing at crossroads where it has to cope with many swiftly approaching challenges including a very consistent stiff competition from Insurance industry. Insurance businesses are in win-win situation in comparison of Mutual funds as they availing the traditional edge of being a tool of tax saving besides having a wide network of its distribution channels lead this industry to every threshold in both the urban and rural spaces in equal manners.

To gain an actual breakthrough, potential think tanks of Mutual fund sector should reassess their ongoing business model in terms of targeted breakthrough and further marched towards the comprehensive diversification. Diversification's in the sense, that it would reduce any adverse exposure from a specific sector and would mitigate other invisible travesty.Probably this lesson is most rational after suffering a chronic, meltdown of international financial system which not only raises question on the confined treatment of financial planning but also showed the solution in a diversified and transparent way of business behavior.
Indian market has a huge potential for the growth of Mutual fund business but it would require first to decipher the codes of investor’s expectation from the products. More and more adaptation with the Indian condition would harness the success story; fewer amounts of frills along with the greater amount of ethics and trust would be matched with the genuine plight of this growing sector.

Atul Kumar Thakur
17th August2009, New Delhi
atul_mdb@rediffmail.com

Myopic Routes of Finance (Sovereign Wealth Funds& Participatory Notes)

Amidst the ongoing crisis; it will be quite interesting to see and visualize the scale of losses…what we have actually lost in recent months, which have been in our possession through a considerable time. A lot of debate and writing has been stuffed about the potential causes of financial failure and diminishing market sentiments in past few months.
There could be many reasons behind the present financial chaos; among them, inflated treatment of stock markets best be attributed because the unprecedented growth till the crisis broke out largely caused by the unrestricted financial routes which don’t even canopied under the regulation of SEBI. So, no one can exactly traced the investors as their business dealt through intermediaries, even those middlemen’s never required to follow Know Your Customers (KYC) Norms.
These myopic investment roots may be considered to progenitor and nurturer of speculative finance. Two most prolific among them are: -

Sovereign Wealth Funds (SWF): -
Some SWF own by the State Governments of countries to handle with its idle assets for its maximization of value. SWF is not a fresh concept since its genesis can be traced back to 1950’s, then their size worldwide was $300billion.The current level now reached to $2 trillion to $3 trillion, the size may be cross $10trillion by 2010.
At present more than twenty countries have set up these funds. A dozen more have expressed willingness in establishing them. More than half of assets are possessed by oil exporting countries. Ranging from Norway to Trinidad, including Australia, China and Singapore. Still the holding are mostly concentrated with the top five funds, accounting for more than 70% of total assets under management.

Like hedge funds, SWF are also not governed by any single authority except the Singapore. SWF also operates through hedge funds, Private Equity for high return. So,it requires great care in fund management.SWF have a positive tendency to go long on securities that means to say, they buy and hold it invested for longer periods. This creates some establishing influence on stock markets.
But this establishing factor of SWF is highly disproportionate with its destablishing factor. Since it creates more place for irresponsible transaction. Overall SWF are immensely surrounded with chances of risk and failures, so neither it’s a meticulous route of investments nor it is good for just and equitable society.

Participatory Notes (PN): -
PN is an investment root by Foreign Institutional Investor (FII), through Offshore Derivatives Instrument (ODI); Such as Equity linked Notes and Participatory Return Notes have created storm in stock markets.
Basically FII issues PN to funds for companies whose identity is not known to the authorities. The PN is discriminatory as it promotes unethical investments; further it creates harmful effects on domestic companies. PN having very firm presence in India, as its proportion lies around 15-20% of stock of the top 1,000 companies. They have almost ruling influence on the market.PN outstanding by middle of 2007 was 3,53,484crores(51.6% of Asset under custody of all FII Sub Accounts). The value of outstanding ODI with underlying derivatives currently stands at Rs.1, 17,071crores, which is approx to 30% of total PN outstanding.

Users Of PN Route: -

1.Regular funds whose twin objectives are returns and more returns
2.Prodigal money returning
3.Foreign Governments/Entities who would like to acquire/control Indian entities by tracking them over.

PN investors channelizes their investment through the FII, but despite playing the role of intermediary, FII are not required to reveal their face. This situation further become more mysterious when regulators like SEBI simply let PN to escape from registration, which set them free from any regulation. Such allowances, promotes Indian financiers to enter in Indian Financials to enter in Indian Financial Markets.
Overall producers of PN transaction violates know Your Customers Norms, lastly, National Security Advisor cautioned against terror financing through stock market channels. Rising concerns of Indian authorities are very genuine, because unprecedented rise as well as fall are misleading the Indian growth story.

Two major constraints, which can lessen the impacts, are: -
1.A Special Purpose Vehicle (SPV), can be created which would be dollar dominated to hold these funds at attractive rates and which are countered over a period of time to minimize the followed impacts.
2.Generally these are two types of PN- Spot based and Derivatives/Future based (ODI). The latter accounts for around 32-33 percent of all PN. FII and their sub accounts shall not issue/renew ODI with underlying as derivatives with immediate effect .It should also mean that the hedge funds ,which has been fairly responsible for the steep rise in the markets, might exit the market because SEBI will never let them register as FII.

On such proposals, due consideration was given by SEBI to cope with threats of PN. Ultimately SEBI allowed 18 months to wind up outstanding PN in late 2007, now the proposed ceiling is near end, which means ends of the unauthorized PN.Decision taken by the SEBI was in very right directions. Since its timely implementation optimized and lessen many future losses. Some such more measure are imperative to check irregularities in financial markets.
Authorities have to play catalyst role in such initiatives. Investors should have also rationalize their paramounting expectations from financial markets and now must start to keep faiths in realistic rewards.
Atul Kumar Thakur
New Delhi
March12,2009
atul_mdb@rediffmail.com