SEBI asks brokers to collect investors' income proof

This Message is posted by Mr Amit Bachhawat, Email: amitbpb9@gmail.com

NEW DELHI: Concerned over inadequate checks on possible flow of black money into stocks, market watchdog SEBI has asked brokers to get income details such as tax returns, salary slips and bank account statements of the investors, not once but every year. 
 
To begin with, SEBI has asked the brokers to bar those traders and investors, who do not furnish the adequate proof for the source of their funds, from trading in derivatives market. 
 
Sources said that the direction would be soon extended to the cash market segment also. 
 
To seek a speedy and more effective compliance from the brokers, the Securities and Exchange Board of India has also directed the stock exchanges to enforce the new requirements. 
 
Sources said that SEBI might consider asking the bourses to put a mechanism in place through which the non-compliant brokers and clients could be denied access to the market. 
 
As per a circular from Bombay Stock Exchange to its member brokers, "In respect of clients trading in derivative segments, the member shall collect documentary evidence for financial information." 
 
"The illustrative list of documents to be collected from the clients include copies of Income Tax Return (ITR) acknowledgement, annual accounts (for institutional clients), Form 16 for salary income, net worth certificate, salary slips, bank account statements for six months, demat account holding statements and asset ownership certificates," it said. 
 
Besides getting these documents at the time of opening an account for the client, the brokers have also been asked to collect fresh documents every year as part of an annual updation of financial information exercise. 
 
Sources said that the move is aimed at checking illicit money, including those coming through money laundering or for terror financing as also from tax defaulters, from entering the stock market. 
 
The first move has been taken for derivatives market as the trading volume and turnover is much higher in this segment as compared to the cash market, sources said. 
 
Although they find it a daunting task to get the income details from lakhs of investors, brokers have started asking their respective clients for these details. 
 
SEBI had first asked the brokers to adopt these measures in December 2009, but brokers have been buying time on the ground of the enormity of the exercise. 
 
However, SEBI is now considering stringent measures to guard against any further delay in the compliance to these directions, sources said. 
 
Accordingly, the brokers are writing to their clients that "Submission of documentary evidence of financial details is must in case if you wish to trade in Derivatives Market" and they need to immediately submit the relevant documents. 
 
For company accounts, the clients are also required to submit copies of balance sheets for the last two financial years and copy of latest shareholding patterns, including list of all those owning more than five per cent stake. 
 
These documents need to be attested by the company secretary, whole time director or managing director of the client company. 
 
For both individual and company clients, all the documents would be valid for only one year and these would need to be submitted every year for continued access to trading.

Regards,
Amit Bachhawat

Should CAMS / KARVY / Deutsche / Sundaram allowed to do Distribution Business ?

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How to kill Mutual Funds

How To Kill Mutual Funds
August 23, 2010 06:34 PM
R Balakrishnan on saving and investing prudently
Source: http://www.moneylife.in/article/71/8459.html

It is the distributor who expands the market, as was proved again when a foreign bank raised Rs1,000 crore for its PMS when MFs are losing assets


There is a lot of discussion over the fact that mutual funds are not able to increase their assets under management. The reason for this is simple. They are not paying the salesman enough money. Investor preferences have absolutely NOTHING to do with money not coming into equities. Investors have no clue about where to put their money and need some push. Pushed hard enough, they will put money into fixed deposits of companies with no credit rating or low credit rating, dubious real-estate portfolio management schemes or plantation schemes. They need just one nudge from the distributor and they will do it. The retail and the high net worth investors are the ideal clients for smooth-talking sales guys.

Just last week, one foreign bank raised over Rs1,000 crore (yes, a thousand crore rupees) for a portfolio management scheme (PMS). At the same time, ‘experts’ are saying that mutual fund inflows have dried up due to market valuations getting stretched and for other equally inane reasons. I went a little behind the curtain to see what the distributor got from the foreign bank. He got a 4% upfront commission for selling this PMS which itself had a very simple structure. An upfront annualised management fee of 2%, and exit-load of 2.5% if redeemed within 12 months and a profit share if the returns crossed two digits! There was no link to market performance. If the market returns were 30% and the PMS delivered 20%, the PMS manager still got an incentive. It is typical of most PMS structures. And, of course, the return is measured before tax and not after tax.

Now, let me talk of a second PMS, where the value of a Rs5-lakh investment had gone up by Rs1.45 lakh, but all of it was short-term gains. Removing 30% tax, the gain shrank to under one lakh rupees. The PMS manager also deducted his incentive on the gross gain (around Rs0.29 lakh). The investor was left with around Rs0.70 lakh! The more interesting part was that the money was invested three years ago. If one takes the churn into account, the broking firm has made a handsome return. The investors got totally screwed.

What is the connection between the first and the second scheme? It is the same investor of the second PMS who again put money into the PMS of the foreign bank that I mentioned first.

The investor is a fool and no amount of reading or counselling makes any difference to the guy. All that matters to him is a slick distributor making a sexy PowerPoint presentation and perhaps treating him to a drink or attacking some other weakness of his. In any case, neither the investor nor the distributor understands the product. What the distributor knows is that by selling this, he makes 4%. So, he sells. For the investor, it is ‘long-term’ investing advised by an ‘expert’.

It is the distributor who is the key to the expansion of any market. By taking him on, the regulator has killed the reach of the mutual fund industry. No mutual fund can build a distribution system of its own and survive, given the paltry amount that is available to meet expenses.

To top it, we are seeing a toothless and mindless agency like the Association of Mutual Funds in India (AMFI) trying to slam the distributor with a nine-fold increase in ‘registration’ fee. I do not know why a distributor has to have a registration with AMFI which is only a trade body. Its inability to do anything meaningful has been demonstrated by the fact that even the test it used to hold for distributors, was a sham and it has now been transferred to an agency of the Securities Exchange Board of India. Why should AMFI have anything to do with the distributors? Distributors should ignore AMFI and have their own trade body. If I were a distributor, I would simply not sell a mutual fund product. I can sell PMS or insurance and make my living.

Sebi asks MFs to furnish distributor commission details

SEBI asks MFs to furnish distributor commission details August 24, 2010 02:48 PM Ravi Samalad

Source: http://www.moneylife.in/article/72/8479.html

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The regulator wants to make sure that fund houses are not distributing commissions from investors’ pockets
Market watchdog Securities and Exchange Board of India (SEBI) has once again turned the heat on mutual fund distributors. The regulator has sought details of commissions paid out to distributors over the last 10 months from asset management companies (AMCs). Some fund houses have already submitted this information to the regulator while others are in the process of doing so. According to industry sources, the regulator wants to ensure that AMCs are complying with SEBI's recent diktat which disallowed fund houses to disburse upfront commissions from the load account. AMCs had to comply with this rule from 1 April 2010.

"We are not paying commission from the load account. The problem is peculiar with fund houses which are in existence since the last 7-10 years. Their load accounts will be heavy. AMCs which have entered the business recently will neither have many schemes nor much money in their load accounts," said an official from a mid-sized fund house. Typically, it is Unit Trust of India that can pay a lot of money from its load accounts.

Equity schemes come with a lock-in period of one year while equity-linked saving schemes (ELSS) have a three-year lock-in period. If an investor exits the scheme before this lock-in period, the fund house charges 1% exit load. This money is stored in the load account and is utilised for investors' benefit. SEBI has been asking fund companies to carry out investor education programmes with this money.

There are variants of incentive structures like age-wise (tenure of investment holdings) and target-wise commission (among others) which are offered to intermediaries. Big fund houses that are ready to push their funds by going that extra mile are paying money from their own pockets. The distribution of schemes is carried out by filtering the top performing schemes. The schemes which have a consistent track record are pushed. Some industry players say that national distributors are only pushing schemes of a few fund houses which are ready to pay a handsome commission in return for sales.

Distributors are now paid 45 to 75 basis points (bps) trail commission depending on the fund house. Moneylife had earlier reported on how fund houses were offering upfront commission to the tune of 2%-3% under ELSS.
See: (http://www.moneylife.in/article/8/4440.html).

How SEBI killed the IFA: A murder investigation report

August 24, 2010 01:56 PM
S Rodrigues
Source:  http://www.moneylife.in/article/72/8477.html

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The IFA (Independent/Individual Financial Advisor) is on life support — suspected dead — and the prime suspect is the Securities and Exchange Board of India (SEBI). The acronym is alternatively called in a parallel world, the Systematic Elimination of Brokers and Intermediaries
Now the distributor is on the incubator, on life support, suspected dead. We know how he got there - is SEBI going to revive him or remove the life support system?
Let us study the history of this crime, and discover what the investigation reveals:
1. The Golden Beginning:
The golden days of mutual funds (MFs) were when they were a hard sell. The IFA educated the investor about risk-control measures, liquidity, profitability over a gestation period, tax benefits and working of an MF and introduced them to asset allocation before putting down a single rupee. However, the investor wanted to hear about the 'guaranteed returns' that he was addicted to - thanks to the Unit Trust of India (UTI), fixed deposits, etc. So he missed the boat but not before dipping his feet into the swimming pool by investing small amounts. The IFA said to himself, "Today he is dipping his toes into the swimming pool - tomorrow he is going to jump in." Right enough!
2. The 'Unethical Practices' begin:
Once the investor started to take a dive into mutual funds, they (mutual funds with the active connivance of some IFAs) introduced their first unethical practice - 'dividend stripping'. They did not inform the investor that the net asset value (NAV) falls to the extent of the dividend amount and that there is no advantage in chasing dividends (in fact there is a disadvantage as the investor is paying a load on money merely returned to him - without any fund management).  It was dividend that attracted the inflows and not the client's investment goals nor the fund performances - the party continued.
3. The 'Unethical Practices' grow:
The next big 'con' encouraged by mutual funds was "NFOs" (New {and unnecessary} Fund Offers). Mutual funds did not educate the distributors and investors that the NAV does not generate any return (but rather the 'Portfolio' does) - thus whether the NAV is Rs10 or Rs10,000 does not make any difference - it is merely a mechanism for 'entry' and 'exit'! They instead sold 'Rs10 as 'cheap'. This resulted in thousands of superfluous schemes being launched. SEBI did a great job of stifling the NFOs by abolishing the entry load.
4. Some 'Greedy Distributors/IFAs':
The biggest evil is yet to be highlighted - it is the 'banker' - who sold MFs based on head office's recommendations, which in turn were based on target collection shortfalls - client needs were nowhere in the picture. If the client needed 'debt' - sell 'equity' because there lies the shortfall in targets and the HO's rewards for them.  To make things worse, these qualified MBAs would each come with their own ideas and churn the client's portfolio many times and get multiple credits towards their sales targets. Next they would get a job promotion based on this (churning) performance and the new MBA would take his place with his bright ideas and rape the investor again with another few churns.
Some greedy IFAs joined this circus and sold equity as a 'short-term' instrument and wrongly taught investors that 'share funds have to be bought and sold quickly' - they did not inform the investor that they merely have to make an 'asset allocation' and the fund manager will be doing the 'buying and selling' for them.
Thus I maintain my stand that it is not merely 'education/educational qualifications' that will revive the industry but rather 'dedication' - let the investor decide who is dedicated and who isn't!
SEBI, too, messed up over here. When MFs set the exit load on share funds as 1% for those who exit before three years (gestation period of equity product) - SEBI in its benevolence to become popular among the investors reduced this to one year - this move encouraged churning after one year - thus doing more harm than good to the industry, which is suffering from too much short-term money and views.
5. SEBI lands its death blows:
A person is satisfied and gives his best if:
a. He is well-paid - if you pay peanuts you will get monkeys - why should you attract a qualified and dedicated force consisting of the brightest minds if the payment is inadequate? Not only was the payment made inadequate, the upfront brokerage was hastily abolished without setting into place international 'best practices'.
b. He is sufficiently motivated - SEBI and the media continuously focused on the unethical practices of a few distributors. The whole distributor community got demoralised and was viewed with suspicion - as cheats. How can you expect performance from a demoralised force?
c. He has the necessary job security - SEBI has released a diarrhoea of circulars and the entire MF industry is of the view that they all need to go on a long holiday. With the goalpost continuously being shifted, the IFA is totally disoriented and refuses to sell - this has rubbed on to the investor who is resorting to selling to invest in bank deposits and properties.          
Let me elaborate:
a. 'Investor Going Direct' is an injustice to a distributor:
A person approached me for the investment of a huge sum. I explained mutual funds to him in great detail. He wanted MF portfolio reports and performance comparisons - these were sent by email. He wanted a detailed plan with a suggested asset allocation - these too were promptly sent to him. After four months of discussion and deliberation - on 4 January 2008 I received an email 'Happy New Year - I heard that now we can now invest directly in mutual funds. Thanks for all the help and advice.'
Now do you think this is fair??? Why on earth should I spend hours of my time on an investor when I do not know whether I will be adequately remunerated? So thanks to this move of SEBI I have turned tight-lipped and sketchy in my explanations, I now give only 10% of myself - as against 120% previously and new investors are strictly taboo (at a time when SEBI wants them popularised).
Thus thanks to SEBI I am no longer doing justice to the investor community. This move to let the investor go directly is retrograde, with the abolishing of the entry load it has become obsolete - but SEBI will not remove it from the statute book as they will be losing brownie points.
b. The international 'best practices' remuneration structure was not put in place before abolishing loads and commission - death for the small investor:
The international practice of the investor and distributor mentioning a mutually negotiated commission rate on the application form and both signing against it should have been put in place before commissions were abolished. This would have resulted in a smooth transition to the new regime. The move on the part of SEBI of only implementing half the job has won a lot of investor brownie points, a place in the history books but has destroyed the remuneration and motivation of IFAs and has rattled the whole MF industry.
Mutual funds were formed to mobilise the savings of the small investor. But with no upfront brokerage and with the laborious and expensive billing process, who would be interested in the small investor who wants to make an SIP below Rs5,000 per month or invest an upfront amount of Rs5,000 to Rs25,000? The billing would cost more than the revenue earned. Thus this populist move has been self-defeating - the small investors are rejected and no longer welcome!
c. All financial products cannot be marketed on the same remuneration:
SEBI has not understood the marketing of financial products and it is for this reason I am most thrilled they were unsuccessful in taking over ULIPs (the most expensive and mis-sold con product in the financial world - which need drastic distributor cost restructuring for some profitability to emerge).
Here is an explanation:
i. Shares and stocks are sold by giving recommendations/tips - it requires no servicing/discussions. All servicing is done by the investor directly with the demat bank/institution. It is a high-volume business with hundreds/thousands of transactions conducted daily on a low remuneration.
ii. Mutual funds required detailed explanations relating to risk control, liquidity, profitability over a gestation, tax benefits, working, etc. Regular servicing for change of address, change of name due to marriage, change of bank details, death of holder, valuation & tax statements, account statements requests, year ending account statements requests, etc, etc - take up a majority of a working day. Such services are generally rendered free although they take up a lot of time and cost much money.
Thus transactions are few and require a higher remuneration.
iii. With insurance a person sells the insecurity of death - which is a hard sell.
iv. With ULIPs they sell a combination of mutual funds and insurance. Both insurance and ULIPs have only a few strikes (if at all) in a month - so how on earth can all these products be sold and remunerated in a similar way? They each have their own dynamics and remunerative structure to retain quality talent. If SEBI took over ULIPs they would become extinct like the dinosaurs and crumble like the MF industry!
d. Unnecessary focus on commissions:
When SEBI abolished the entry load and upfront commissions and focused on commissions, it did the following:
i. Created huge entry barriers due to which bright and clever minds could not enter the industry. The commission given by mutual funds out of their own resources was too low - new entrants did not have the ability to charge a fee.
ii. Around 80% of the IFAs disappeared (100% would have disappeared if trail brokerage commission was also abolished) and enrolled in employment exchanges or joined call centres. With a depleting force how can there be increased market penetration?
iii. All expansion plans into rural areas and branch expansions, etc, were abandoned.  In fact many of my colleagues shut down branches.
iv. The lack of remuneration de-motivated persons from getting professionally qualified thus stifling the quality of growth in the industry.
v. The whole focus was drawn to commissions, compiling commission sheets, etc rather than reading news articles, studying portfolios, learning/using tools of financial planning, meeting clients needs, etc - the quality of advice deteriorated as more time was spent on such useless activities.
The SEBI chairman does not pin his salary structure on his shirt, Value Research or any financial magazine does not mention how a big article was published due to the support of an advertisement - so why should a mutual fund distributor reveal his (now - token and miserable) commissions when he meets an investor? In fact, the task is daunting and could take months to prepare - as the commissions on 'all competing schemes' need to be displayed i.e. thousands of schemes - an impossible task! This is how the bureaucracy burdens you with burdens nobody can bear - so that they can crucify you anytime!
All this shifts the focus from the client's needs to the commission structure - thus getting everyone 'out of focus'. With the current rule even the best scheme attracts the suspicion of the investor if it pays the most commission!
It would save a lot of time if instead the regulation provided that:
a. The investor can log into CAMS/Karvy/AMFI and find out the commissions payable by all schemes by entering the distributor code.
b. Each mutual fund scheme is rated by CRISIL (or any other rating agency). And only those selling funds below a certain rating should be forced to reveal the commission received thereon and competing schemes. My 25 years experience in this line tells me that focusing on commissions is a bad idea, puts the emphasis on the wrong thing and get everything 'out of focus'.
vi. The distributor also suffers from the stigma of other injustices in relation to commissions, e.g.:
a. While everyone is exempt from service tax for service income up to Rs10 lakh, the mutual fund distributor's commission is subject to service tax deducted at source from Re1. Why is SEBI not acting in this matter and making representations to the government? It is now three years and this injustice continues - distributors earning more than Rs10 lakh have lost more than Rs3.6 lakh due to this move.
b. A manufacturer does not ask a wholesaler how much of the produce he is going to personally consume and charge him a retail price thereon. An Insurance Distributor gets a commission on his own policy!
So why has an MF distributor to disclose his personal investments and not be paid thereon? It does not make sense especially since upfront commission payment from investor money has been abolished.
This rule was introduced so that persons would not become distributors merely to earn commissions on their own investments. With the professionalization of the distribution business this provision has become obsolete and needs to be abolished.
c. AUM (Assets Under Management by a distributor) is tantamount to goodwill created, as an investor is free to change his broker if he is not happy with him. Thus AUM is nothing but 'retained assets' i.e., goodwill. However there is no uniform mechanism to transfer the AUM on change of the organisational structure, for the distributor to sell the AUM on retirement, for the heirs to sell the AUM within a reasonable time after the death of the distributor. Thus the distributor's 'gold nest' can easily get frittered away and is without any legal protection.
          
The fact is that for the mutual fund industry to succeed two things need to be done:
a. SEBI, MFs and distribution channels need to work ethically together as a team.  Right now there is a major conflict with SEBI. And SEBI is hated by MFs and distributors with all their might (and rightly so!).
b. The investors must be given proper product knowledge and MFs must be sold ethically. Each investment must be tied to an investor's need - so that he remains invested with a purpose.
Until this comes about, the MF industry is not going to expand but will instead stagnate.

c. He has the necessary job security - SEBI has released a diarrhoea of circulars and the entire MF industry is of the view that they all need to go on a long holiday. With the goalpost continuously being shifted, the IFA is totally disoriented and refuses to sell - this has rubbed on to the investor who is resorting to selling to invest in bank deposits and properties.           
Let me elaborate:
a. 'Investor Going Direct' is an injustice to a distributor:
A person approached me for the investment of a huge sum. I explained mutual funds to him in great detail. He wanted MF portfolio reports and performance comparisons - these were sent by email. He wanted a detailed plan with a suggested asset allocation - these too were promptly sent to him. After four months of discussion and deliberation - on 4 January 2008 I received an email 'Happy New Year - I heard that now we can now invest directly in mutual funds. Thanks for all the help and advice.'
Now do you think this is fair??? Why on earth should I spend hours of my time on an investor when I do not know whether I will be adequately remunerated? So thanks to this move of SEBI I have turned tight-lipped and sketchy in my explanations, I now give only 10% of myself - as against 120% previously and new investors are strictly taboo (at a time when SEBI wants them popularised).
Thus thanks to SEBI I am no longer doing justice to the investor community. This move to let the investor go directly is retrograde, with the abolishing of the entry load it has become obsolete - but SEBI will not remove it from the statute book as they will be losing brownie points.
b. The international 'best practices' remuneration structure was not put in place before abolishing loads and commission - death for the small investor:
The international practice of the investor and distributor mentioning a mutually negotiated commission rate on the application form and both signing against it should have been put in place before commissions were abolished. This would have resulted in a smooth transition to the new regime. The move on the part of SEBI of only implementing half the job has won a lot of investor brownie points, a place in the history books but has destroyed the remuneration and motivation of IFAs and has rattled the whole MF industry.
Mutual funds were formed to mobilise the savings of the small investor. But with no upfront brokerage and with the laborious and expensive billing process, who would be interested in the small investor who wants to make an SIP below Rs5,000 per month or invest an upfront amount of Rs5,000 to Rs25,000? The billing would cost more than the revenue earned. Thus this populist move has been self-defeating - the small investors are rejected and no longer welcome!
c. All financial products cannot be marketed on the same remuneration:
SEBI has not understood the marketing of financial products and it is for this reason I am most thrilled they were unsuccessful in taking over ULIPs (the most expensive and mis-sold con product in the financial world - which need drastic distributor cost restructuring for some profitability to emerge).
Here is an explanation:
i. Shares and stocks are sold by giving recommendations/tips - it requires no servicing/discussions. All servicing is done by the investor directly with the demat bank/institution. It is a high-volume business with hundreds/thousands of transactions conducted daily on a low remuneration.
ii. Mutual funds required detailed explanations relating to risk control, liquidity, profitability over a gestation, tax benefits, working, etc. Regular servicing for change of address, change of name due to marriage, change of bank details, death of holder, valuation & tax statements, account statements requests, year ending account statements requests, etc, etc - take up a majority of a working day. Such services are generally rendered free although they take up a lot of time and cost much money.
Thus transactions are few and require a higher remuneration.
iii. With insurance a person sells the insecurity of death - which is a hard sell.
iv. With ULIPs they sell a combination of mutual funds and insurance. Both insurance and ULIPs have only a few strikes (if at all) in a month - so how on earth can all these products be sold and remunerated in a similar way? They each have their own dynamics and remunerative structure to retain quality talent. If SEBI took over ULIPs they would become extinct like the dinosaurs and crumble like the MF industry!
d. Unnecessary focus on commissions:
When SEBI abolished the entry load and upfront commissions and focused on commissions, it did the following:
i. Created huge entry barriers due to which bright and clever minds could not enter the industry. The commission given by mutual funds out of their own resources was too low - new entrants did not have the ability to charge a fee.
ii. Around 80% of the IFAs disappeared (100% would have disappeared if trail brokerage commission was also abolished) and enrolled in employment exchanges or joined call centres. With a depleting force how can there be increased market penetration?
iii. All expansion plans into rural areas and branch expansions, etc, were abandoned.  In fact many of my colleagues shut down branches.
iv. The lack of remuneration de-motivated persons from getting professionally qualified thus stifling the quality of growth in the industry.

v. The whole focus was drawn to commissions, compiling commission sheets, etc rather than reading news articles, studying portfolios, learning/using tools of financial planning, meeting clients needs, etc - the quality of advice deteriorated as more time was spent on such useless activities.
The SEBI chairman does not pin his salary structure on his shirt, Value Research or any financial magazine does not mention how a big article was published due to the support of an advertisement - so why should a mutual fund distributor reveal his (now - token and miserable) commissions when he meets an investor? In fact, the task is daunting and could take months to prepare - as the commissions on 'all competing schemes' need to be displayed i.e. thousands of schemes - an impossible task! This is how the bureaucracy burdens you with burdens nobody can bear - so that they can crucify you anytime!
All this shifts the focus from the client's needs to the commission structure - thus getting everyone 'out of focus'. With the current rule even the best scheme attracts the suspicion of the investor if it pays the most commission!
It would save a lot of time if instead the regulation provided that:
a. The investor can log into CAMS/Karvy/AMFI and find out the commissions payable by all schemes by entering the distributor code.
b. Each mutual fund scheme is rated by CRISIL (or any other rating agency). And only those selling funds below a certain rating should be forced to reveal the commission received thereon and competing schemes. My 25 years experience in this line tells me that focusing on commissions is a bad idea, puts the emphasis on the wrong thing and get everything 'out of focus'.
vi. The distributor also suffers from the stigma of other injustices in relation to commissions, e.g.:
a. While everyone is exempt from service tax for service income up to Rs10 lakh, the mutual fund distributor's commission is subject to service tax deducted at source from Re1. Why is SEBI not acting in this matter and making representations to the government? It is now three years and this injustice continues - distributors earning more than Rs10 lakh have lost more than Rs3.6 lakh due to this move.
b. A manufacturer does not ask a wholesaler how much of the produce he is going to personally consume and charge him a retail price thereon. An Insurance Distributor gets a commission on his own policy!
So why has an MF distributor to disclose his personal investments and not be paid thereon? It does not make sense especially since upfront commission payment from investor money has been abolished.
This rule was introduced so that persons would not become distributors merely to earn commissions on their own investments. With the professionalization of the distribution business this provision has become obsolete and needs to be abolished.
c. AUM (Assets Under Management by a distributor) is tantamount to goodwill created, as an investor is free to change his broker if he is not happy with him. Thus AUM is nothing but 'retained assets' i.e., goodwill. However there is no uniform mechanism to transfer the AUM on change of the organisational structure, for the distributor to sell the AUM on retirement, for the heirs to sell the AUM within a reasonable time after the death of the distributor. Thus the distributor's 'gold nest' can easily get frittered away and is without any legal protection.
           
The fact is that for the mutual fund industry to succeed two things need to be done:
a. SEBI, MFs and distribution channels need to work ethically together as a team.  Right now there is a major conflict with SEBI. And SEBI is hated by MFs and distributors with all their might (and rightly so!).
b. The investors must be given proper product knowledge and MFs must be sold ethically. Each investment must be tied to an investor's need - so that he remains invested with a purpose.
Until this comes about, the MF industry is not going to expand but will instead stagnate.
 
(Ms S Rodrigues is a financial and investment consultant based in Pune. She has, of course, used a pseudonym).

Sebi wants listing of all mutual fund schemes

Transactions in mutual fund schemes could soon become as easy as those in stocks. Securities and Exchange Board of India (Sebi) is planning to make listing of all schemes mandatory. These will include all debt, equity, open-ended and close-ended schemes.
Settlement will also be in line with those in stocks, that is, settlement must be completed within two days of transaction (called T+2), instead of the existing T+3 format. “Sebi wants transactions in mutual funds to become just like stocks in the secondary market,” said a source familiar with the development.
.market regulator is working in association with exchanges and fund houses to iron out the technical aspects of such a system. According to the sources, a series of meetings have already taken place.
Last week, Sebi held meetings with bankers that act as MF distributors. At that meeting, they were asked to become members of exchanges for MF distribution. Banks have been given two weeks to respond. The meeting was also attended by stock exchange representatives and intermediaries.
The first step – launching a mutual fund platform at both the Bombay Stock Exchange (BSE) and National Stock Exchange – took place last November. The second stage, listing all mutual fund schemes at the exchanges and making the settlement procedure faster, is in the works. And the final stage will be launching new fund offerings through the exchanges.
However, Sebi’s decision has been delayed by a few problems. For one, there are over 2,000 schemes in the market. Then, there are listing costs. When listing of fixed-maturity plans (FMPs) was made mandatory last year, cost was an issue.
At present, the cost of listing FMPs depends on assets under management. The cost is Rs 16,000 for funds that have AUM up to Rs 100 crore, for the first six months. The cost of listing exchange-traded funds is the same. “The listing cost of schemes may be too high, especially for smaller fund houses. It should not be a big deal for large players,” said a source.
Trading of mutual funds at the exchanges has not really taken off. Monthly volumes on the BSE, the bigger player in this segment, rose from Rs 18.80 crore to Rs 78.85 crore in July. The reason: settlements take place directly between fund house and investor. That is, units of a mutual fund are deposited directly into the demat account of an investor.
When trading through the exchanges, things are different. In comparison, in the case of stock trading, the broker takes delivery of shares.
So, if the cheque of a mutual fund investor bounces, the broker may have to chase an investor. “It is this lack of control at the broker’s end that does not encourage them to aggressively promote mutual fund trading. We are looking at a process whereby units can be delivered through brokers,” said an exchange official.
PAST & FUTURETHE STORY SO FAR# Listing of schemes has started, but not mandatory# Volumes so far have been minuscule# Brokers not pushing mutual funds through exchanges the road ahead# Listing will become mandatory # Banks and distributors to take SE membership# Settlement cycle to be two days of transaction
According to Sebi officials, the basic reason for listing all mutual funds is to give investors another option. Also, costs will come down further. “The stock exchange is used as an efficient order-routing system from the investor to the fund house. We are simply using exchanges as efficient couriers of orders,” said a Sebi official.
Industry experts feel that while it makes sense to list closed-ended and exchange-traded funds (ETF), listing open-ended schemes will not help expand the market. “Listing close-ended schemes, though they trade at a discount, is quite simple. The investor has an exit route,” said the CEO of a fund house. In the case of open-ended schemes, listing does not make much sense because the investor can exit at any time, at the existing net asset value.
“Both the earlier directives, investing directly with the asset management company at zero cost and through exchanges, will take time to work. The market has not really expanded manifold after their introduction,” said an industry expert.
Internationally, while closed-ended and ETFs are listed, open-ended schemes are not. However, unlike India, the number of investors in ETFs is very high.

Finance ministry asks Irda, Sebi to park surplus with government

The finance ministry has asked market regulator Sebi and insurance watchdog IRDA to deposit their surplus funds with the government, a move that may be resisted by these bodies citing regulatory autonomy. The directive follows repeated suggestions by the Comptroller and Auditor General (CAG) of India, the government’s statutory auditor, which says this will improve the regulators’ accountability to the exchequer.
“It is just a matter of principle,” a senior finance ministry official said.
“Public expenditure needs parliamentary approval. So we have insisted that they deposit their income in the Consolidated Fund,” he said, adding that the regulators are free to use the money anyway after they gets legislative sanction.
Sebi and IRDA had resisted earlier attempts by the government to make them park their income and surplus funds in government accounts. About Rs 1,800 crore of surplus funds generated by financial sector regulators through fees and penalties on companies are parked in their respective accounts at present.
The finance ministry has directed the chief controller of accounts to open a new accounting head to keep the funds from regulators and evolve a method for transferring them into the public accounts.
“To avoid any dispute, we have taken advice from the law ministry, which has supported our stand,” the finance ministry official said, adding that under Article 266 of the Constitution money collected by the regulatory authorities should be submitted towards the government account.
The government’s move assumes significance as this comes at a time when it has floated a discussion paper on the setting up of a Financial Stability Development Council (FSDC), an inter-regulatory agency. Earlier this month, the Parliament had passed the Securities and Insurance Laws (Amendment and Validation) Bill, 2010, which provides for a statutory body under the finance minister to resolve disputes between financial sector regulators.
The Parliamentary standing committee on finance and the CAG have highlighted the issue in their earlier reports.
The issue first surfaced in 2001 when the finance ministry asked Sebi to transfer funds to government accounts and get its expenditure vetted by Parliament. In 2002, the ministry asked asked IRDA to follow the procedure.
In January 2005, the department of economic affairs in the finance ministry directed all ministries and government departments to ensure that funds of regulatory bodies are maintained in the Public Accounts.
The CAG tried to address these concerns in an earlier audit report in 2006-07.
“The apprehensions of the regulatory authorities that there could be compromise of their autonomy, if their receipts are credited to the government account and expenditure met out of the budgetary appropriations, are unfounded in the light of the status obtaining in respect of similarly placed organisations abroad and the practice of maintaining accounts of the constitutional and independent authorities like judiciary, UPSC, CAG, CERC, TRAI and Election Commission as a part of Government accounts,” the report said.
In a 2008 report, the CAG pulled up interim pension fund regulator PFRDA, electricity regulator Central Electricity Regulatory Commission and Petroleum & Natural Gas Regulatory Board for keeping their funds outside public accounts.
“The finance accounts of the Union government, therefore, do not present a correct and complete picture of government finances to the extent of funds of Rs 1,747.37 crore lying outside government accounts,” the CAG said in its report on Union government accounts for 2008-09.

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SEBI ban on MFs' options play upsets AMCs, brokers

20 Aug, 2010, 03.34AM IST, Nishanth Vasudevan,ET Bureau
SEBI ban on MFs' options play upsets AMCs, brokers

MUMBAI: Mutual funds and stock brokers are miffed at capital market regulator Securities and Exchange Board of India’s (Sebi) move to bar asset managers from selling options contracts starting October 1. This is because the step will limit mutual funds’ abilities to maximise returns in their schemes, affect business of stock brokers and impact volumes in the options segment, fund officials and derivative sales persons at broking firms said, requesting anonymity. “This ban amounts to denying investors the opportunity to get the most in their scheme,” said a senior fund manager with a private mutual fund, which is known to be most active in derivatives in the industry. “Even if we were to go by the logic of unlimited risks in selling options, a complete ban was not the solution,” he said. Option sellers enjoy limited profits to the extent of the premium they receive from trade, but face the risk of unlimited losses, if their bets go wrong. Sebi did not offer any reason on why it was banning mutual funds from selling options, but industry officials said Sebi was worried that wrong bets in illiquid options could wreak havoc on the industry. Mutual fund officials said that this concern was misplaced, as schemes’ average exposure to futures and options has not exceeded 10% of their corpus in the past. This claim could not be independently verified. Industry officials grudge that the securities market regulator has not considered any of their feedback to its proposals that included banning mutual funds from selling options. “It looks like the circular that was sent for seeking feedback has been put up as the final circular,” said a top official with a bank-owned mutual fund. Sebi, which is believed to have sent the proposals to mutual funds late March, announced the ban, along with some other restrictions in their use of derivatives, in a circular on Wednesday. “Ironically, retail investors, who have very little skills to use derivatives, can continue to sell options while professional fund managers with their superior access to information will have their hands tied,” said a head of equities with an asset management company. Stock brokers are angry with the Sebi move, as their business will likely be affected with mutual funds increasingly getting comfortable with derivatives. Reliance Mutual Fund, ICICI Prudential Asset Management, Birla Mutual Fund, Kotak Mutual Fund and DSP Blackrock are considered to be most active in derivatives in the local mutual fund industry. “In recent times, mutual funds have been among the dominant drivers of volumes in the options market. They have been comfortable selling options while foreign institutions have been the buyers,” said a head of derivatives with an institutional broking firm. “If a section of the dominant sellers go overnight, it could affect the balance of the options segment,” he said. Not all agree that the move would dry volumes in the options segment. TS Harihar, head-derivatives, ICICI Securities, said, “I don’t think it would have any significant impact, as local funds are not big players. Also, their activity has declined, of late.”

Regards
Valady V Barathwaaj

CAMS Group CO. - LAKSHMI DIRECT - BE AWARE

Dear all,

 

Yesterday I had received a call from the above company and a lady was talking to me. She said that they are selling mutual funds and would service me without any charges or fees for my investments. To get more details I asked where she got my database, the answer she gave me was CAMS gave them. Then I told her " you people are living on the works of various distributors who have done the leg work earlier to create such investors.'"  Now they want to cash in the opportunity of invading our clients on the pretext of no charges or fees.

 

Not once I asked her twice about the database she reconfirmed saying that CAMS has given them. Now if you ask CAMS they will lift their hands and say we are the best in the world maintaining secrecy and no leakage of data. Even so, now they themselves are invading on the data right royaly by giving it to their group company and trying to grow business.

 

Finally, in business they are trying to prove NO ETHICS once more. Kindly take care of your clients at the best possible methods so as to avoid such unhealthy competition.

 

Regards

 

Sincerely,

 

Sathish Kumar C

9840189123 / 9790803751 / 24338788/ 24343674 / 42128243

 

After the Death of ARN Holder will Nominee Get Trail or Not - Should he/she should be ARN Holder?

Dear All,

 

In case of sad demise of an ARN holder what will happen with his/her trail commission

i) if the nominee is also an ARN holder

ii) if the nominee is not an ARN holder

 

I will be highly obliged if any one can clarify.

 

No local AMC has a clear view in this regard.

 

Regards

Saikat Sen (MFRT)

ARN 0402

KYC Must for Any Investment Amount

Source: http://new.valueresearchonline.com/story/h2_storyview.asp?str=14989

The Association of Mutual Funds in India (AMFI) has asked all asset management companies (AMCs) to make KYC (know-your-customer) norms mandatory for all non-individual and NRI investors irrespective of the amount of investment.

Under the present norm, KYC is mandatory only for investments above Rs 50,000.

In a letter sent to AMCs, AMFI has said that the mutual fund industry should go ahead with making KYC mandatory, irrespective of the amount of investment for all non-individual investors/NRIs/channel investors (high risk category) with effect from October 01, 2010. These categories will include corporate, partnership firms, trusts, HUF (Hindu undivided family), NRI and investors coming through channel distributors.

However for individual investors, a decision would be taken only after feedback from the Securities and Exchange Board of India (SEBI).

The AMFI committee on KYC had made the proposal to lower the current threshold amount from Rs 50,000 to zero in a phased manner for different categories of investors and the proposal is still under consideration of SEBI. However, the AMFI committee has recommended that even as the proposal is pending clearance from SEBI, the mutual fund industry should remove the limit of Rs 50,000 for all non-individual investors and NRIs investors.

KYC norms were implemented from February 1, 2008, for all investors investing in mutual funds schemes amount of Rs 50,000 and above. It was done in order to comply with the Prevention of Money Laundering Act 2002.

For the convenience of investors, all mutual funds have made special arrangements with CDSL Ventures Ltd. (CVL), a wholly owned subsidiary of Central Depository Services (India) Ltd (CDSL).

Happy Independence Day

Who is winning the Game : Bank or IFAs

A very interesting article by CAMS-BCG, which explodes several myths about distribution scene in India, a must read. http://www.wealthforumezine.net/Industrytrends120710.html Shankar S Credo Capital Who is winning the game : banks or IFAs ?
	Boston Consulting Group (BCG) and CAMS have come up with a wonderful report on   the state of play in equity mutual funds. There is a wealth of data in this report - some   of which effectively busts some popular notions- with hard data. Analysis and findings   are based on CAMS data - which represents some 57% of industry equity fund assets -   and can be considered representative of the whole industry.   Some major notions that are busted by this report :     - That IFA assets are stickier than bank assets     - That retail investors always get their hands burned by investing at market highs        and redeeming in panic in subsequent corrections     - That banks and NDs are squeezing out the IFA segment     - That banks and NDs were the major beneficiaries of the AuM transfer mania that the        industry witnessed in early 2010     - That MF penetration into smaller towns remains a pipe-dream

Notion 1 : IFA assets are stickier and long term, banks have much shorter tenure

Reality 1 : Stickiness of assets is more a function of investor size and not distributor type.

There is not much of a difference between IFAs, banks, NDs and RDs in terms of duration of equity fund assets - as seen from the chart below (Exhibit 2b). The difference is stark when one looks at it from the perspective of type of investor - not type of distributor. Retail investors assets are certainly far stickier and longer term than HNI investors assets.

The authors of the report estimate that ageing of assets in the less than Rs. 1 lakh segment (retail) is about 33 months and in contrast, its around 20 months in the HNI segment (above Rs. 1 crore).

Notion 2 : Retail investors always get their hands burnt by investing at market peaks and panic-selling in subsequent corrections.

Reality 2 : 72% of all redemptions made between Apr 2008 and Mar 2010 were at a profit.

In fact, retail investors (below Rs. 5 lakhs) as a sub-segment seem to have done even better : 80% of redemptions were at a profit. In the HNI segment, (over Rs. 5 lakhs), 63% of redemptions were at a profit.

The story is however a little different if one looks at redemptions from NFOs. Around 50% of redemptions from NFOs were below par and a further 22% were at NAVs less than Rs. 11 - a 10% gain. Investors who redeemed out of NFOs were clearly not a happy lot - unlike those who redeemed out of ongoing schemes.

As the authors of this report say, there is clearly a great story here of investors making money in mutual funds - which must be effectively converted into marketing communication to daw in the more sceptical investors - nothing succeeds like success - and there is no better advertisement than satisfied investors who have made money. The industry can justifiably boast of 80% of retail investors taking home profits even in the most volatile period (Apr 08 - Mar 10). This fact must be leveraged effectively by AMCs, distributors and advisors.

Notion 3 : Banks and NDs are squeezing out IFAs and will soon dominate the distribution landscape

Reality 3 : In the last 6 years, banks and NDs have lost market share. The only segment that has been gaining market share on a year-on-year basis is the IFA segment.

If we dig deeper, the facts are even more interesting. Large IFAs (defined as IFAs who have CAMS equity assets of more than 1 crore) have gained share very rapidly - from 10% to 23% over the last 6 years. Small and medium sized IFAs have lost share.

It is abundantly clear that serious and committed advisors have been winning market share at a rapid pace over the last 6 years - and we see no reason for any change in this trend. Small and marginal IFAs - who have perhaps never been very committed to this business - are exiting this business - which is unfortunate, but perhaps inevitable. But the message for committed IFAs is crystal clear - it is their segment that is winning the market share game - and not the banks and NDs as was the popular notion. There is no need to fear competition - as long as you continue to put your clients interest first, always.

Notion 4 : In early 2010, when AuM transfers were rampant, banks and NDs grossly misused this facility to squeeze out IFAs

Reality 4 : Banks and NDs at a category level lost as much as they gained. RDs gained significantly, at the expense of small IFAs. Large IFAs were largely unaffected.

There was indeed a very sharp jump in transfer requests - which is what prompted AMFI to come up with its rather controversial decision to deny trail altogether to both ARN holders on transferred assets.

A look at who gained and who lost in this AuM transfer mayhem that happened is quite revealing. Small IFAs (less than 1 crore in CAMS equity assets) saw the maximum activity - not just in AuM lost, but in AuM gained as well. As a category, they gained Rs. 417 crores - that's much more than any other category - and also lost the most - Rs. 500 crores. That's quite different from the picture we were told was happening - that large banks and NDs were "acquiring" assets of small IFAs - not always through fair means. The biggest churn happened - it seems - within the small IFA segment itself.

The biggest winner - at a net AuM level - was the regional distributor segment. Banks in fact lost a little more assets than they gained at an overall level. Same was the story in the large IFA segment.

Notion 5 : MF penetration in smaller towns remains a pipe-dream. MFs remain a metro-centric product

Reality 5 : AMCs and distributors have been making steady progress in increasing MF penetration in smaller towns - and the trend is very encouraging

Mumbai's overwhelming dominance is fading. The next 9 cities have more or less held their share over the last 7 years. The encouraging trends are in the cities ranked 11 to 30 and cities ranked 31 to 100 - which are rapidly becoming very meaningful participants in the equity funds industry.

But, while the direction is undoubtedly very encouraging, a sobering reminder about the work yet to be done by the industry can be seen from the next chart - which shows the share of smaller cities in other savings and investment products. Clearly the insurance industry has achieved significantly higher penetration levels. But the real one to take note of is retail stock broking. At the very least, the MF industry must aspire to match the penetration of retail stock broking. If investors in small towns can buy direct equities, why can't advisors and AMCs get them to buy equity funds? That's the immediate challenge for the MF industry.

SEBI cracks whip on online mutual fund distributors

SEBI cracks whip on online mutual fund distributors August 13, 2010 03:22 PM Ravi SamaladSource: http://www.moneylife.in/article/72/8211.html The regulator has asked fund houses to furnish all investor-related documents by 22nd November which  were opened via online distribution channels Asset management companies (AMCs) will not be allowed to open any new accounts if they do not possess  all investor-related documents with them. A majority of these accounts mainly belonged to online distributors  who were not ready to share investor details with AMCs. "Online distributors were not disclosing the customers' identity and were merely saying that these transactions  were happening at their level. They said they would do business based on power of attorney (PoA) but the  Securities and Exchange Board of India (SEBI) did not agree. So now, SEBI is forcefully implementing the  norm by involving trustees. This is a good move by SEBI. Know your customer (KYC) norms are mandatory  for AMCs and it cannot be masked under a distributor's identity," said a top official from a fund house. According to industry players, some distributors were executing mutual fund (MF) trades by misusing PoA  signed by investors. "This is essentially for people who are selling MFs through online channels. They have to comply with  the Prevention of Money Laundering Act (PMLA). For offline clients, we are anyway filling up the application  forms and taking all details. SEBI is doing it ensure that no suspicious money is coming into MFs. Investors can also do transactions  over the phone, so PoA is required in that case. So whether the PoA is valid or not also needs to  be checked," said K Venkitesh, national head (distribution), Geojit BNP Paribas. Moneylife had reported on 29 July 2010 on how the Financial Intelligence Unit (FIU) had revised the  guidelines for Suspicious Transaction Reports (STRs) for MFs. (See: http://www.moneylife.in/article/81/7749.html).  SEBI in its 11 December 2009 circular had mandated fund houses to halt commissions paid to  distributors who did not have complete investor-related documents. Distributors were supposed  to submit all investor-related documents to AMCs. Moneylife had reported on 22 March 2010  on how distributors were unable to submit KYC documents to AMCs. (See: http://www.moneylife.in/article/8/4340.html). The SEBI circular states, "It appears that all the investor-related documentation is not available  with the AMCs. It has been observed that due to such incomplete documentation, investors' rights  to approach the AMCs directly are restricted and investors are forced to depend on the  distributors for executing any financial or non-financial transactions." AMCs will be allowed to open a new account only when they have all investor-related documents like PAN, KYC, specimen signature and PoA. The regulator has  asked the trustees of AMCs to submit a confirmation report by 22 November 2010. Existing accounts  will have to be updated by 15 November 2010.

SEBI circular on Updation of investor related documents

SEBI circular on Updation of investor related documents

Aug 13, 2010 SEBI

Cir / IMD / DF / 9 / 2010   ,August 12, 2010

1. SEBI vide circular No. SEBI/IMD/CIR No.12 /1 86868 /2009 dated December 11, 2009 has inter alia advised mutual funds to confirm whether all the investor related documents are maintained/ available with them. Further in case the investor related documentation was incomplete, the trustees of the mutual funds were advised not to make further payment to such distributors till full compliance/ completion of the steps enumerated in the said circular and to send a status to SEBI as and when process is completed to satisfaction.

2. SEBI has not received any confirmation from the trustees of the mutual funds on the completion of the process as mandated in the said circular. Thus it appears that all the investor related documentation is not available with the AMCs. It has been observed that due to such incomplete documentation investors' rights to approach the AMCs directly are restricted and investors are forced to depend on the distributors for executing any financial or non-financial transactions.

3. In order to ensure that investors have unrestricted access to AMCs and to enable AMCs to provide prompt investor service including execution of investors’ financial or non-financial transactions, all mutual funds/ AMCs are directed that:

All new folios/ accounts shall be opened only after ensuring that all investor related documents including account opening documents, PAN, KYC, PoA (if applicable), specimen signature are available with AMCs/RTAs and not just with the distributor.

For existing folios, AMCs shall be responsible for updation of the investor related documents including account opening documents, PAN, KYC, PoA (if applicable), specimen signature by November 15, 2010.

4. The trustees shall submit a confirmation after they receive certification from an Independent auditor on completion of the said process latest by November 22, 2010.

5. Mutual Funds/Asset Management Companies shall comply with the above requirements in letter and spirit.

6. This circular is issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992, read with the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

Yours faithfully,

Asha Shetty
Deputy General Manager
Tel no. 022-26449258
Email-ashas@sebi.gov.in

===========================================================================================================

Regards

Valady V.Barathwaaj

Chennai: +91  98418-25188