MFs uneasy with AMC-wise data declaration

  

After opposing the idea of monthly declaration of assets under management (AUM), the domestic fund industry seems uncomfortable with publishing asset management company-wise data too.

The Association of Mutual Funds in India (Amfi) is understood to have taken up the issue. At least two persons familiar with the development told Business Standard that Amfi’s board was likely to discuss the demand soon.

Fund managers say that every first week of a month, the industry invites undue attention with ups and downs in its assets on the back of redemptions.

“Quite often, money from one fund house flows to another, which brings unwanted competition among the players,” said the CEO of a large fund house.

Independent experts said the debate could be useful as part of a process to put things in better order for an industry under pressure from both regulator and investors. “It is a desirable discussion. The size of fund houses does not matter. What matters is the performance of their funds,” said Dhirendra Kumar, CEO of Value Research, which tracks the domestic fund market.

The executive director of a domestic brokerage firm which tracks the industry said, “Ever since the entry load ban has come into force, the entire industry is in disorder. It is a precarious situation for the industry. It has triggered a discussion at Amfi as large fund houses are becoming larger and smaller players are getting squeezed.”

Amfi has indicated its acceptance of the industry’s concerns on declaration of monthly AUM and wants only retail assets to be declared. Industry players said there was a consensus on separate declaration of institutional and retail assets.

H N Sinor, chief executive officer of Amfi, had told Business Standard earlier that publishing monthly data would not fully reflect things.

The industry’s average assets under management on August 31 was Rs 6.87 lakh crore, a rise of 3.3 per cent against the previous month. However, on a year-on-year basis, the assets declined over eight per cent. According to industry observers, the actual size of retail assets is not more than Rs 2.5 lakh crore, with the rest of the money being that of institutions, which come and go in line with the market movement.

Source : AMFI

Last Weeks Market Review

Global : Equity markets gained closed higher on the back of positive economic data and expectations that monetary policies will remain conducive for growth; Gains were tempered to some extent by concerns around fiscal health of some European economies and signs of economic slowdown in the region; Indications of further quantitative easing by US Federal Reserve boosted treasuries and precious metals; the US dollar index continued to lose ground. Asian/ EM central banks announced measures to stem the rise in their currencies vis-à-vis the dollar.

India – Equity: Indian equity markets retained their positive streak helped by strong FII flows and frontline indices inched closer to all-time peaks, despite the profit booking; FII inflows aggregated $1.5 bln last week and for the calendar year to date have topped $17 bln. Corporate India’s growth continues to be robust and justifies the valuation premium the country enjoys over its peers.

India – Debt: Indian bond yields closed mixed with yields at the short-end moving up on liquidity tightness and those at the long-end easing in response to relaxation in FII investment limits; The rupee rallied on hopes the move could help in increasing capital inflows given the low rates in developed markets and boost the Balance of Payments situation; Govt announced a marginal cut in issuances for the second half.

Limit for FII investment in govt, corporate bonds raised by $5 bn

The measure will take the total amount that FIIs can hold in the debt market at any time to $30 billion

The government on Thursday raised the limit of investment by foreign institutional investors (FIIs) in the debt market by $5 billion (Rs. 22,800 crore) each in government and corporate bonds.

The move will take the total that FIIs can hold in the debt market at any time to $30billion—$10 billion in government and $20 billion in corporate bonds.

The extra funds can only be invested in securities from infrastructure companies that have a minimum remaining maturity of five years.

This increase in limits will “help investment in infrastructure sector and the development of government securities and corporate bond markets in the country”, the finance ministry said in a statement.

“The impact (of this announcement) on the government papers will be more visible than (on) the corporate bonds. Utilisation on the government side is lot higher than the corporate side. In fact, there is still some limit left in the corporate bond papers,” said Ananth Narayan, head of rates, foreign exchange and credit (South Asia) at Standard Chartered Bank.

Bond dealers said restricting the extra investment to infrastructure-related firms and in papers with five-year residual maturity may not enthuse FIIs—who typically chase papers that expire within two years, not wanting to take longer-term interest rate risk in an emerging market with high inflation rate.

The head of a primary dealership said using FII money for infrastructure would not enthuse investors.
Primary dealers are firms that underwrite government bond issues, and must buy any papers that are unsold at the close of the auction.

“It will be all project-specific investment and FIIs have to evaluate the credit profile of the issuer closely. They would surely not like to take interest rate risk, market risk, credit risk and the high hedging cost for these bonds,” said the FII debt manager, requesting anonymity because of the sensitivity of the issue.

“The pickup in investment will not be instantaneous but will take (a) very long time to take off. The high maturity profile will also deter FIIs to invest in government bonds,” he said.

The last time the central bank raised the cap on foreign investment was in January 2009 when the global financial crisis had drained liquidity from Indian markets, leaving local institutions reluctant to lend to one another.

In late August, Mint had reported that government and the Reserve Bank of India (RBI) were considering hiking the limits. At the time, the RBI and a section of the finance ministry were concerned about the short-term investment profile of FIIs that could lead to arbitrage-induced volatility in the market.

According to both government and RBI estimates, India’s economic output is set to grow by at least 8.5% this fiscal. However, investment by both the government and the private sector is essential for the rate of growth.

The increase in FII limits comes at a time when this class of investors is aggressively buying Indian debt paper, which offers higher yields than that in many other countries. India also needs substantial foreign inflows to bridge a current account deficit, which, at close to 3%, is the highest since 1991.

FIIs have largely been equity investors in the 17 years since the country allowed their entry. However, the higher yield differential between Indian bonds and fixed income securities in the developed markets has induced FIIs to buy local debt paper worth $9.8 billion since January.

Close-to-zero percent interest rates in western markets allows investors to borrow in dollars and yens, and invest these in emerging markets such as India, where the benchmark 10-year paper offers a 7.90% return.

Together with investments in equity, FIIs have so far brought in a total of about $26.5 billion, the highest in any calendar year.

Helping the inflow is an increased risk appetite from investors for whom worries about the European debt crisis and US slowdown are fading.

The JPMorgan EMBI Plus Index, which measures the extra yield that investors demand to hold emerging market bonds over US treasuries, on Thursday stood at 290.26.

At the height of the Greek debt crisis in May, it had reached 354.7 basis points. One basis point is one-hundredth of a percentage point.

Allowing increased foreign investment could take some pressure off the local money market, where the government—looking to fund a fiscal deficit projected at 5.5% of gross domestic product—is jostling with companies that need to raise money to fund expansion.

Advance tax outflow may lead to cash crunch in the system

With Rs 40,000 crore going out of the banking system due to advance tax payments, the cost of funds, in the short-term money market, will operate close to the repo rate (6%) — the rate at which the Reserve Bank of India (RBI) makes available overnight funds to banks.

Tax outflows have led to a marked cash crunch in the system. On Friday, banks borrowed Rs 42,290 crore from RBI through its repo window. This borrowing is reflective of the fund shortage in the system.
Most treasury heads expect the repo rate, or the rate at which RBI lends to banks, is likely to be the effective policy rates for the coming weeks. This would mean that money market rates would hover around 6% — the repo rate, following the 25-basis-point hike on Thursday.

But bond yields continue to remain steady, as dealers expect that prospects of future rate hikes has eased. “We think that the yield on the benchmark 10-year bond will remain protected at 8%,” said Anoop Verma, DCB. But at the shorter end, rates are expected to rise, following the increase in the repo rate. On Friday, the 7.80% 2020 bond closed at 7.98%, up from Thursday’s close of 7.96%. The immediate impact of the liquidity crunch is an upward spike in short-term rates. “Tax outflows will ensure that liquidity remains tight until they are ploughed back into the system which can happen by the end of the month,” said Roy Paul, DGM, Federal Bank.

The repo rate has been revised to 6% from 5.75% by RBI in its mid-policy review released on Thursday. RBI has narrowed the LAF or the repo-reverse repo corridor by 50 basis points by increasing the repo rate by 25 bps and the reverse repo rate by 50 bps to 5%. “The policy was markedly hawkish than most market participants expected. The rate action and the narrowing of the corridor clearly signals RBI’s emphasis on inflation management and comfort with growth per say,” said Hemant Mishr, MD and head of global markets, Standard Chartered Bank.

However, the measure will reduce volatility of short-term rates, thereby ensuring more efficient transmission of monetary policy, he said. Stability of short-term rates also help banks price their deposits and loans better. RBI, in its mid-policy review statement, said, “The lead-up to the July policy review saw the liquidity situation transit from a large surplus to a mainly deficit one, making the repo rate the operative policy rate. Consequent on this transition, the transmission from policy rates to market rates has strengthened, with 40 banks raising their deposit rates and 26 raising their lending rates. These circumstances are expected to prevail, maintaining the repo rate as the effective policy rate and sustaining the strength of the transmission mechanism.”

Bankers also feel that they have surplus SLR securities which would allow them to borrow from RBI through the repo window. The basic difference between borrowing from RBI and borrowing through the inter-bank route is that banks can borrow from RBI only against securities, but they don’t need securities backing collateral, when borrowing from each other.

Harihar Krishnamurthy, treasury head, First Rand Bank, says, “With the advance tax payment having exited the system, there is a temporary shortage of liquidity in the market, though system has enough surplus SLR, which can be used to obtain funds from RBI’s repo window.” He added that the tightness would come off as soon as government spending resumes.

Interest rate on EPF to be raised to 9.5%

The increased outgo on account of the hike from the present 8.5% will be Rs 1,600 crore, which will be more than offset by a surplus of Rs 1,731 crore in the suspense account, the difference between receipts and disbursements

In what could be a bonanza for over 50 million employees in the organized sector, Harish Rawat, minister of state for labour, on Wednesday signalled the government’s intent to raise the interest payout on provident fund to 9.5% for the current fiscal.
 This followed the central board of trustees (CBT) of the Employees’ Provident Fund Organisation (EPFO) recommending an increase in the rate and kicking off the process of hiring fund managers for its portfolio after the current fiscal.

It ruled out any relaxation in investment norms that would allow EPFO to park some of the corpus in stock market instruments. Nearly 30 million accounts defunct for the last three years will not incur any interest beginning 1 April 2011.

CBT deferred a decision on the Employees’ Pension Scheme.

The increased outgo on account of the hike from the present 8.5% will be Rs. 1,600 crore, which will be more than offset by a surplus of Rs. 1,731 crore in the suspense account, the difference between receipts and disbursements.

The recommendations will now be forwarded to the finance ministry for approval, usually a formality. The CBT meeting was attended by labour minister Mallikarjun Kharge and Rawat among others.


“The demand for liquidity is always there and as of now it was decided not to get into stocks,” a labour ministry spokesperson said. “It was decided that EPFO will not take any risk of putting 15% of it in the stock market.”


The finance ministry had written to the labour ministry in July seeking such a relaxation to improve returns on the corpus, currently at least Rs. 1.7 trillion.


Ashok Singh, vice-president of the Indian National Trade Union Congress, the trade wing of the Congress party, welcomed the decision. “We had demanded that the surplus money of Rs. 1,731 crore should be distributed to the workers,”




Source : Liz Mathew

RBI hikes policy rates to fight inflation

With the latest round of rate hike, the repo rate is now 6% and reverse repo rate 5%, shrinking the gap between the two rates or the rate corridor to 1 percentage point.

The Reserve Bank of India (RBI) on Thursday hiked its repo rate or the rate at which it lends to commercial banks by 0.25 % and reverse repo rate or the rate at which it drains liquidity from the banking system by 0.50 % in its first-ever mid-quarter review to fight inflationary pressures.

With the latest round of rate hike, the repo rate is now 6% and reverse repo rate 5%, shrinking the gap between the two rates or the rate corridor to 1 percentage point.

Analysts and economists said the current rate of inflation and pick up in industrial production influenced the central bank’s policy decision.

The industrial output expanded by 13.8 % in July, more than twice the pace in the previous month.

Bankers, however, were hoping that RBI will go soft on the rate front.

Nine out of the 12 bank chiefs who participated in a rent Mint snap poll had said they did not expect the central bank to increase rates.

The wholesale-price based inflation dropped to 9.8% in July after staying in double digits for five consecutive months. It further fell to 8.5 % in August after the government changed the base year to 2004-05 from 1993-94.

However, the 8.5% inflation figure was arrived at after changing the base year. Following the old method, the August inflation would have been 9.5%.

The central bank’s move, which came as expected by economists and analysts, is likely to prompt banks to hike their base rates by at least 25 basis points in the near future, bankers said.

Base rate replaced the benchmark prime lending rate since 1 July. This is the fifth time the central bank is increasing its policy rates this year.

So far in 2010, the RBI has hiked its overnight lending rate or the repo rate by 125 basis points and the reverse repo rate by 175 basis points.

One basis point is one hundredth of a percentage point. “There is a strong possibility that our base rate going up by 0.25 %. This is a signal that cost of funds and lending rates will go up. Banks will have to take a view on this now,” State-run Bank of Maharashtra, chairman and managing director, Allen C A Pereira said.

Key rates	July 3rd 2010	July 27th 2010	Sep- 16 2010
CRR	6	6	6
Repo Rate	5.5	5.75	6
Reverse Repo	4	4.5	5
Bank Rate	6	6	6

Restructuring in Insurance Sector

After a fairly long time, there has been some restructuring in the insurance sector on the product front. The move, triggered by the spat between the capital market regulator Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority of India (IRDA), is likely to have a far-reaching impact on the sector as a whole. The first such impact was felt with the introduction of the unit-linked insurance plan (ULIP) a decade ago. ULIPs ended up repositioning insurance as an investment product to an extent that the consumer almost forgot the true responsibility of insurance.

Insurance companies prompted the consumer to think short-term with his long-term portfolio. The tenure for ULIPs have been coming down over the years with some companies even offering three-year paying term products for a long-term need like insurance. While in a rising market environment, the performance was not disappointing; the trouble came when prices came crashing down. The steady rise in the cost of products made matters worse as the focus of many companies was acquisition of business rather than retention.
 
The insurance regulator has decided to cleanse the system with its new proposals. While the customer has been made to think long with his insurance product, it sadly deprives him of flexibility, which was the hallmark in the earlier decade. For instance, any failure to pay up the premium will be detrimental to the policyholder as the policy will be terminated instantly and paid back with maturity. In the previous regime, the policyholder had the advantage of clearing old dues and still keeping the life cover going.

Source : ET 

Sweet prescription for cashless mediclaim

Patients who are undergoing treatment and have cashless medical policies can now breathe easy. Their existing policies will cover their expenses even if the hospital they are admitted to is no longer a part of the preferred provider network (PPN) of their insurer.

In a recent order, the Insurance Regulatory and Development Authority (Irda) asked all life and general insurance companies to allow cashless facility to patients who are already being treated.

"Being denied the benefits of a policy you have paid for while your close one is going through a medical emergency is the last thing you are prepared for," says Bangalore-based A Shridhar, who faced this situation when his wife was admitted to a hospital. Like Shridhar, many policyholders were caught off-guard when the four public sector general insurers — United India Insurance, New India Assurance, Oriental Insurance and National Insurance — removed 300 hospitals from their PPN list. Issues of over-pricing is the crux of the tussle that began a couple of months ago.


Present scenario

Many insurers say the issue is on the verge of being resolved after various rounds of discussions between them and the hospitals. Yet, only the smaller hospitals have joined hands with the insurers. Under the agreement, the two sides have fixed prices for 42 procedures. The public sector insurers are also working on a premium cashless policy, but nothing has been finalised.
 Irda has also asked insurers to keep policyholders informed about changes in their PPN lists. The order states, "The insurers are directed to inform policyholders the nearest alternative hospitals where the cashless facility is available."


Reaching out to policyholders

Obeying Irda's order, public sector general insurers say they are making arrangements to provide better services to policyholders. Insurance companies discourage policyholders from availing of cashless treatment in non-network hospitals. However, according to G Srinivasan, chairman and managing director, United India Insurance, the company has anyway extended the cashless facility to policyholders who are in the middle of treatment. "We have been giving advertisements saying emergency or trauma treatments can continue on a cashless basis even in non-network hospitals," he says.


This is the first time the company is re-jigging its PPN list, also updated on the website. According to Srinivasan, "At present, 450 hospitals are part of this list, and many more will join soon. Any policyholder can check the website to spot the nearest hospital."


The number of hospitals varies from city to city. At present, there are 110 hospitals in the PPN in Mumbai. The public sector companies have also resorted to advertising in newspapers to reach out to a large number of policyholders. "Besides, we are still in talks with hospitals and the list is being updated on a daily basis," says a senior official at New India Assurance.

Their private sector counterparts, though not part of the PPN row anymore, are reaching out to policyholders individually.


Hemant Kaul, CEO and managing director, Bajaj Allianz General Insurance, says, "Our PPN list has hardly seen any change. But whenever there is any, we inform each policyholder."


Insurance companies' customer care centres can also be contacted to know more about hospitals offering the cashless facility. Life insurance companies, too, have a small health insurance portfolio, ranging from one to five per cent. Though most of them have tie-ups with third-party administrators, they claim to keep each policyholder updated about any slightest change in their policies and hospital tie-ups through electronic mails and newsletters.



Source : Business Standard

New DTC Bill: Implications for individuals

The much awaited direct taxes code (DTC) bill, introduced this week in Parliament, has set high expectations in the minds of taxpayers of the country - individuals and businesses alike.
 In particular, the expectations of salaried taxpayers were something that the government wanted to earnestly address in view of the unmatched diligence in tax payments through the unfailing tax deduction mechanism.
With the above perspective if one has to analyze the implications of the proposals in the DTC bill, the outcome is a mixed feeling of delight and disappointment raising the expectation further when the government is open and sincere in its intention to meet the genuine demands of this tax-paying fraternity.



The major disappointment is the postponement of the implementation by a year to April 2012, though the government has its reasons - administrative and fiscal - that do not really matter to the taxpayers. The major delight is the government`s policy of consultation and collaboration.



Tax rates

Proposals: There will be no tax on income up to Rs 2 lakh (the current slab is Rs 1.6 lakh). 10% tax will be charged on income between Rs 2 lakh and Rs 5 lakh, 20% if the income is between Rs 5 lakh and Rs 10 lakh. Those falling in the bracket above Rs 10 lakh will attract 30% tax.
For resident senior citizens, the slabs will be Rs 2.5 lakh; Rs 2.5 lakh to Rs 5 lakh; Rs 5 lakh to Rs 10 lakh and above Rs 10 lakh. The respective tax rates are nil, 10%, 20% and 30%.



Upside: Those earning between Rs 2 lakh and Rs 8 lakh will be able to save Rs 4,120, while those in the bracket of Rs 10 lakh and above will be able to save Rs 24,720. In the resident senior citizen`s category, the savings will be Rs 1,030 (Rs 2.5 lakh to Rs 8 lakh) and Rs 21,630 (Rs 10 lakh and above).



Downside: Separate concession for resident woman has not been proposed.


Income from employment (salary income)



Proposals: Exemption for non-domiciliary medical reimbursements claims to be enhanced from Rs 15,000 to Rs 50,000 per annum.

Upside: Will offset increased medical costs.



Proposal: Exemption of tax borne by the employer on non-monetary perquisites not to be continued.

Downside: Displays lack of consistency in approach.



Proposal: Exempt-Exempt-Exempt method of taxation to be continued in respect of contributions to PPF, government provident fund, recognized provident fund, approved superannuation fund and new pension scheme with contributions eligible for deduction up to Rs 1,00,000.

Upside: A reassuring measure in the absence of a comprehensive and cohesive social security system to take care of old age and health needs.

Downside: Investments in equity-linked savings scheme and unit linked insurance plan are left open.


Proposal: Additional deduction for tuition fees for two children, life insurance premium and health insurance premium up to Rs 50,000.
Upside: Relief to address increasing costs of education and health needs.

Proposal: Discontinuance of deduction for repayment of housing loan.

Downside: Would result in increase in effective cost of loan. The proposal needs reconsideration, especially as affordable housing is considered to be one of the critical infrastructure needs of India.




Income from house property



Proposal: Income from house property is to be computed only if the property is let-out.

Upside: Income of unoccupied property not assessable to tax on deemed basis.


Capital Gains



Proposal: Long-term capital gains on sale of equity shares and equity oriented mutual funds on which securities transaction tax has been paid.



Upside: Continuance of exemption in the form of deduction up to 100%, 50% of the gains according to the period of holding as more than one year, one year and less respectively has ensured broadly the benefit available under the present Act is continued with no change.




Proposal: The date of adoption of fair market value as cost of acquisition in respect of assets is shifted from Apr. 1, 1981, to Apr. 1, 2000, for capital gains computation.

Upside: Welcome relief to ensure tax on unrealized gain is not attracted.



Proposal: Exemption of capital gains on investment in residential property subject to placing an additional restriction in the roll over benefit that the assessee does not own more than one residential house on the date of sale of original asset.

Downside: Will stunt the growth in housing sector.



Proposal: Concessional rate of tax at 20% on long term capital gains for assets other than the above to be removed.
Downside: Difference would make substantial inroads into gains.

Wealth Tax


Proposal: Increase in exemption limit from Rs 30 lakh to Rs 1 crore.

Upside: Real relief considering substantial increase in market valuation of assets today.


Compliance

Proposal: Tax return filing requirement to be simplified with a single return consolidating income and wealth.

Upside: Avoiding multiple filings leads to better compliance.


In substance, the new sets of proposals are, by and large, in line with the provisions of the current law. Given the above, one has to take a balanced approach and compromise on the gaps with the hope that curative days are not far off to have them addressed by the government through consultative process, which has been rightly engaged for over a year ever since the first draft of direct tax code was introduced in August 2009.



Source : Business Line

Removal of ELSS from 80 (c) Unfortunate

For many retail investors, ELSS funds are the first step in starting to invest in mutual funds. Unfortunately, the new Direct Tax Code has closed off this gateway to equities.

For savers and investors, who were living in dread of new Direct Tax Code (DTC) completely transforming their tax-planning approach, the new law must come as a relief. There are two main reasons for this. One, generally, the basic structure and the approach to taxation is very much the same. And two, specifically, long-term capital gains on equity and equity-backed mutual funds remain untaxed.



The retention of the zero-tax rate on long-term equity gains is probably the fundamental difference between the DTC as it was proposed originally and the shape it has finally taken. However, on a relative basis, long-term capital gains are now more attractive by a smaller margin than earlier. Since short-term gains are now taxed effectively at half the rate of the income tax slab the investor is in, they can be no more than 15 per cent and potentially as low as 5 per cent. The basic bias of the tax laws for shorter-term gains remains intact.

For mutual fund investors, there are two big changes. One, the tax saving funds — the so-called equity-linked savings schemes (ELLS) — funds will be history after the act comes into force. What used to be the section 80C deductions are now applicable to much smaller range of investments. This is unfortunate — ELSS funds were important in being tax-saving investment, which brings the benefits of equity returns. ELSS funds also have another benefit. For many retail investors, they tend to be gateway products in which the investor gets the first taste of equity investing and mutual funds. The tax-savings attract people to these funds and the three year lock-in generally ensures that investors get good returns. This experience converts many of these investors to investing in equity mutual funds. Under the DTC, 80C-type benefits are limited only to term insurance, Provident Fund (PF), Public Provident Fund (PPF) and the New Pension System (NPS). Of these, only th e NPS offers some equity exposur -- only up to 50 per cent and with a lock-in to retirement age.



The other change is the imposition of tax on dividends distributed by mutual funds. In theory, this has been imposed on unit-linked insurance plans (ULIPs) as well but that’s just a characteristically fake attempt to show that the government is treating mutual funds and ULIPs similarly. In reality, ULIPs don’t actually pay dividends so this measure hits only mutual fund investors. Worse, this tax will be a disproportionately harder hit on older investors, who rely on mutual funds to provide regular income. Amongst fund companies, I would expect it to be a disproportionately harder hit on someone like UTI Mutual Fund, which has historically been stronger among this class of investors. For investors who understand the mechanics of fund dividend, it would be a better strategy now to derive regular income from redemptions rather than dividends. As long as they avoid short-term capital gains tax by not redeeming within one year of investing, they will find it better to simply redeem a regular income. Fund companies already offer a facility for this called systematic withdrawal plan (SWP).


Incidentally, the new tax code has added art and paintings to the list of assets which qualify as investments. These will now be available for a reduction of capital gains tax by becoming eligible for indexation of acquisition cost. Given the impossibility of nailing down an unambiguous valuation for all but a handful of art, I fully expect this to become a handy loophole for creating capital losses and gains by the art-owning classes. One can also look forward to a recurrence of the plague of art funds that were floated 2006 and 2007.


Artcile Posted by Dhirendra Kumar