Foreign retail investors may get to buy Indian shares

The finance ministry is considering a proposal to relax foreign individuals to directly buy shares of Indian companies. Current guidelines permit only foreign mutual funds to directly invest in the domestic bourses.

“There is a view that the government should not distinguish between India focused mutual funds and foreign retail investors,” a finance ministry official said, adding that a final decision is yet to be taken. However, if the move goes through, the government would set a ceiling on investments by foreign individuals.

This was also one of the key recommendations of the committee chaired by UTI AMC chairman U K Sinha on foreign investment, which recently submitted its report to the finance ministry. As part of its recommendations on a single window for portfolio investments, the committee has laid out a system where a foreign individual can trade in the Indian securities market “without ever setting foot in India”.

Courtesy : Indianexpress
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Only 1.4% of the population directly invests in markets, finds a study

Despite the benchmark Sensex crossing 20,000, existing market infrastructure fails to include most Indians, finds an MCX-SX study, underlining the need for more competition and fresh thinking on market penetration and market development





While the market indices are headed for new highs and foreigners are pouring in billions of dollars into India, an investor survey conducted by MCX Stock Exchange (MCX-SX) has found that only 1.4% of the population directly invests in the markets. Also, only 18% of the urban, informed segment directly invests in equities, the study found.

The MCX-SX and Nielsen survey, titled 'Indian Equity Investors Survey 2010', is the first major Indian equity market survey, post the market meltdown of 2008. The survey polled 1,207 current and potential retail investors from 12 cities across all geographic zones and levels of development, ages and occupation; 60 corporates, including banks and financial institutions, from the four metros and 120 SMEs from clusters in 12 cities throughout India.

While the volumes on the National Stock Exchange have surged to Rs100,000 crore a day, the survey pointed out that 50% of the retail (individual) investors, 27% of the small and medium enterprises (SMEs) and 11% of the corporate respondents are yet to be approached by a broker or investment advisor. Businessmen were the most-approached segment by brokers and investment advisors. However, 57% of defence personnel, 57% of students and 51% of salaried personnel have never been approached for investing in equities, the survey said.

Domestic retail investors remain disengaged from the market because institutions such as stock exchanges and the regulator have failed to develop the market.

It may be recalled that minister of state for finance Namo Narain Meena recently told Parliament that 50% of the cash market transactions came from just 451 investors, out of which 156 were proprietary traders. About 50% of the total trading on the National Stock Exchange (NSE) in the derivatives segment came from just 106 investors of which again 58 were proprietary traders.

While the NSE had tried to change the interpretation of this data (yes, the government data was provided by the exchange), multiple surveys show that India's investor population is indeed far below than what is assumed.

Consistent with this picture of investor apathy, over the past 14 months to September, the total outflow from equity mutual funds has been as much as Rs21,731 crore. As per data released by the Association of Mutual Funds in India (AMFI), Rs7,281 crore was pulled out of equity schemes, including equity-linked tax schemes in September alone. Although the Sensex has crossed the 20,000 mark, the main reason behind this surge is inflows by foreign institutional investors (FIIs). During the second quarter to end-September, FIIs infused almost $12 billion into Indian equity markets, taking their total inflows to $14 billion for the first six months of FY11. At the same time, domestic institutional investors turned sellers. During Q2, domestic investor sales were at around Rs23,800 crore or $5 billion.

Across the country, 56% of those surveyed said that lack of information about investing was a major barrier to participating in the market. Additionally, 47% of those surveyed have no knowledge of where to buy equity, mutual funds or ULIPs. Even institutional investors like SMEs (42%) and corporates (32%) conveyed lack of information about investing as a major barrier to participating in capital markets.

Trading and investing is concentrated in certain regions and cities. About 80% of the turnover in India continues to come from the top five cities. In 2001-2002, there were 21 regional stock exchanges across India in addition to two national level exchanges. Of these 23 exchanges, 16 exchanges used to conduct active transactions in 2001. However, in 2008-09, the active exchanges had been reduced to four. While the NSE contributes about 92.5% in the total turnover across the country, the share of Bombay Stock Exchange (BSE) and Calcutta Stock Exchange comes at 7.48% and 0.0026%, respectively. Uttar Pradesh Stock Exchange has a share of just 0.0006% in the total turnover, as of 2008-2009.

According to the survey, about 80% of retail respondents believed the stock market industry would benefit from competition. Similarly, 68% of the respondents perceive that more competition in exchanges will lead to investors receiving better services and 57% of respondents feel that competition will lead to lower cost of participation.

The survey found out that among the respondents, mobile telephony has emerged as a preferred channel that would give the respondents greater access to the markets. It said that a majority (56%) of the retail respondents surveyed preferred mobile telephony as the preferred channel that would improve their access to the market. This was followed by the Internet (31%) and bank cross-selling (19%). This preference for mobile telephony is reinforced strongly across zones and tiers, with 83% of the west and 65% of Tier II cities expressing strong demand for it as a key enabler.

Although everyone has been talking about financial inclusion and so on, it is often the lack of knowledge that keeps people away from participating in the markets. According to the survey, 94% of retail respondents surveyed confirmed that they would attend market-oriented training programmes in finance, if offered in their vicinity.

Courtesy : moneylife
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It's biz as usual for MFs despite load ban

MUMBAI: Indian fund houses, reeling under the impact of a ban on entry load or an upfront fee that they collected from investors to pay distributors, may have something to cheer about, with a majority of these intermediaries saying that they expect the ban to either have a positive or no impact on the future of the mutual fund industry. A survey of 622 distributors in Mumbai and Delhi by Cafemutual, a Mumbai-based mutual fund industry tracker, shows that 57% of the participants expect the ban on entry load to have positive or no impact on the future of the mutual fund industry.

The entry load ban , imposed by capital market regulator the Securities and Exchange Board of India (Sebi) and that came into force in August 2009 to prevent distributors from pushing clients to switch across products in shorter durations for fees, has prompted 31% of the IFAs or distributors surveyed to ‘try charging’ fees to their clients, Cafemutual said. Significantly, 79% of those who tried were successful, the survey said.

Prior to this ban, distributors of mutual fund products got their upfront fee of 2.25% money they brought in from the AMCs, which deducted the commission from the investments.. Sebi felt the routing of commissions through AMCs resulted in distributors pitching for products that were not in the best interests of investors.

The regulator said that investors needed to pay distributors directly for selling a product rather than obtain the fee through AMCs. According to wealth managers, most investors, who put money in mutual funds, refuse to pay fees for advice, leading to many distributors shifting to selling other products, including insurance. But even distributors are getting more comfortable with the role of advisors, they said.

“There are fewer distributors and IFAs which are selling mutual funds after the ban on entry loads, but some, including us, are focusing on the advisory business. As long as the investor is ready to pay us for our advice, we will give advice and this can be a product that suits his needs...not necessarily a mutual fund or insurance product,” said Om Ahuja, head-wealth management, Emkay Global Financial Services .

The Cafemutual survey said that according to 63% of the IFAs, Ulip sales rose due to the entry load ban, while 15% said sales of structured products to the wealthy went up.

Courtesy : Economictimes
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AMFI to become self-regulatory

AMFI must move beyond being just an industry body. We have to engage other players who are on the periphery. Presently AMFI doesn't have any representation from distributors or registrar and transfer agents. Ultimately AMFI must become a self-regulatory organization (SRO).

No longer content with being just an industry association and trade body for the Rs7.13 trillion mutual fund industry, the Association of Mutual Funds in India (AMFI) is taking baby-steps towards becoming a self-regulatory organization. In an interview, newly elected AMFI chairman U.K. Sinha refused to specify a time frame for the planned transformation, but said the objective is on his agenda. "The capital market regulator, Securities and Exchange Board of India (SEBI), has been asking AMFI to do this for quite some time. We'll consult SEBI on the matter and soon start the groundwork to move in this direction," he said. SEBI now regulates mutual funds, but Sinha says the industry, with 41 asset management companies and at least 100,000 distributors, is too large and intricate for the market regulator to oversee every detail. Define the Association of Mutual Funds of India (AMFI). AMFI must move beyond being just an industry body. We have to engage other players who are on the periphery. Presently AMFI doesn't have any representation from distributors or registrar and transfer agents. Ultimately AMFI must become a self-regulatory organization (SRO).


We have also started talking to SEBI (Securities and Exchange Board of India) more actively. We would also like to work towards developing a mutual fund (MF) policy. Tell us more about this policy. For a variety of reasons, we observe that MFs are being perceived as a short-term vehicle and it is an aggregator for liquid assets of firms. That is just one part of our overall existence; to say that that is our only objective is a wrong impression. I protest.


The policy statement will define the industry's role, list out measures to reach out to small towns, small investors, the MF industry's obligations and thereafter its responsibilities. We have seen policies in the banking, civil aviation, insurance and even the pension sector. Do such policies work? Many still can't borrow from banks, non-remunerative flight sectors go empty. However, mobile phones (an area without policy) get penetration. Aren't we going back 25 years? I don't think we can call these examples as failures. Maybe they have not been able to meet their expectations. For instance, if 40% of a bank's advances has to go to the priority sector, banks have to set aside that money. Whether it reaches the final destination can be a question we can ask.

MF pension products are excluded from the tax deduction instruments under the new Direct Taxes Code. What also hurts the MFs is the differential treatment. There will be no harm to get clarity on this from the government and the regulator. But, despite tight regulations and strong performance, why is it so difficult to get your message across to the investor? Low financial literacy is a problem. Competitive products can offer incentives; the MF industry can't. Since 2003, when the markets were going up, there has never been a year when retail equity inflows in the industry has been negative. But since last one year, the retail equity inflows has been negative. In fact, we are losing around Rs3,000 crore per month on average. The number of folios is dwindling.


This is also why the New Pension Scheme has not taken off despite being a good product because there is no incentive for distributors. So we have to recognize that if there are other products where it's possible for people selling them to be incentivized in a better way, a product which doesn't pay incentives-no matter how good it is-will be at a disadvantage. Are we talking of a move back to a system of paying incentives? It is too early to comment on how the policy would shape up on this issue, but I am flagging this is as one of the issues. Fortunately, we have evidence of the past 15 years. If the government or the regulator is convinced that MF is a good product for retail investors, then a suitable incentive plan can be devised. Would an incentive-based structure address the problems of mis-selling if adviser regulations are in place? Yes it would. The absence of distributor regulation is a big lacuna. Would AMFI-as an SRO-be interested in taking the leading and devising distributor regulations, at least for distributors selling MFs? We have not discussed this with SEBI or with the distribution industry; I'd be speaking out of turn, if I say we will do this. Though I think AMFI should move in that direction.


courtesy : .Indiainfoline
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Game may be up for part-time life insurance agents

After the mutual fund industry, it’s time for the insurance sector to tighten its distribution business.

If recent statements by the insurance regulatory chief and the largest hirer of agents in the life insurance industry are any indication, the part-time life insurance agents may soon be flushed out of the market.

During his visit to Mumbai, J Hari Narayan, chairman of Insurance Regulatory and Development Authority (Irda), said, “We have a large agency force. We are looking at whether there should be a different type of a licensing structure so that the distribution is taken up seriously and will the number of full-time agents increase.”

On hiring of agents during the year, T S Vijayan, chairman of Life Insurance Corporation of India, said, “We are looking forward to more employment this year. We believe instead of appointing part-time agents, it will be worthy to employ more professionals… We wouldn’t mind funding in order to train them.”

It’s noteworthy that a majority of the 28 lakh agents selling life insurance in India work part-time.

In an earlier instance in 2009, Hari Narayan had said that in a five-year span, of the agents who enter, about 80% drop out. He said the present entry bar that allows 10-12th pass candidates to become agents would be raised.

“You will have to raise the entry point and as a result of that the total number of people will be reduced. But the reach also will be affected and we have to balance the two so that the reach is not impacted.”

And, the ground work to raise the bar for agents has already started.

Irda has put up a proposal through an Exposure draft on Persistency of Agents, which states among other things, “The agency licence for agents with a persistency ratio of less than 50% will not be renewed. The minimum number of policies sold by an agent should be 20 per annum and the minimum first year premium income should be Rs150,000. In case the agent does not meet one of these criteria, the agent should achieve proportionately more in the other one to make up for the shortfall.”

Persistency, says Irda, is the percentage of business retained without lapsing or being surrendered. The draft says, “The profile of the agents may not be up to the required standards...Many of the agents take up insurance policy distribution as an auxiliary occupation and lack in professionalism. This is also one of the factors adding to the reduced persistency.”

Also, when asked about the impact of the new unit-linked insurance plans guidelines on remuneration of agents, life insurance senior officials say unanimously that agents
will have to match the reduced commissions with higher volumes.

But selling more means more dedicated time, and with regular office work the agents just won’t be able to manage.

The industry is already slashing the headcount of agents even though the agents are part-time agents and not on the company rolls.

According to Life Insurance Council data, the industry has cut down its agency strength between June 30, 2009 and June 30, 2010, by 44,857 to 28.62 lakh. In addition, 184 branches have been reduced across the industry in the period.

When asked about the slashing of agents, the chief of a leading life insurance company said, “Renewal commissions have to be given even if an agent is not on the rolls and hence the need to cut down on costs as we are rationalising other costs.”

Not just agents, the overall hiring in the insurance space, too, has reduced. Hiring activity in the insurance sector fell 58% in September 2010 over a year ago, according to a study by naukri.com, the online jobs portal.

Hitesh Oberoi, CEO and MD, Info Edge, the company that owns naukri.com, said, “The dip in the insurance sector was anticipated as insurance firms have been looking for ways to reduce headcount, post Irda regulations.”

This move comes after the mutual fund industry body, Association of Mutual Funds in India (Amfi), mandated higher enrolling and security standards for mutual fund distributors coupled by a hike in fee to get a selling registration number. This, Amfi has said, will make sure distribution business is taken up seriously.

courtesy : dnaindia

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It’s time to add value to services

In recent times, with the objective of ensuring full transparency, both the Sebi and Irda have forced the hands of the asset management and insurance companies, respectively, to overhaul product pricing, and in many cases, the products themselves

The wealth management industry in India has truly gone through a paradigm shift in the last one year or so. Till the shift came in, common practices of entry load structure and exit load compulsions for mutual funds, charge structures for unit-linked insurance plans (Ulips) were borne by the customer. A portion of these load structures and charges were given as commission to banks, distributors and financial institutions. The customer was being made to pay a charge that should have been ideally given by the product manufacturer to his partner.

Positive changes

In recent times, with the objective of ensuring full transparency, both the Securities and Exchange Board of India (Sebi) and Insurance Regulatory and Development Authority (Irda) have forced the hands of the asset management and insurance companies, respectively, to overhaul product pricing, and in many cases, the products themselves.

The first change was initiated in August 2009 by Sebi, abolishing the entry load structure for all equity mutual funds. A more recent change was pushed through by Irda in September 2010, bringing in a new charge structure for Ulips. Both the regulators have ensured that changes are to the benefit of the end user. This is clearly a welcome change. As a distributor of third-party investment and insurance products, I know that the new products to be launched will be even more customer-friendly.

As for the existing ones, customers are already benefiting from the simplicity of the load structure. Another key benefit of these new initiatives will be from the client’s point of view. Clients will now be more awar

e of the structure of these products and the specific benefits that would accrue to them.

The distributor’s role here is also huge and I know for certain that the time and effort spent on educating the client on the product benefits is a lot more now. For instance, product illustrations adopted by insurance companies are becoming far more comprehensive.

The way ahead for wealth management industry

Business models have evolved and shall continue to evolve over time. Often changes, of the kin

d now seen, act as triggers. In the case of the wealth management industry, most banks are now adopting a fee-based model charged on advisory instead of pure product-driven distribution strategies. From the client’s perspective, they

will pay a fee to the distributor only if they see value in the overall offer that they buy into.

Overall planning: This will change the way products are sold to clients in the future. The role for a pure “transacting intermediary” will shrink. The intermediaries, in order to command attention from clients, will instead have to move towards an overall wealth management approach that involves financial planning and client asset allocation leading up to need-based sale of suitable investment or insurance products. Effective education of product benefits and matching it to the requirements of the client will be followed as a standard practice.

Customizing products and value addition: Banks and wealth management firms are now evolving the manner in which they sell an investment proposition to their clients. Providing customized and comprehensive investment solutions, focusing on technology and increasing convenience and analytical support will be the de rigueur composition of all banks and wealth management firms. They will now have to increasingly ensure that clients recognize the value-add in their services in order to willingly obtain fee from them.

New role of relationship manager: At the core of any wealth management proposition for a bank is the relationship manager. In the future, the role of an relationship manager will change; new regulations acting as the trigger here too. In short, banks will have to evolve into becoming a one-stop total solutions provider to their clients.

Pankaj Narain is director and head (private clients, banking and investments, India), Deutsche Bank AG.

courtesy : livemint
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