'SEBI move to structurally alter nature of MF industry'

Q: There are two more instruments that have been allowed by SEBI to meet that 25% minimum shareholding norm - the bonus and the rights issue. What is your view on whether promoters will use these options because using the rights issue option would perhaps mean pricing it at a discount, they would maybe involve more dilution as well? How viable do you think these options would be?

Ramesh: The way I would look at it is we should step back for facilitating companies and promoters to get to the 75% share holding. There is a fairly good bouquet of options available. So it is not just rights of bonus where they do not participate but there is an institutional placement programme (IPP), there is an offer for sale (OFS). I think there is also a saying that over time, the regulator will be happy to hear other suggestions, and on merits, will consider it. So, the good news is that companies and promoters will have more menu and more options to get there.

If I have to give a one line view about rights, for example, if there is a profile of shareholding of companies where there are good long-term institutional and other retail investors who have been in the company for a long time, the company would like to look at raising money.

At the same time, it would want to reward its existing shareholders and also feel that the existing shareholders other than the promoter can make a subscription to the rights issue - maybe this may get used in such cases. So in all, it's just broadening the bouquet available; that's the way the market and promoters should see it.

Q: What have you made of all the details that have come out and which are the reforms that you have liked the most?

Chaddha: My first reaction is one of optimism and also I am impressed that these measures that are actually long-term measures. These are not measures that are going to result in an immediate fillip to the stock market or to investor interest. But it will structurally alter the nature of the mutual fund industry and align the interest of all the stakeholders in the system, which will eventually benefit everybody including the end investors.

In terms of the specific measures, I think there are two that stand out; penetration in cities beyond the top 15 and financial incentive to do so, is a great move forward. It is not an easy task to penetrate these cities or the smaller cities with mutual fund products. The financial incentives that the new regulations will provide asset management companies (AMCs) are a big step in that direction.

The second big thing for me is the exit loads going back into the schemes. This will force AMCs to very carefully look at the kind of payouts they are currently engaging in. My sense is that we are going to see upfront payouts with claw backs or payments. Therefore, there will be a move to garnering more long-term assets rather than just short-term flows, which we were seeing in the past.

Q: What is the cost of investing in mutual funds or how much will it go up by given the fact that SEBI has allowed funds to charge that additional total expense ratio? As an investor, I would wonder how much the cost would surge by.

Chaddha: There are two ways of looking at it; there is a mathematical way of looking at the immediate increase in cost that you see as the total expense ratio. So that is going to go up with the increase of 20 bps that SEBI has allowed across the board. It could potentially go up by another 30 bps, which is the expense that you would probably incur if you are in a location beyond top the 15. There is first the element of service tax. That said, overall 2.5% for equities probably could go up to as high as 3-3.5% or little less than 3.5% - that’s one way of looking at it.

The other way of looking at it is that this encourages investors to have easy access to the stock market, to have a diversified portfolio. One of the things that we have struggled with, as an industry, is to provide awareness to investors. By using these measures, if we are able to reach out to a larger body of investors, I think the long-term benefits to these investors will outweigh the incremental cost.