In recent months, there has been a flurry of activity from the Indian regulators—the Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI) and Association of Mutual Funds of India (AMFI)—in the financial space. These included guidelines and code of conduct for portfolio managers and investment advisers, true-to-nature asset allocation of multicap mutual funds, margin obligations to be met by way of pledge/re-pledge in the depository system, cyber-security audit reports and usage of credit/debit cards for international transactions.
The notable commonality among all is the customer-centric reforms or regulations and are commensurate with the changing landscape of transactions and investments in financial assets. An average Indian, for many decades, believed that physical assets like real estate and gold, offering touch, sight and feel, were the only options for investment. But with changing times, financial assets are fast gaining ground. The adoption of internet and fintech advances have ushered us into a new era—a digital age supporting financial inclusion, cutting across demographic lines. The evidence is quite stark and rightly so.
A few numbers to reiterate the facts and reforms implemented to address the landscape:
• As of August 2020, mutual fund SIP accounts stood at 3.31 crore, with 10 lakh monthly registration of new SIPs. Monthly SIP contribution in terms of value rose from Rs 3,100 crore in April 2016 to Rs 7,792 crore in August 2020. Since May 2018, SIP monthly contributions stayed above Rs 7,500 crore for a good 28 months. These are large inflows coming from retail investors who wish to use mutual funds as a saving and a wealth-building mechanism.
SEBI and AMFI together brought in necessary changes and reforms in the mutual fund space. In 2018, with the categorisation and reorganisation of mutual fund schemes, the number of plans were cut down from multiple thousands to a few hundreds, easing the selection process for investors.
A recent circular on asset allocation for multicap funds was necessary so as to keep the scheme objective true to its name and nature, thereby broadening the scope of investments across listed stocks. Similarly, the detailed guidelines to investment advisers (IA) notified the segregation of advisory and distribution activities at client-level to avoid conflict of interest.
• The new demat accounts opened in the current year is mind-boggling – a million new accounts for the third month in a row! Since the start of the year, around 6 million new accounts have been opened, taking the tally to 44.46 million by the end of August 2020. This has resulted in tremendous retail participation and subjected the stock markets to higher bouts of volatility at times.
With coronavirus pandemic confining everyone to their homes, retail trading activity increased multifold and so have advertisements and messages pertaining to stock tips and misuse of client demat accounts.
As per sources, the average daily turnover in the cash market on the National Stock Exchange (NSE) in four months of this financial year was around Rs 55,000 crore, 53 percent higher than the daily turnover in FY20. This comes on the back of only 16 percent of the trades resulting in delivery, compared to an average delivery volume of around 22 percent in FY20. Hence, the latest SEBI circular for an upfront margin money is very much valid and in the best interests of the investors and financial markets. In these volatile times, managing risk is of utmost importance and SEBI is trying its best to protect investors’ interests.
• The RBI's payment system indicators from FY20 annual report show that the volume (number) of card payments increased from 47,486 lakh in FY18 to 73,012 lakh by FY20, with payment value increasing from Rs 9,19,035 crore in FY18 to Rs 15,35,765 crore by FY20. The number of cards issued are increasing dramatically. Six private banks along with the largest public sector bank added 3.43 lakh new credit cards in July 2020 over June 2020.
• Such explosive growth in financial transactions doesn't come without its share of issues. Cybercrime is on the rise. The number of fraud cases involving cards or internet increased from 1,866 (27.5 percent share in total frauds) in FY19 to 2,678 (30.8 percent share in total frauds) in FY20. The amount involved has risen from Rs 71 crore to Rs 195 crore.
While this may seem small in the larger schemes of things, it is equally important to nip such issues early on and shield consumers. Hence in a bid to reduce banking-related fraud cases, effective October 1, RBI has issued fresh guidelines to allow only domestic card transactions at ATMs and Point of Sale (PoS) terminals in India at the time of issuance or reissuance of debit and credit cards. For international, online and contactless transactions, customers will have to distinctly set up services as per individual needs.
All these regulations and reforms are pertinent and indispensable in addressing the evolving misleading, misuse and false promotions employed by fraudsters to lure gullible and new investors and customers of the digital age.
The transition from traditional routes of banking and financial transactions to a fast-paced information-loaded environment is fraught with risks. There is a visible upward shift in investing by Indian households, as they continue to accept financial assets as a necessity for their future security. With digitalisation and financial technologies expected to penetrate deep into lower tier towns and cities, the risks and opportunities for frauds are only going to increase.
Regulators are the first line of defence to counter any negative influences on the financial and investing ecosystem. They need to identify and comprehend the threats faced on a continuous basis and work towards smoother, efficient and credible systems with effective guidelines and regulations.
Stock exchanges, SEBI, AMFI, Asset Management Companies and other agencies through various programmes and channels are involved in educating and creating awareness among investors. These programmes are extremely necessary, useful and have a positive impact on investors. Change is inevitable and a constant; whether good or bad can be judged only in hindsight.
(Gopal Kavalireddi is the Head of Research at FYERS.)
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