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Last Updated : Aug 17, 2012 02:58 PM IST | Source: CNBC-TV18

'SEBI move to structurally alter nature of MF industry'

The market regulator granted asset management companies (AMCs) flexibility on fees by allowing them to charge up to 30 basis points more as total expense ratio (TER) across schemes from inflows from smaller towns beyond the top 15 cities. S Ramesh, Joint MD of Kotak Investment Banking and Puneet Chaddha CEO of HSBC AMC welcome this move.


Throwing a lifeline to the mutual fund industry, the Securities and Exchange Board of India (SEBI) has brought about extensive reforms in mutual fund regulations to benefit investors in Tier II cities.


The market regulator granted asset management companies (AMCs) flexibility on fees by allowing them to charge up to 30 basis points more as total expense ratio (TER) across schemes from inflows from smaller towns beyond the top 15 cities.


S Ramesh, Joint Managing Director of Kotak Investment Banking and Puneet Chaddha CEO of HSBC AMC welcome this move. S Ramesh is of the view that this is expected to favour the long-term investor as against the short-term investor. "It's a directional move from a market perspective, and to that extent, it will be seen as positive. But we will have to wait and see how this plays out. I think you have to give some time for the intermediaries, the mutual funds and the investors to absorb this and let's wait and see. I am optimistic," added Ramesh.


Echoing Ramesh's view, Chaddha said, "My first reaction is one of optimism. 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."


Here is the edited transcript of the interview on CNBC-TV18.


Q: It is very surprising that Securities and Exchange Board of India (SEBI) has allowed higher charges when you service the tier II cities. As it is, it's a space where financial inclusion is just working its way. In a market like this, it is difficult to get investors to stay put. Do you think mutual funds will even use this to compensate or to charge more in tier two cities? Wouldn't that be a deterrent to financial inclusion?


Ramesh: This is the popular Bharat versus India story. If you have to deepen investor participation in Indian markets, you have the direct route and the mutual fund route. I think there is money available in tier two, rural and other places and you have to make a beginning somewhere. So somewhere I see nobility in this. It's a beginning and there is money available; there is fairly good savings but very little of that comes into the market. So I would view this in that perspective.


Q: Another positive is the fact that the exit load will now be credited back to the mutual fund account. According to you, how encouraging is that for an investor and how much do you think it could push up the net asset value (NAV) of the scheme?


Ramesh: I would not comment on the NAV but the way we analyzed it, our first impression is it in favour of the long-term investor as against the short-term investor. So, it's a directional move from a market perspective, and to that extent, it will be seen as positive. But we will have to wait and see how this plays out. I think you have to give some time for the intermediaries, the mutual funds and the investors to absorb this and let's wait and see. I am optimistic.


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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.


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Q: How will this benefit the IPO industry? Do you think the safety net issue that the SEBI is mulling is a feasible option?


Ramesh: I will like to sum up, if you look at the direction of the announcements yesterday if you can break them into three buckets; one that there is a directional statement that we want to encourage retail, look at some measures that protect the retail investors to the best extent you can. Second, there have been feedbacks from issuers about operational issues and difficulties.


So I think the regulator has been proactive in handling them. Third is a little bit of cleaner announcements for the market on a number of measures. So these are very positive for the primary markets.

One of the things that we have to accept as reality is there has been a fairly overbearing FII market, which has been the backbone of our Indian markets. So it’s also time to have domestic pools of money and the mutual fund industry and the insurance industry is where that pool of money can develop. So, some of these measures, over a longer term, will be beneficial for the industry as well as for the IPO market. So this is the way I would sum up the slue of measures that were announced yesterday.


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First Published on Aug 17, 2012 11:55 am
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