Monday, November 23, 2009

My latest piece in Moneylife

My new piece in Moneylife.

Killing the mutual fund industry- SEBI style

SEBI wants mutual fund units to be traded through the exchange. This is already happening (or should happen) in closed ended funds and ETF’s. It is generally the experience that brokers do not have any enthusiasm to service the mutual fund investor due to the small change type of business.
SEBI took the first right step in waiving entry load for ‘direct’ applicants. Then it dealt the mutual fund industry a body blow by totally banning entry loads. SEBI has to understand that unless there is some money, no one will undertake activity. Yes, the distributors were screwing the investors with 3 and 5 percent upfront commissions. The NFO market existed only because of the entry load which the distributor got in full, in addition to goodies from the AMC’s. It also ensured that the distributor did not sell existing schemes. Today, we have a plethora of schemes, which mimic each other, have no focus and then fund houses like UTI fold one scheme in to another.
The doing away of the entry load, has in no way diminished investments in mutual funds, as can be evidenced by the steady growth in the Assets Under Management. What it will do however, is to stop the penetration of mutual funds beyond the traditional financial market centres.
The unfortunate part is that SEBI has no say over the insurance companies, which collectively cheat investors through schemes like ULIP’s and endowment policies. Here, the agent commissions can be as high as 40% of the premium paid in the first year and then taper down to around 5% p.a. In addition, the insurance companies dob the investor with administrative charges, management fees etc, that can amount to as high as 3.5% p.a.
As a result, the distributor of mutual funds is now hooked on to insurance products, none of which are insurance products in the true sense. I went to an agent seeking details of pure life policy and except that he showed me everything else! His idiotic logic was that there is some return of money!
SEBI should stop over regulating the harassed mutual fund industry and focus on regulation and ensuring a healthy platform for growth. Micro management does not help, because the regulator has no clue of the industry.
By pushing trading of MF units through the exchange platforms, SEBI is promoting the cause of the exchanges, which are seeking the holy grail of the capital markets. The broker will charge anything between 0.25 to 0.75% for buying/selling mutual fund units. In addition, service tax, turnover tax and STT will be loaded. If the same thing is allowed to the distributor, he will do a better job. In addition the investor would have to have a demat account (for which maintenance charges would have to be paid) and one more round of the obnoxious Kill Your Customer (KYC) compliances would evolve. Further, the stock broker is not going to help the investor in other areas like redemption etc. It will force the distributor to get some kind of a terminal, with SEBI oversight and SEBI will charge a fee for it. SEBI is merely pushing up the costs for the investors whilst pretending to save costs for the investors through making fund houses cut costs!
It is unfortunate that the mutual fund industry is totally at the mercy of the regulator. The investor does not seem to figure at all. Of course, the regulator efforts are clear when one sees the stock markets, where the number of retail investors is steadily declining, only to show a spike when IPO’s open the floodgate for spurious demat accounts.

Tuesday, November 10, 2009

Corrupting India

Three contractors are in a bar after work enjoying a cold one, when a truck crashes into the bar killing all of them.
Suddenly they're at the pearly gates and Saint Peter says “This is perfect. The gates need repair and I can get three estimates.”
He asks the first contractor Bubba what it would take to fix the gates. Bubba walks over to the gates, inspects them, measures them and gives Saint Peter an estimate of $750.
Saint Peter says thank you and asks the next contractor for an estimate. He walks over to the gates, inspects them, measures them and gives Saint Peter an estimate of $1500, and tells him I won't make a dime off this.
Saint Peter says thank you and asks the next contractor for an estimate. Anthony quickly gives Saint Peter a price of $2750. Saint Peter asks Anthony how he could come up with an estimate of two thousand seven hundred and fifty dollars without even inspecting or measuring the gates. Anthony replies, "Its easy Saint Peter, $1000 for you, $1000 for me, $750 for Bubba"

This contractor Anthony is surely an Indian contractor. Most infrastructure and construction contracts happen this way in India. In most PSU companies, tendering is a closed ring (especially in the eastern coal belt) and anything where spending is involved.
We have the recent case of a Madhu Koda ( one of the younger state Chief minister) who is alleged to have 'laundered' a few thousand crore (1cr= ten million) rupees. Whilst the media is going hammer and tongs at this, NO ONE QUESTIONS WHO GAVE THE BRIBES? SURELY EQUAL GUILT IS WITH THE BUSINESSMAN WHO GAVE THE BRIBES. If Madhu Koda is guilty, the guys who gave the bribes are more guilty and they should be the first ones to be punished.
Mera Bharat Kahaan?

Saturday, November 7, 2009

Loan write offs, ARC's and other scams

Some mild thoughts on the Indian businessman and the farmers, who rip the system and have perfected the art of paratism.
The PSU banks are notorious for forgiveness. And the retired bank Chairmen end up with plum pickings.
The banks who forgive, do not even ask for something when the borrower becomes hale and healthy again and is rolling in the dough.
Businessmen and politicians have a ball with the stamp of legality given to this scam through creation of ARC's and the notorious thing called CDR.

Monday, November 2, 2009

IPO bazaar.. A mug's game

Questions posed to me by DNA Money:

1.Do you believe that the low listing day gains would affect the appetite of QIBs?

2.What would you say might explain the anchor investor's willingness to invest in IPOs even when aggressive pricing has been seen to leave little room for short-term gains?

My response was as under:
1. QIB’s are of different shades. Genuine Institutions would go by price and value equation and take a long term view. Unfortunately, in our markets, too many QIB’s appear to be of the buy and flip kinds (as evidenced by the huge churn on listing days) and to this extent, the appetite would be driven by expectations of listing gains. Often, subscription by QIB’s is not a cut and dried factor. Relationship and influence of the investment banker selling the issue is a strong factor too. Apart from this, there are informal arrangements, which influence the decision to invest.
2. The anchor investor is a misnomer. Thirty days is hardly any time for a QIB. Here, the influence used by the lead manager/book runner plays a big role. The merchant banker has to convince the QIB fund manager about the market making mechanism, the ability of the promoter to support the scrip through friends and associate etc . Also, if a QIB is sold on the issue from a long term perspective, they could come in as anchor. I also wonder at some of the brave QIB’s who come in as anchor investor at the kind of pricing that is prevalent. Perhaps, in a bull market, the Institutional buyer is more foolhardy and under pressure to perform. The participation level of retail vis a vis the institutional buyers in recent IPO’s clearly shows that the former is smarter.

The paper has carried some parts of my response in its write up which appears here:

The IPO debate will not die down. I maintain my stance" AVOID IPO's. THEY ARE INJURIOUS TO YOUR FINANCIAL WELL BEING".