SEBI, the ‘regulator’ of the Indian capital markets, is truly a bull in a China shop. Chronicles of regulators worldwide would rival Cervantes’ Don Quixote. The regulator thinks that it is engaged in ‘investor’ protection. Action that is focused on investor protection ends up having a totally bizarre result. To protect the ‘investors’ from the mutual fund sales man, it took several steps, which have had the unintended (?) impact of hammering a nail in to the coffin of the yet to mature mutual fund industry. When the noise became unbearable, SEBI tried to take on the Insurance industry which was merrily run by proxies of the insurance salesmen. Regulators tend to see windmills as giant enemies.
SEBI has never been able to pre-empt any white collar crime in India. Its investigation and prosecution has been the stuff that comedies are made of. The Harshad Mehta scam, after everything was handed to it on a platter, is testimony to its prosecution abilities. The Gods got tired of waiting for action from the regulator and pulled Harshad below. Innumerable acts (rulings) of SEBI were overturned by its tribunal.
Suddenly, SEBI discovered ‘compounding’. A full import from the US of A. Compounding has now become a planned expenditure for brokers, bankers and other players who now have a way to evaluate the costs and benefits of breaking a law. And compounding has enabled AMC’s, brokers, investment bankers, companies and other regulated entities to break the law with impunity and not carry any scars! When punishment for an act is merely a fine, it is no longer a sin. There is merely a price at which it is right. Going through the website of SEBI and reading the compounding done so far, is scary. The hallowed names all have contributed to the bottom line of SEBI. Of course, the IRDA (the agency that ‘regulates’ the insurance industry) has also picked this practice up. Recently, it slapped a ‘penalty’ of a miserable half a million rupees on an insurance company that submitted one product for approval, but sold something else altogether!
Now SEBI is chasing the likes of Bennett Coleman (Times of India, Economic Times, ET Now etc). These media companies have been selling ad and PR space in exchange for equity in many companies. Naturally, to protect their investments, the media ensures that the investee companies are plugged and negative news blanked out. Yes, it is a scam, but who can say it is legally wrong? The media company is not bound by any law. They are unlisted entities. They do not legally mislead anyone. On what basis can SEBI regulate this? SEBI clearly is caught with its pants down. Crime does pay.
World over, it is the business interests that write the rules. Regulators are there merely because it seems logical. No country in the world can actually claim that regulators stopped or saved an investor. Sometimes, public pressure and legal compulsions do force the regulator to do some good. Given a choice, the regulator is merely a spectator. I remember going to meet the Deputy Governor of RBI, once upon a time. My boss and I were worried about what the leasing and hire purchase companies were up to. It was obvious to everyone that there is a tragedy in the making. Public deposits were being accepted in gross violations of all norms. Fancy accounting had inflated the networth of all the NBFC’s. Credit quality was slipping. NBFC’s were paying six to ten percent commission to get one year deposits at the then ceiling rate of 14% p.a.! We discussed all this. Then the honourable gentleman said that the RBI can act only if someone ‘brings it to our attention’. We were stunned! He wanted us to put in a written complaint so that the government could act! I lost my temper and told the gentleman, that right outside the main RBI building, there were cloth banners announcing incentives of six percent on the one year deposit by a NBFC. The gentleman was getting uncomfortable and we were pissed off with him. True to his form, the Dy Governor did precisely nothing.
How many people have lost money with time shares and plantation companies? Has the regulator been able to do anything at all?
Regulation of financial markets is a charade. You have only yourself to blame if you get trapped in the web of deceit that is continuously being spun by the players. Caveat Emptor!
Monday, August 30, 2010
Wednesday, August 25, 2010
Of Mutual Funds, PMS schemes and the seller
There is a lot of shout that mutual funds are not able to increase their assets. The answer is simple. They are not paying the salesman enough money. Investor preferences have absolutely NOTHING to do with money not coming in to equities. Investors have no clue about where to put their money and need some push. Pushed hard enough, they will put money in to fixed deposits of companies with no credit rating or low credit rating, dubious real estate PMS schemes or plantation schemes. They need just one nudge from the distributor and they will do it. The retail and the HNI investor are the ideal clients for any smooth talking sales guys.
Just last week, one foreign bank raised over Rs.1,000 crores (Yes, a thousand crores) for a PMS scheme. At the same time, ‘experts’ are saying that mutual fund inflows have dried up due to market valuations getting stretched and equally other inane reasoning.
I went a little behind the curtains to see what the distributor got. He got a four percent up front commission for selling this PMS. The PMS itself had a very simple structure. An upfront annualised management fee of two percent, and exit load of two and a half percent if redeemed within twelve months and a profit share if the returns crossed two digits! There was no link to the market performance. If the market returns were thirty percent and the PMS delivered twenty, the PMS Manager still got an incentive. It is typical of most PMS structures. And of course the return is measured before tax and not after tax. Recently, I saw a PMS, where the value of a five lakh investment had gone up by Rs.1.45 lakh, but all of it was short term gains. Removing 30% tax, the gain shrunk to under one lakh rupees. The PMS Manager also deducted his incentive on the gross gain (around Rs.0.29 lakh). The investor was left with around Rs.0.85 lakh! The more interesting part was that the money was invested three years ago. The value, after tax and incentives etc is today below Rs.5 lakh, which was the original investment. If one takes the churn in to account, the broking firm has made a handsome return. The investors got totally screwed.
Why I am giving the example is that the said investor again put money in to the PMS of the foreign bank that I mentioned above.
So, if we look at it, the investor is a fool and no amount of reading or counselling makes a difference to the guy. All that matters to him is a slick distributor making a sexy power point presentation and perhaps treating him to a drink or attacking some other weakness of his. The distributor knows this and attacks. In any case, neither the investor nor the distributor understands the product. What the distributor knows is that by selling this he makes four percent up front. So, he sells this. For the investor, it is ‘long term’ investing advised by an ‘expert’.
So, as I see it, it is the distributor who is key to expansion of any market. By taking him on, SEBI has killed the reach of the mutual fund industry. No mutual fund can build a distribution system of its own and survive, given the paltry amount that is available to meet expenses. To top it, we are seeing a toothless and mindless agency like AMFI trying to dob the distributor with a ninefold increase in ‘registration’ fee. I do not know why a distributor has to have a registration with AMFI, which is only a trade body of mutual funds. Their inability to do anything meaningful has been demonstrated by the fact that even the test they used to hold for distributors, was a sham and the same has now been transferred to an agency of SEBI. In this context, why should AMFI have any nexus with the distributors? In fact, I would urge the distributors to simply ignore AMFI and have their own trade body. AMFI is irrelevant for the distributor. Of course, SEBI is trying to push AMFI in to the corner by making it a ‘Self Regulatory Organisation” or a SRO. I do not know if that is any answer to expanding the market or any use for the distributors.
If I were a distributor, I would simply not sell a mutual fund product. I can sell PMS or insurance and make my living.
Just last week, one foreign bank raised over Rs.1,000 crores (Yes, a thousand crores) for a PMS scheme. At the same time, ‘experts’ are saying that mutual fund inflows have dried up due to market valuations getting stretched and equally other inane reasoning.
I went a little behind the curtains to see what the distributor got. He got a four percent up front commission for selling this PMS. The PMS itself had a very simple structure. An upfront annualised management fee of two percent, and exit load of two and a half percent if redeemed within twelve months and a profit share if the returns crossed two digits! There was no link to the market performance. If the market returns were thirty percent and the PMS delivered twenty, the PMS Manager still got an incentive. It is typical of most PMS structures. And of course the return is measured before tax and not after tax. Recently, I saw a PMS, where the value of a five lakh investment had gone up by Rs.1.45 lakh, but all of it was short term gains. Removing 30% tax, the gain shrunk to under one lakh rupees. The PMS Manager also deducted his incentive on the gross gain (around Rs.0.29 lakh). The investor was left with around Rs.0.85 lakh! The more interesting part was that the money was invested three years ago. The value, after tax and incentives etc is today below Rs.5 lakh, which was the original investment. If one takes the churn in to account, the broking firm has made a handsome return. The investors got totally screwed.
Why I am giving the example is that the said investor again put money in to the PMS of the foreign bank that I mentioned above.
So, if we look at it, the investor is a fool and no amount of reading or counselling makes a difference to the guy. All that matters to him is a slick distributor making a sexy power point presentation and perhaps treating him to a drink or attacking some other weakness of his. The distributor knows this and attacks. In any case, neither the investor nor the distributor understands the product. What the distributor knows is that by selling this he makes four percent up front. So, he sells this. For the investor, it is ‘long term’ investing advised by an ‘expert’.
So, as I see it, it is the distributor who is key to expansion of any market. By taking him on, SEBI has killed the reach of the mutual fund industry. No mutual fund can build a distribution system of its own and survive, given the paltry amount that is available to meet expenses. To top it, we are seeing a toothless and mindless agency like AMFI trying to dob the distributor with a ninefold increase in ‘registration’ fee. I do not know why a distributor has to have a registration with AMFI, which is only a trade body of mutual funds. Their inability to do anything meaningful has been demonstrated by the fact that even the test they used to hold for distributors, was a sham and the same has now been transferred to an agency of SEBI. In this context, why should AMFI have any nexus with the distributors? In fact, I would urge the distributors to simply ignore AMFI and have their own trade body. AMFI is irrelevant for the distributor. Of course, SEBI is trying to push AMFI in to the corner by making it a ‘Self Regulatory Organisation” or a SRO. I do not know if that is any answer to expanding the market or any use for the distributors.
If I were a distributor, I would simply not sell a mutual fund product. I can sell PMS or insurance and make my living.
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