News Round Up

IIML, Aditya Birla PE, Shapoorji Pallonji and US-based Darby Private Equity have shown interest in buying the fund.
Six Firms In Race For Axis PE Buy - Axis Bank, India’s third largest private sector lender, has received bids from six suitors for buying out its private equity arm called Axis Private Equity. IL&FS Investment Managers, Aditya Birla Private Equity, Shapoorji Pallonji group and US-based Darby Private Equity are among those that have shown interest in buying the fund. Earlier in February, the top managers of the company were looking to buy Axis Bank’s interest in Axis Private Equity, but some investors have opposed this move. Axis Private Equity had raised Rs 600 crore for its infrastructure fund in 2008. (ET)
NSR Likely To Hike Stake In INX Media - New Silk Route (NSR), a Mauritius-based private equity firm, is likely to increase its stake in INX Media Pvt Ltd to 80%, from 20% now. NSR is reportedly buying out stakes of some of the existing foreign and domestic investors to hike its stake in the company. NSR has agreed to infuse Rs 55 crore initially and will also pump in more money as per the business needs of the company. INX has been undergoing a financial restructuring since last 10-12 months, and sold its general entertainment channel 9X to Zee Tele Films last month. (FE)
SAIL Looks To Ink JVs With Posco, Others - Steel Authority of India Ltd (SAIL), the state-run steel manufacturer, is looking to form joint venture agreement with Korean giant Posco to build a 2 million tonne plant in Jharkhand. Besides Posco, SAIL is also in talks for multiple ventures with Tata Steel, Arcelor Mittal group and Japanese steel companies like Kobe for greenfield ventures. Reportedly, the Tatas could also set up a 2 million tonne steel unit with SAIL in Bokaro, while ArcelorMittal could set up a 3-4 million tonne in the eastern regions. (DNA)
Prudential May Sell AIG Stake To Tata Group - Prudential, the British insurance giant, may sell its stake in Tata AIG Life to its partner Tata Group. In March, Prudential had acquired AIG's Asia business for $35.5 billion, which included the 26% stake in Tata AIG. Prudential has to sell the AIG stake due to regulatory problems as it already owns 26% stake in ICICI Life Insurance that barred it from acquiring stake in another life insurance venture. Both the firms are reportedly in advanced stages of talks on the price at which the shares would be sold to the Indian conglomerate. (BS)
Shriram Transport To Infuse Rs 600Cr In New Arm - Shriram Transport Finance Company Ltd (STFC), one of India’s leading commercial vehicle finance company, is planning to infuse around Rs 600 crore capital in its proposed subsidiary, for conducting equipment finance business. The funds are expected to be infused in a month. The company has also forayed into gold loan by joining hands with one of the group’s subsidiary. (BS)

Investment in Shriram Transport Finance's NCD makes sense

Shriram Transport Finance is coming with yet another issue of non-convertible debentures (NCD). The issue opens on May 17, 2010, and closes on May 31, 2010. The investor can invest with a minimum sum of Rs 10,000. The company intends to raise Rs 250 crore through this issue with an option to retain over subscription of another Rs 250 crore. The company had tapped the NCD route to raise funds last year too.

The investment in company’s debt gets strength from the fact that it is one of the most successful non- banking financial companies (NBFC) in the country. It is primarily into financing of second-hand commercial vehicle. It is the only company in the organised market providing finance for such kind of customers, which other financial institutions are not comfortable dealing with due to an extremely difficult credit appraisal process.

The company can access the creditworthiness of its borrowers, as it is into this market for the past three decades. And its success is borne by the fact that net non-performing assets form less than 1% of its net advances as at the end of December 2009 quarter. This is one of the best asset qualities in NBFC space in India. And it gives comfort to the investors too.

The salient part of the issue is that this time the company intends to raise 80% of corpus from the retail investors. The scheme is structured in five options. In three of the options the investment is secured and in the remaining two, it is unsecured. While the secured options are rated as CARE AA+, the unsecured have been rated as CARE AA. A point to be noted is that even the unsecured option is rated adequately high by the credit rating agency. So the retail investors can be rest assured that the risk is minimal.

Within secured options, there are three alternatives, wherein an investor can invest for either 5 or 7 years depending upon the duration of investment he is comfortable with. The yield that a retail investor can earn ranges from 9.5% to 10.51% per annum. At a time, when most of the bank’s fixed deposits are not giving a better interest than 7.5% per annum, the company’s NCD issue seems to offer an attractive yield for the retail investors.

The yield is higher for unsecured options. The investor can invest either for six-and-a-half or for seven years. The yield a retail investor can make ranges from 10.75% to 11.25% per annum. The premium over fixed deposit rates is obviously more in case of unsecured options. What makes this issue attractive for retail investors is that the term of investment is quite high i.e. 5-7 years. We are in a phase, where interest rates are on an upward trajectory. At a time, when the general interest levels are already a bit high, this offer provides a premium over and above already high interest rates. So it makes a lot of sense for retail investor to park some funds at high rates for a long period of time.

Moreover, NCDs are going to be listed at National Stock Exchange (NSE). So an investor can redeem his investments should an urgent need for cash arises. Therefore a crucial aspect of investment i.e. liquidity is taken care of. In nutshell, an investment in Shriram Transport Finance’s NCD comes with twin advantages of high return and high liquidity. It makes sense for retail investors to park some hard-earned money here.

Insurance companies keen to grab client details of independent financial advisors

You trust them with your money, you have faith in them as they will guide you to the right financial path, you believe in them as they are completely independent and loyal to their clients. These of course are your independent financial advisors (IFAs). However, we now learn that some of these IFAs are being wooed by insurance companies to part with your contact details.

Companies like Reliance, HDFC Life Insurance, SBI Life Insurance, Aviva Life insurance, Birla Sun Life Insurance and other insurance majors are understood to be inducing IFAs with incentives to get contact details of clients. These are either meant to locate new customers for unit-linked insurance plans (ULIPs) or, simply to poach customers from other insurers.

An IFA gets paid for his co-operation in providing other details of a competitor’s clients to an insurance company. All your details, right from your telephone numbers to email IDs, even residential addresses, are also provided to the insurance company.
This is all part of a desperate attempt by insurance companies to keep selling ULIPs after a very public brawl between the Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) brought ULIPs sales down to a trickle. Thanks to that imbroglio, many ULIP customers are worried about their investments and are having second thoughts of continuing with premium payments for a product plagued by high default rates. Insurers are trying to reach out to existing and potential customers to dispel doubts and fears.

Secondly, insurance companies need to find other ways to bring in new customers. It is not clear whether they can launch new ULIP products before the courts pick the winner of the SEBI-IRDA fight; so they have to sell more to their existing customer base and need to interact with them directly. Or they have to incentivise IFAs to lure investors from other insurance companies.

“Insurance companies have often come to us to either sell their ULIPs or ask for our contact list in order to create a greater database to sell them directly to the clients,” said a certified financial planner who wished to remain anonymous. He calls this “a routine affair.”


These deals are obviously not done transparently. “There is no paper trail or a
black-and-white agreement,” says Neeraj Bahal, a certified financial planner (CFP), from Fasttrack Investments. Usually, an executive from an insurance company would meet an IFA and tell him about a chance for him to make some money by parting with his clients’ details for a fee. Depending on the deal, the IFA will either part with the data which the insurer uses to contact a potential customer; or, in some cases, the insurance executive will actually accompany the IFA to client meetings to sell a product. This enhances the credibility of the insurance product being sold.

We learn that many IFAs who sold mutual fund products are tempted by the kickbacks from insurance companies after their business was hit by SEBI's ban on entry loads. "Since mutual fund commissions were dwindling and distributors were affected, it created an opportunity for the sales of ULIPs,” said Harish Mohan, managing director, Time Financials (Chennai).
Some distributors have a different perspective. Jayant Vidwans, president of the Society of Financial Planners said, "Sharing of data with various organisations is not wrong.”

Not all IFAs are jumping in to grab the money. “If he is a serious advisor then he shouldn’t be selling his clients’ details. He shouldn’t do that as this is his bread and butter,” says Sumeet Vaid, founder and managing director, Freedom Financial Planners.

The function of an IFA is to provide the best possible financial option for his clients. However, when an IFA’s conduct is influenced by incentives, he becomes just like any other insurance agent and clients’ interests are compromised. 

UTI to reach out to investors using social media, mobiles

UTI Asset Management Company Ltd. (UTIAMC) is now going aggressive, with its plans to use social media and wireless technology to reach out to investors.

Mr. Jaideep Bhattacharya, Chief Marketing Officer of UTI Asset Management Company said in India about 63 % of the investments are done through community-based recommendations. This community can be friends, colleagues, relatives or social media like Orkut, Twitter, Linkedin, Facebook etc. Besides, the company is doing a lot of activities on Facebook and Twitter to educate the investors.

Mr. Bhattacharya said as people communicate a lot through social networking sites, therefore the company is focusing more on social media. The key objective out here is that wherever there is a discussion happening, the user can communicate or guide.

UTI Asset Management Company, who is well known for its innovative marketing initiatives, has now come out with initiatives such as - tying up with Mumbai's dabbawallas to distribute its NFO-Wealth Builder Fund-Series II, advertisements in Mumbai's local trains and tying-up with Meru cabs to communicate with investors in the past. Mr. Bhattacharya also said this year the company is eyeing on using wireless technology on mobile platforms, which would help the company in penetration of new markets, reducing cost of transactions and knowledge distribution. UTIAMC is a company incorporated under The Companies Act, 1956.

UTIAMC was registered by SEBI to act as the asset management company for UTI Mutual Fund vide its letter of January 14, 2003.

UTIAMC has also entered into a service agreement with the Administrator of the Specified Undertaking of the Unit Trust of India (SUUTI) to provide them with back office support for business processes.

UTIAMC is also a registered Portfolio Manager under the SEBI (Portfolio Managers) Regulations, 1993 since February 3, 2004 for undertaking portfolio management services.

BSE steals a march over NSE in mutual fund volumes

Bitter exchange rivals Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) have been at each others’ throats for grabbing a larger share of the cash and derivatives segment in equity trading. It seems another battle is playing out on the newly-promoted mutual fund platforms of both exchanges.
However, the BSE appears to have hit the road running while its bigger rival is desperately trying to play catch-up. BSE has witnessed a sharp spike in trading volumes over the past few months. NSE, on the other hand, has remained mostly stagnant during this period. For the month of December 2009, when BSE StAR MF was launched, subscriptions touched Rs11.61 crore, with net inflows of around Rs4.43 crore. Comparatively, NSE’s MFSS platform registered a turnover of only Rs2.77 crore, with net inflows amounting to Rs1.85 crore.

Volumes on BSE StAR MF have surged by 82%, touching Rs21.19 crore by the end of April this year. On the other hand, volumes on NSE MFSS have witnessed a dip of 13%, touching Rs2.42 crore in April. While net inflows on BSE have jumped 268% to Rs16.30 crore during this period, NSE has barely managed an 18% rise amounting to Rs2.19 crore.

While the NSE was the first to jump into the fray when it launched its NEAT system based MF platform—Mutual Fund Service System (MFSS) on 30th November last year, the BSE followed closely on its heels by opening its Web-based trading platform—BSE StAR MF—on 4th December.

Why is it that NSE is so far behind its smaller competitor in this segment, when it enjoys an enviable market share in the equity derivatives segment?

Lack of adequate participation from brokers has probably hurt the NSE in its new venture. Some technical and operational issues have tipped the scales in favour of the BSE platform.

Chandrashekhar Layane, vice president, Fairwealth Financial Services, revealed that brokers prefer the BSE platform due to its comparative ease of use and flexibility. “Brokers favour the BSE platform because it is much more user friendly, not only in terms of technology but also in relation to operations.”

Deena Mehta, managing director, Asit C Mehta, believes that BSE enjoys a first-mover advantage in terms of providing a Web-based Internet platform. “When BSE launched its service, it started with a Web-based Internet platform straight away. Brokers could log in from anywhere and put in the trade. On the other hand, NSE started with its NEAT system. Hardly any broker now has NEAT terminals. We have shifted to Orion terminals. So having a direct connectivity with NSE was not workable.”

Ms Mehta also pointed out that BSE also offers a back-office solution, which facilitates billing and other tasks. “Otherwise, we would have to develop our own back-office software, which takes a lot of time and involves costs. Since BSE has already provided for technological compatibility, it is a lot more convenient for us,

Pensions, too, must be sold

NPS flounders for want of marketing.

The new pension system (NPS) for private citizens generated a return of 12% last fiscal year. This is higher than what the Employees’ Provident Fund has achieved, and higher than what fixed deposits of banks yield.

However, it is significantly lower than what could have been achieved in a year in which stock indices doubled. It transpires that the NPS started investing in equity only a little late in the year and secured a modest 26% returns on equity investments.

One has to wait for a full cycle to get a clear picture of how the NPS performs. However, the most striking feature of the NPS’ first year of performance after it opened up to voluntary contributions is that the corpus of such contributions amount to a meagre Rs 10 crore.

This is remarkable under-achievement for a well-structured, well-regulated scheme with an asset management charge as low as 0.0009%. Of course, there is a disincentive in the form of discriminatory tax treatment of the NPS, as compared to savings schemes like the Public Provident Fund (PPF).

Withdrawals from the NPS are taxed, while those from the PPF are tax-exempt. The promised harmonisation of the tax treatment of all long-term savings schemes is yet to materialise.

But the NPS is floundering essentially because of a faulty marketing model. A course-correction is imperative for the scheme to succeed. The government now contributes Rs 1,000 to the pension account of every new NPS subscriber.

It will cover the cost of starting an account with the central record-keeping agency and of carrying out transactions, and give a positive return on the very day of joining the NPS.

But this incentive to the subscriber does little to spread awareness of the scheme, to market the scheme. And the biggest problem with the NPS is that it is relatively unknown.

With a wafer-thin asset management fee, fund managers can hardly afford to market the scheme using their money. The pensions regulator PFRDA does some publicity for the scheme, but this is not enough.

The government must offer distributors, the so-called points of presence — banks that open NPS accounts for subscribers — and others, reasonable incentives for roping in subscribers.

MFs told to make complaints public

Securities and Exchange Board of India (Sebi) on Thursday said mutual fund houses need to put complete details about investor's complaints on public domain.
"It has been decided that mutual funds shall henceforth disclose on their websites, on the Amfi website as well as in their annual reports, details of investor complaints received by them from all sources," Sebi stated. The details of complaints will be signed off by the trustees of the mutual fund house. This is one of major steps to bring more transparency in the mutual fund industry, feel the experts.
For reporting of such complaints, Sebi has classified it into three types - delay/non payment of money, statement of accounts and service related (which will include wrong and unauthorised switching between schemes and loads charged).
Mirae Asset Mutual Fund CEO Arindham Ghosh said, "This is a welcome move by the market regulator which will increase transparency. I don't think it is a problem for the mutual fund industry as they are already disclosing investor's complaints regularly to the regulator". He adds that from now on though it will be on the public domain, all the fund houses have to upload their report for the year 2009-10 by June 2010 on their website as well as on the website of Association of Mutual Funds in India (Amfi). For the subsequent financial years, such reporting will be made within 2 months of the financial closure. In the last one year, Sebi has brought in handful of new regulations in the mutual fund industry, like ban on entry load, abolition of NOC for changing brokers and Application Supported by Blocked Amount (ASBA) facility.

Sebi arm to conduct distributor exams
From June 1, 2010, onwards, Sebi will effectively takeover the examination process for the mutual fund distributors. National Institute of Securities Markets (NISM), established by Sebi, would be conducting examination for the mutual fund distributor's certification. From the above date, test for AMFI Mutual Fund (Basic) Module and AMFI Mutual Fund (Advisors) Module will be discontinued.

News Round Up

The fund is planning to deploy $600-700 million over the next 12 months.
IIML To Raise Up To $350M For New Fund - Private equity firm IL&FS Investment Managers Ltd (IIML), the listed subsidiary of Infrastructure Leasing & Financial Services Ltd (IL&FS), is planning to raise $300-350 million for a new fund. The company plans to approach the market at the end of 2010 to raise the capital. IIML’s last growth private equity fund was of $225 million size. The fund is planning to deploy $600-700 million over the next 12 months. It is currently investing from its growth equity fund, TARA India Fund III, of which about 75% has been committed so far. (Mint)
Mahindra Retail To Raise PE - Mahindra Retail, the retail arm of tractor major Mahindra Group, is planning to raise private equity to fund the expansion of Mom & Me Stores. The company may look at raising up to Rs 443 crore in the second round of funding over the next quarter. The retailer, which currently runs 12 stores, plans to open 100 stores across India, apart from building IT infrastructure. The company plans to open 30 new stores this year. ICICI Venture has earlier invested in the company. (FC)
3i Sees High Asset Prices Hindering New Deals - Private equity firm 3i Group sees huge competition from its rival firms as the funds started to pursue new deals in recent months. It expects overhang of capital to be around for the next 18 months and the market will be pretty competitive. 3i has invested in two new portfolio companies over the course of the year. The group invested a total of 386 million pounds compared with 968 million the previous year as the industry's investments sunk to their lowest in a decade. (Reuters)
US Firm To Acquire Bangalore’s Mistral Solutions - Mistral Solutions, the Bangalore-based product realisation company in the embedded space, is understood to have been acquired by a US-based multinational which offers solutions to the global defence sector. The enterprise valuation of the deal is understood to be in the range of Rs 120 crore. Venture capital funds, Nexus India Ventures and JAFCO Asia, had invested around Rs 30 crore in Mistral Solutions in 2008. (BS)
GE Shipping Unit Files IPO Papers - Great Eastern Shipping Co, the shipping and offshore service provider, is planning to sell 22.05 million shares in unit, Greatship India Ltd, to raise funds via an initial public offering (IPO). The company has filed papers for approval with the market regulator Sebi for the IPO. Though the company did not divulge the amount of money it plans to raise, it mentioned a total expenditure of around Rs 325.65 crore in various projects. Kotak Investment Banking and Bank Of America-Merrill Lynch are the book running lead managers to the issue. (DNA)

Kotak May Acquire CitiFinancial India

Kotak Mahindra Bank Ltd may acquire CitiFinancial Consumer Finance India Ltd from Citibank NA.

Citi was rumoured to be exiting the personal loan business India in 2008, when the subprime crisis broke out in the US. CitiFinancial is a part of Citi Holdings.

Kotak is said to be conducting due diligence on CitiFinancial’s assets. CitiFinancial has about 118 branches and 2,000 employees in its network, out of which 800 are certified professionals authorized to sell insurance products. This will increase Kotak’s retail reach beyond it 249 branches. Kotak can use these branches as a distribution setup  

CitiFinancial has been reeling under bad loans and lossess since 2007. The losses largely accrued because of higher NPA and below par asset quality in unsecured personal loans. CitiFinancial reported a net loss of Rs.729 crore in fiscal 2009 against a profit of Rs.19 crore in the previous year. The management has also cut the branch network from 450 to around 118, retrenched at least 400.
Citi has infused $200 mn (Rs.900 crore) in the past two years to absorb the losses and cleaned up the balance sheet.

StanChart says India share sale to open May 25-28

 

 

Britain-based Standard Chartered's share sale in India will open from May 25 to 28, the bank said on Thursday. The sale of shares through Indian Depositary Receipts (IDRs) will be the country's first such issue. StanChart will issue 240 million IDRs, with every 10 IDRs representing one share of Standard Chartered Plc., according to its red herring prospectus.
The bank has hired UBS AG, Goldman Sachs, JM Financial Consultants, Bank of America-Merrill Lynch, Kotak (KOTAKBANK.NS : 777 +8.5) Mahindra Capital and SBI (SBIN.NS : 2310 -14.2) Capital Markets to manage the offering.
StanChart has appointed its STCI Capital Markets unit as a co-book running lead manager.

News Round Up

The acquisition will help Kotak to offer home and personal loans to retail borrowers in the low income segment.
Kotak In Talks To Buy CitiFinancial - Kotak Mahindra Bank Ltd, a leading financial major, is in talks with Citibank NA’s Indian management for a possible acquistion of the latter’s consumer finance arm -- CitiFinancial Consumer Finance India Ltd. The acquisition, if materialises, will help Kotak to offer home and personal loans to retail borrowers in the low income segment. Kotak is reportedly conducting due diligence on CitiFinancial’s assets. It currently has 249 branches across 145 locations, with an asset base of Rs 37,439 crore. (Mint)
RBI Yet To Decide Sequoia’s Stake Buy In Care- Private equity fund Sequoia Capital, which was planning to pick up stake in the rating agency Care, has encountered fresh hurdles. Though Sequoia has received approval from the Foreign Investment Promotion Board (FIPB), the Reserve Bank of India (RBI) is yet to take a stand on the deal. It is believed that the investment may not meet the minimum requirement of $500,000 (around Rs 2.25 crore) that foreign entities must invest in non-banking finance companies or credit rating agencies. Sequoia is said to have been in talks with a number of stakeholders to purchase anywhere between 10% and 15% of the organisation. (DNA)
GVK Power Plans Separate Holding For Portfolios - GVK Power and Infrastructure Ltd, a Hyderabad-based infrastructure major which owns substantial minority stake in two of India’s international airports, is planning to form separate holding companies for its assets in various divisions. The company has interests in power, airports, special economic zones, roads and urban infrastructure. It also has presence in the hospitality, services and manufacturing sectors. The move is part of company’s plan to have holding in each vertical and unlock better value when they are listed. (BS)
VLCC Plans IPO In 18 Months - VLCC Group of Companies, one of India’s leading fitness services and wellness products majors, is planning to hit the capital market with its initial public offer (IPO) in the next 18 months. Though the size of the IPO is not disclosed, its founder reoportedly said the issue size would be fairly big. The company has posted revenue of Rs 700 crore in the last fiscal from all its business verticals, and is expecting to achieve a turnover in excess of Rs 1000 crore by the end of 2011-12. Apart from domestic operations, VLCC has 14 centers overseas, in UAE, Oman, Bahrain and Nepal. (BS)
Blackstone, THL Group's Fidelity Bid May Exceed $15B - Blackstone Group LP, Thomas H. Lee Partners LP and TPG Capital are in talks to pay more than $15 billion including debt for Fidelity National Information Services Inc. Fidelity National is likely to reach for an agreement with the buyout group by May 16. At this price, the deal would value the company at about $32 a share. Fidelity National had about $2.9 billion of net debt and noncontrolling interest as of March 31. (BS)
L&T To Foray Hotel Biz - Larsen & Toubro (L&T), India’s leading infrastructure company, is planning to foray in hospitality business. The hotel projects will include budget, mid-market, business hotel, five-star and serviced apartments. It has identified four markets for its hospitality business foray that include Navi Mumbai, Chandigarh, Bangalore and Chennai. The proposed hotels will be developed through the special purpose vehicle (SPV) route, either directly through L&T Ltd or through a group company such as L&T Urban Infrastructure Ltd. (DNA)
Golden Tulip To Biuld 8 Hotel Properties In 2010 - Golden Tulip Hospitality Group, a Netherlands-based hospitality major, is planning to invest over $200 million in the next three years to expand its footprint in India. The company plans to open eight properties by the end of 2010, comprising a total of 1,100 rooms. Out of the eight properties, three will be developed with company equity, while the balance will be through franchise or management contracts. The hotels will be developed in Gurgaon, Rajasthan, Jaipur, Bangalore, Mumbai and Goa. (Business Line)

PE NEWS

The company is expecting around $225 million valuation at this stage.
Kings XI Punjab May Sell Majority To PE - ISIS Equity Partners, a UK-based private equity fund, is in talks with some of the promoters of KPH Dream Cricket Pvt Ltd, the holding company of Kings XI Punjab. The PE fund is likely to buy a majority stake in the IPL franchisee. KPH Dream is in discussions with four suitors and nothing is finalized yet. Mohit Burman and Ness Wadia were the key shareholders in the company, and together hold around 40% stake. The company is expecting around $225 million valuation at this stage. (ToI)
Reliance Big Buys Hollywood Distributor IM Global - Reliance Big Entertainment Ltd, part of diversified ADA Group, has bought a majority stake in IM Global, a Hollywood film sales company. IM Global has bases in Los Angeles and London. The acquisition is part of company’s plan to ramp up its own distribution abilities for Bollywood movies in key markets outside India. Both the firms were already in alliance since February this year by which IM Global was distributing Bollywood cinema - essentially films produced and distributed by Reliance Big - in the US and the UK. (DNA)
GMR Energy To Raise Rs 450Cr From IDFC PE - GMR Energy, a subsidiary of GMR Infra, is raising $100 million (Rs 450 crore) from private equity firm IDFC Private Equity. The fund raise is part of company’s plan to boost its power generation capacity from the current 808 Mw to 6,500 Mw over the next 3-4 years. This is the second round of equity raising by GMR Energy. Last month, it had raised $200 million from Singapore-based investment company Temasek. The deal is expected to be closed in the next few weeks. (BS)
Srei To Launch $500M International Infra Fund - Srei, an infrastructure focused fund, is planning to launch a $500-million international infrastructure fund. This will be the fifth fund of the company, and will be launched under Srei Venture Capital Ltd (SVCL), the wholly owned subsidiary of Srei Infrastructure Finance Ltd. At present, the subsidiary has about Rs 440 crore fund under management. The company is looking to rope in international investors for the new fund. (BS)
IVRCL Assets To Raise Rs 1,000Cr Via QIP - IVRCL Assets & Holdings Ltd has received shareholders’ approval to raise up to Rs 1,000 crore through qualified institutional placement (QIP) of shares. IVRCL Assets is a newly formed entity in which two group firms of IVRCL were merged together. IVRCL has restructured its businesses and merged two of its group firms, IVR Strategic Resources and Services Ltd and IVRCL Water Infrastructures Ltd with IVR Prime Urban Developers Ltd, and subsequently renamed the unit as IVRCL Assets & Holdings Ltd. (Business Line)
Dalmia Cement Looks To Buy Sugar Firm - Dalmia Cement, the company which brought private equity major KKR recently in a Rs 750-crore deal, is planning to acquire a sugar mill and is in talks with two such firms in Karnataka and Andhra Pradesh. The size of the proposed deal would be around Rs 250 crore, including the investment to be made for a power plant to run the sugar mill. The company currently has three integrated sugar mills in Uttar Pradesh with a capacity of 22,500 tonne of crushing a day. (ET)
Cantabil Receives SEBI Nod For IPO - Cantabil Retail India Ltd, an apparel manufacturer and retailer, has received approval from market regulator the Securities and Exchange Board of India (SEBI) for its forthcoming initial public offering (IPO). The firm had filed the draft red herring prospectus (DRHP) for the IPO in September 2009. It intends to raise upto Rs 105 crore from the IPO, which may hit the market in a month or two. (Business Line)
GSPC To Merge Two Of Its Units - Gujarat State Petroleum Corporation (GSPC), a state-owned oil and gas major, is close to merging unlisted unit Sabarmati Gas with its gas distribution subsidiary, GSPC Gas. This is part of company’s plan to increase its presence in the gas distribution business in Gujarat. The department of energy and petrochemicals, which is the nodal ministry for energy in the state, has given its in-principal approval to the merger and a swap ratio is expected to be completed within a month. (ET)
Evolve Medspa To Invest Rs 75-100Cr Over Three Years - Evolve Medspa, a joint venture between Yash Birla Group and Pacific Healthcare, that provides integrated healthcare in Singapore, Hong Kong and China, is planning to expand its operation in the domestic market. The company has earmarked an investment of Rs 75-100 crore for the expansion and branding exercise. Evolve is also open to venture capital and private equity investments in the company. The proposed investment will be made over the next three years, and it plans to expand its footprints in Mumbai and other major cities across the country. (FE)

--

Birla Sun Life MF launches Birla Sun Life India Reforms Fund

Birla Sun Life Mutual Fund has launched Birla Sun Life India Reforms Fund. The New Fund Offer (NFO) for the open ended growth scheme opened for subscription today and will close on June 9, 2010. An exit load of 1% of applicable NAV is payable for units redeemed / switched out within 1 year from the date of allotment. For units redeemed / switched out after 1 year from the date of allotment, no exit load is payable. The investment objective is to generate growth and capital appreciation by building a portfolio of companies that are expected to benefit from the economic reforms, PSU divestment and increased government spending.

Mutual funds rework strategies on new plans

As the Rs7.47 trillion Indian mutual funds (MF) industry comes to terms with the new no-load scenario and several such measures, mutual funds are reworking their strategies to launch new funds. No longer are new fund offers (NFOs) used as an excuse to gather assets. Apart from an occasional exception, fund houses expect to collect a modest amount. With a drop in distributor commissions and a need to keep costs in check, fund houses are tweaking their strategies to get more bang for their buck. Fund houses are, finally, trying hard to find a balance between what they want to sell and what investors really want. Is the product relevant?
As NFOs are costly affairs, fund houses claim a lot more thought is going into whether a scheme makes sense or not. Historically, fund houses have launched funds to garner more assets. In April 2006, when the capital market regulator, the Securities and Exchange Board of India (Sebi), banned open-ended funds to charge 6% NFO expenses and later amortize that over a period of five years, fund houses took to launching closed-end funds. According to data provided by mutual fund tracker Value Research India Pvt. Ltd, fund houses had launched 43 open-ended funds and no closed-end fund in 2005 during rising markets. Between April 2006 and December 2006, 10 closed-end funds were launched that garnered Rs7,764.25 crore as against six open-ended funds launched that garnered Rs1,521 crore. In fact, when Sebi announced its decision in July to ban entry loads, a total of eight NFOs hit the market within a span of a month compensating distributors in a last-ditch attempt to woo assets; together these funds mopped up Rs1,260.79 crore in total, as per Value Research.

Graphic: Yogesh Kumar/Mint

With entry loads abolished and fund houses having to compensate the distributors out of their own pocket, they have become realistic. “NFOs these days are purely need-based. Instead of aiming to gather assets under management, fund houses are paying more attention these days to see if a gap in an investor’s portfolio can be filled up by launching a new scheme. The days where you’d typically get two-three huge NFOs once a quarter are gone,” says Yogesh Kalwani, head (investment advisory), BNP Paribas-Private Banking. “Apart from abolition of entry loads, Sebi has been particular in ensuring that clones of existing schemes within the same fund house do not enter the market,” says Dhirendra Kumar, chief executive of Value Research.Kumar also says that up until 2007, investors had forgotten that equity markets also fall, even if temporarily. The fact that investors’ capital has got permanently eroded in “in quite a few funds”, says Kumar, has made investors wiser.
Hard or soft launch

Once fund houses decide on the product they want to launch and its viability, they decide on their decibel level—a “soft” launch versus a “hard” launch. Typically, a “hard” launch—such as DSP BlackRock Focus 25 Fund (DBF25)—would entail printing more forms, engaging as many agents as possible and wall-to-wall advertisements. A “soft” launch—such as Baroda Pioneer Infrastructure Fund or DWS Global Agribusiness Offshore Fund—is one where the fund houses launch a fund quietly. “Typically, we have our regional managers (RMs) shortlist the top 30-50 odd agents in their town and cities that they feel would rake in good business and have our RMs focus all their energies on a select few,” says Rajan Krishnan, chief executive officer, Baroda Pioneer Asset Management Co. Ltd.
Krishnan met Mint in one of a series of meetings with a few journalists over tea to talk about his newly-launched scheme, marking a contrast with glitzy press conferences and lavish luncheons in five-star hotels that characterized NFO launches till about a year ago.
Earlier, MFs could spend as much as 6% of their initial collection on marketing, sales and advertising and charge it to the scheme (the net asset value or NAV would drop by that amount) over a period of five years. If an equity fund NFO collects Rs1,000 crore, an AMC (asset management company) could spend a maximum Rs60 crore as issue expenses. Sebi first banned amortization of NFO expenses in April 2006 for open-ended funds and then in January 2008 for closed-end funds.
While “hard” launches are expensive, “soft” launches help curtail costs. For the first kind, a fund house prints and dispatches around three million forms and spends around Rs5-8 crore for advertising and marketing. The second sort of launch entails around one million forms and Rs2-4 crore for advertising and marketing.
Distributor events are no longer preferred to be held at five-star hotels. A typical luncheon at a banquet room at the Taj Mahal Hotel, Mumbai, would set back the fund house by around Rs2,300 (including taxes, soft drinks and juices) per person. If 100 people were to attend one such meet and the fund house holds 10 such events across the country, the fund house incurs around Rs23 lakh on such an exercise. The total cost now can be brought down to around Rs7.50 lakh.
“The choice of hotels is done carefully. The idea is to not to cut down on quality, but to save costs,” says Karan Datta, national sales head, Axis Asset Management Co. Ltd.
Adds a sales official of a Mumbai-based fund house: “Many fund houses prefer to go for ‘soft’ launches these days; garner a small corpus, build up a decent track record and then target fresh investors.”
Obviously, the collections are expected to be muted in “soft” launches. Market sources say that DWS Global Agribusiness Offshore Fund collected around Rs25 crore. This pales in comparison to the Rs1,500-2,000 crore that DSP BlackRock is expecting for DBF25.
Where to advertise
Advertising is another avenue where fund houses are chasing value. Instead of going after print, TV and outdoor advertisements (billboards), fund houses are picking and choosing.
A marketing official of a fund house whose NFO closed recently says that while a front page solus advertisement would cost between Rs11 lakh and Rs25 lakh (discounted rate), the same money could pay for 15-20 commercials on TV over several days.
MFs are allocating more money to TV than print, some analysts say.
Fund houses need to pare spending on advertising and marketing as much as they can. Say, a fund house spends Rs4 crore on advertising, marketing and sales on an NFO that garners Rs100 crore. It can charge around 1% as management fees, which is its own income from managing the scheme on an ongoing basis.
In other words, assuming the corpus of Rs100 crore stays with the fund house for the first few years, it earns Rs1 crore every year. At this rate, it would take at least four years for the fund house to make money on this NFO. 

Is the hand of God playing around Dalal Street?

 In response to a Securities and Exchange Board of India (SEBI) directive urging investors not to make investments based on astrological predictions and other unreliable sources, we at MoneyLife decided to visit a website offering astrological predictions based on the positions of the sun, moon, stars, and various other celestial bodies. It was surprising that not only did the website offer general advice about the trend for the day; it even gave the reasoning behind the prediction, based on the position of a certain planet.

This advice was not for free; however, to get “accurate and reliable” predictions on individual sectors and stocks, one had to subscribe to the service for a modest fee of around several thousand rupees a month. Apparently, more specific predictions can cost even more.

This site is not alone; a simple search on any search engine will throw up a number of similar sites, all claiming to offer the same information, in spite of a SEBI directive  specifically asking investors to stay away from such unreliable sources.

These sites all have several things in common such as guaranteed predictions—one site even claiming a 95% success rate and vague predictions such as “markets will be volatile”. More detailed predictions may perhaps be found once one subscribes to this service. A certain website even offers a one year “financial astrology course” admission to which is by “selection only”.

A simple analysis shows that the predictions given by these sites are either ambiguous statements or educated guesses based on upcoming events. For example, one site predicted that on 7th May, the markets would make a possible U-turn at around 11 am; conveniently, this was also the time the verdict in the RIL-RNRL case was due.

In view of this, such statements are at best educated guesses, and at worst, reckless speculation.

The basic question that occurs to all of us is that if seasoned traders and veteran market players cannot time the markets with certainty, how can an astrologer? More importantly, if these astrologers could predict the future, then why aren’t they in the list of India’s wealthiest people, or heading successful investment houses?

The fact that many of these websites exist and are growing means that not only do people believe such predictions, but are also willing to pay a premium for these services.

SEBI went as far as issuing a note of caution “The public in general is advised not to fall prey to or be lured by such sources of information promising quick gains and unrealistic high returns. It is advised that investors should take well-informed investment decisions.”

The customers these websites are targeting are not uneducated daily wage earners, but middle-class white collar workers with access to a computer and a trading account. That these customers are not only willing to pay for these predictions, but also risk large sums of money based on this information shows that a significant number of investors believe that the biggest bull on Dalal Street is not Rakesh Jhunjhunwala, but someone far more divine

Shape of the stock market recovery

V is the mould in which the market has been cast. With a correction expected in the second half of May and during July-September, those who invest for the long haul will emerge winners.

It is not only global stock markets that have traced out a V shape in the 19 months since Lehman. Most world economies have experienced a business-led recovery with technology, infrastructure, materials and energy leading the way. Stocks today are cheapest since 1990 on a ‘V-shaped profits boom’ basis.
  
The script of the Greek tragedy and choreography of the Spanish dance are by now baked into the cake. Stock markets move on new news, not old news. You cannot get junkier than junk.
  
What appears as a source of despair should be a cause for reassurance. Greece, as messed up as it is, can still borrow. Pessimists are forgetting that as recently as 20 years ago, responsible borrowers like Germany were paying as much to borrow money as shaky borrowers like Greece and Italy are paying today. Fear of a false factor is always bullish.
  
Events are making life easy for the Federal Reserve, which, in turn, makes life easier for everyone else. Last week’s Federal Open Market Committee (FOMC) statement did not signal a start to the process of lifting rates from their current ‘exceptional’ lows.

Instead, it laid out a Goldilocks scenario, in which growth is not too hot, not too cold. Inflation is ‘likely to be subdued for a time’, while economic activity ‘has continued to strengthen’. The Greek crisis has helped; by driving funds to the US and strengthening the dollar, it has helped damp inflationary pressure.
  
The reasons for strong undercurrents are many. Companies slashed their inventories post-Lehman as demand collapsed. However, a light pick up in demand was enough to lead to an inventory restocking boom. Judging by the ISM surveys, this effect was strong, but it has by now largely played itself out.
  
Second was the impact of government stimulus spending.Third, trade figures and capital expenditures have started to improve, suggesting that companies now have the confidence to plan for expansion as there is much ground to make up.
 
Fourth, the ISM supply managers’ survey — where 50 marks the dividing line between expansion and recession — is now at 59.6, its highest reading since July 2004. Payrolls of US private sector, which started falling since Lehman went under, grew by 1,23,000 last month. Non-farm payroll data is noisy and prone to revision, but is keenly watched, and has, of late, sparked optimism.
  
Fifth, the purchasing manager index, a widely-watched leading economic indicator for the US, is wildly expansive in emerging markets. Those markets — India, China and Brazil, among others — make up more of global GDP than the US does.
  
Sixth, in Europe, which is lagging the rest of the world, business confidence data from the German IFO and ZEW surveys and Belgian confidence data point to a broader recovery, taking over from the restocking boom.
  
Seventh, wage inflation has been relatively benign — in the US, we have seen the first decline in hourly wages in 20 years — offsetting soaring commodity prices — value of metal in a 5-cent US ‘nickel’ coin that also contains copper, currently stands at 6.2 cents.
  
There have been 16 real Dow Jones Industrial Average (for which most data is available) recoveries since 1896. High inflation, such as during the 1974 recovery, gives an exaggerated sense of price growth. Deflation, which accompanied several of the earlier market cycles, makes recoveries appear weaker.
  
Investors will do best to recall that even a ‘tortoise rally’ eventually crosses the finish line. Is there steam left, however?
  
The GDP-weighted global yield curve — spread between long-term and shortterm government interest rates — is steeper than it has been since the 1960s. Banks borrow short-term money and lend long term. A wider spread means higher bank gross operating profit margins. This is bullish because it reflects future eagerness to lend and has historically been a great market-timing tool.
  
The spread between 10-year Treasury yields and the average cost of credit default swaps has narrowed to zero, indicating the US economy — at the epicentre of the credit crisis — is keyed to expansion and credit demand, which is bullish.
  
Investor’s mood is to notice anything bad — 9.5% US unemployment, the RBI’s rate hike, Chinese rate tightening and risk of its bank lending atrophying — while treating anything good — narrowing credit spreads and fiscal consolidation steps in Budget — with trepidation. Healthcare legislation in the US is an Obamanation, and so on. This is the wall of worry bull markets love to climb.
  
Does China matter? On February 26, 2007, the Shanghai Composite index, which had rallied for months, suddenly fell 268 points, or 8.8%. A global selloff ensued. As it turned out, the first Shanghai bubble kept inflating for six more months before popping in October 2007.
  
The benchmark Shanghai Composite Index has recently fallen to its lowest level since last September when China’s economic recovery began to gather pace.
  
Administrative measure has been announced to curb real estate speculation including raising minimum deposit and interest rates for home mortgages, reintroducing a sales tax and outright ban on families buying third homes.
  
A soft landing for a bubbly housing market could help underpin the rebound in the economy in the medium term. If impact on prices is limited, it could force the authorities into harsher measures that could be devastating for an infrastructure-reliant economy such as China’s.
  
Looking at global trends, stock prices could correct in the second half of May and between July and September 2010. Washington’s relationship with Wall Street could get so schizophrenic as to lead to the arrival of the Minsky moment at which markets could correct.
  
However, as the enclosed chart illustrates, those who invest for the long haul emerge winners. In the short term, the V will continue until all sceptics have given up. Only at that point will the stock market sketch out a W.

Bajaj Finserv enters retail loans, wealth

 

 

Insurance player Bajaj Finserv on Wednesday announced its entry into retail lending and wealth management businesses. The company derives close to 80 per cent of its revenue from the insurance business. "Bajaj Finserv will be launching wealth management business, which will act as an advisory (for) distribution of financial products and services to retail investors. The service would be launched by September 2010," said Sanjiv Bajaj, MD, Bajaj Finserv. Arpit Agarwal of Dawnay Day will head the wealth management business, Bajaj said. Under Bajaj Finserv Lending, the company announced launch of retail lending against securities and also a construction equipment (CE) finance business in April 2010.

Five-year index options: A viable option?

Buoyed by the rising share of index-based options in total derivatives volumes in the past few years, capital markets regulator Securities and Exchange Board of India (SEBI) has allowed exchanges to offer options contracts with tenure up to five years.

However, it will be a difficult task for the stock exchanges to attract enough liquidity on a sustained basis in this segment. Currently, contracts that are even two months away, form only a small portion of the derivatives markets. Shorter duration contracts attract a lion’s share (90%) of the total trades on the National Stock Exchange (NSE).

Monal Desai, VP & head-Institutional Equities (Derivatives), Prabhudas Lilladher Pvt Ltd, does not believe that long-dated options are of any value. “I don’t see how this move will work out given that liquidity is already quite low currently. Besides, not many investors would want to take a call over the five-year period. Long-dated contracts have a very minuscule part to play in the overall market. I hardly anticipate any growth in volumes as a result of this move,” he said.

Indeed, there is hardly any trading in this space as the contract expiry grows longer. At the strike price of Rs5,100 (the Nifty’s current level), there were 213,878 transactions on Wednesday for the contract expiring on 27 May 2010. For the 24 June 2010 contract, the volume was just 7,285 contracts. For the September series, there was no volume at all. If this is the situation over near-term contracts, there is no scope for having any amount of liquidity over a five-year period.

Since liquidity is low, the bid-ask spread is so wide, it is difficult to see how one can expect to attract liquidity at such prices. For instance, for the 30 December 2010 contract, the bid-ask spread is Rs325-Rs537. For the contract expiring in 27 June 2013, it runs up to Rs1,213-Rs2,000. The situation is so abysmal that there is not even any open interest at this level.

Not only is there not any trading in long-dated options, it would also create some administrative difficulties while managing the settlement of these contracts, which will be offered on a three-monthly and quarterly basis, besides eight semi-annual contracts being offered with June or December expiry.

Earlier in March this year, the proposal of the derivatives market committee of SEBI to introduce longer-term options contracts was approved by the SEBI board. The committee had suggested in its report, “The growth in turnover of long-dated options is greater than that of short-dated options. With the market having gained sufficient experience in longer tenure options, it is recommended that options with tenures of up to five years may be considered for introduction.”

An option is a contract between two parties wherein the buyer receives a privilege for which he pays a fee (premium) and the seller accepts an obligation for which he receives a fee. An option gives a person the right but not the obligation to buy or sell something.

In January 2008, SEBI had allowed stock exchanges to offer options contracts with tenure up to three years. SEBI has stipulated certain conditions before the exchanges could launch such contracts. It has mandated that there should be eight semi-annual contracts maturing in June or December. In addition, three monthly and quarterly contracts that expire in March, June, September or December must also be offered. SEBI has also stipulated that the exchanges put in place the appropriate risk management framework for such derivative contracts.

GLobal Market

USA

Dow Jones Industrial Average

The Dow is consolidating between 11000 and 11200. Upward breakout would signal another advance, but Twiggs Money Flow (21-day) reversal below the long-term rising trendline warns of a correction. In the long term, the target for the advance is 11500*, while reversal below primary support at 9900 is most unlikely.

* Target calculation: 10700 + ( 10700 - 9900 ) = 11500

S&P 500

S&P 500 recovered above short-term support at 1190, but threat of a correction will only be dispelled by breakout above 1220 — signaling an advance to 1250*. Twiggs Money Flow (13-week) reversal below the rising trendline indicates short-term selling pressure. Retracement to test support at 1150 remains likely, but reversal below primary support at 1050 is most unlikely.

* Target calculation: 1150 + ( 1150 - 1050 ) = 1250

Transport

UPS leads the charge, with all three transport indicators signaling a primary up-trend.

* Target calculation: 4300 + ( 4300 - 3800 ) = 4800

Technology

The Nasdaq 100, having reached its target*, is consolidating between 2000 and 2060. Twiggs Money Flow (13-week) breakout below the rising trendline indicates selling pressure. Reversal below 2000 would warn of retracement to test support at 1900.

* Target calculation: 1900 + ( 1900 - 1750 ) = 2050
 

Canada: TSX

The TSX Composite is consolidating between its new support level at 12000 and resistance at 12300. Upward breakout would signal an advance to 13000*, while reversal below 12000 would warn of a correction. Rising Twiggs Money Flow (13-week) indicates buying pressure, favoring an upside breakout.

* Target calculation: 12000 + ( 12000 - 11000 ) = 13000

United Kingdom: FTSE

The FTSE 100 is testing support at 5550, with Twiggs Money Flow (21-day) below zero indicating selling pressure. If support breaks, expect a test of 5280.

* Target calculation: 5500 + ( 5500 - 5000 ) = 6000

Germany: DAX

The DAX is testing support at 6050. Reversal above 6300 would signal an advance to 6600*, while a fall below 6050 would warn of a correction. Twiggs Money Flow (21-day) reversal below zero would confirm the correction.

* Target calculation: 6000 + ( 6000 - 5400 ) = 6600

India: Sensex

The Sensex is testing short-term support at 17400 on Tuesday; breakout would signal a correction to test primary support at 15800. Twiggs Money Flow (21-day) falling below zero strengthens the correction warning. Recovery above 18000 is now unlikely, but would signal an advance to 19800*.

* Target calculation: 17800 + ( 17800 - 15800 ) = 19800

Japan: Nikkei

The Nikkei 225 is closed until Wednesday, but Friday saw a recovery above support at 11000. Breakout above 11200 would signal an advance to 12000*. Bearish divergence on Twiggs Money Flow (21-day), however, warns of selling pressure — and reversal below zero would indicate a correction. Failure of support at 10900 (and penetration of the rising trendline) would confirm the correction.

* Target calculation: 11000 + ( 11000 - 10000 ) = 12000

South Korea

The Seoul Composite is headed for another test of support at 1700 after respecting resistance at 1750. Rising Twiggs Money Flow (21-day) indicates buying pressure. Recovery above 1750 would signal an advance to 1900*. Reversal below 1700 is less likely, but would warn of a correction.

* Target calculation: 1720 + ( 1720 - 1550 ) = 1910
 

China

The Shanghai Composite Index closed below primary support at 2900, signaling a primary down-trend. Twiggs Money Flow (13-week) reversal below zero would confirm. Expect further support at the August 2009 low of 2650.

* Target calculations: 2900 - ( 3150 - 2900 ) = 2650
The Shenzhen Composite Index is falling sharply, but has yet to penetrate support at 1100 — confirming the Shanghai Index. Twiggs Money Flow (13-week) bearish divergence indicates selling pressure.

The Hang Seng Index is already in a primary down-trend. Having respected resistance at 21000 early Tuesday, reversal below 20800 would confirm another test of primary support at 19500. In the longer term, failure of 19500 would offer a target of the July 2009 low at 17000*. Twiggs Money Flow (13-week) reversal below zero indicates rising selling pressure.

* Target calculations: 19500 - ( 22000 - 19500 ) = 17000

Commodities & Resources Stocks

The Baltic Dry Index is hovering above primary support at 2560, but rates may be distorted by abnormally high Capesize vessel deliveries.

Capesize vessels are typically used for iron ore shipments, while the smaller Panamax class are used to ship coal and wheat. Capesize means the vessel is too large to traverse the Panama canal. The current abnormal situation is reflected by Panamax rates higher than Capesize rates.

The Baltic Panamax Index remains in a healthy up-trend. We will only take signals from the (composite) Dry Index when confirmed by the Panamax index. Shipments of resources remain in a primary up-trend. Reversal of the BPI below its rising trendline, however, would warn of trend weakness.
 

Australia: ASX

The All Ordinaries is undergoing a correction, having broken the rising trendline and support at 4900. Twiggs Money Flow (21-day) falling below zero confirms the signal. Expect a test of primary support at 4500.

The ASX 200 paints a similar picture. Twiggs Money Flow (13-week) reversal below zero would strengthen the bear signal.

IRDA to roll out vehicle insurance tracking system

The Insurance Regulatory and Development Authority (IRDA) plans to unveil a web-based system in order to track vehicle insurance status in a month's time. IRDA will be launching the system formally from June 9 and will have a database of all the insured vehicles from across India. Meanwhile, the data will also be shared with the transport and police authorities in different States. Meaning, that the Road Transport Authority (RTA) in every State will have way in to the insurance status of different vehicles on the road. They can also launch a drive to track down challan defaulters. The good thing for insurance companies is that the centralised data will help them avoid duplications or multiple claims. Moreover, the system will make a big difference for the vehicle owners and general insurers. The premium per policy is expected to decline, as all vehicles will now have to be insured. The third-party insurance procedure will now be efficient, especially for victims of hit-and-run cases. The system may help reduce insurers' losses as these claims will be settled from a 'Solatium Fund' now while currently, the insurers pay for losses caused by the uninsured vehicles. The new system will also help them verify the insurance status of any vehicle, as the data are to be shared with the transport authorities and the police. Earlier, it was said that many insurance companies were taken by surprise, as the Insurance Regulatory & Development Authority (IRDA) changes disclosures norms regarding Unit-Linked Insurance Plans (ULIPs) under the head of controlled fund. As per the investment guidelines, investments under controlled funds are regulated by IRDA. For example, 50 % of the traditional policies fund is invested in government securities, 15 % in infrastructure and 35 % in equity and other approved securities. Meanwhile, IRDA had said that the Initial Public Offer (IPO) guidelines for the insurance sector are likely to come by next month. Mr. J Harinarayan, Chairman of IRDA said the IPO guidelines could take a month-time and the final decision would be taken by Securities and Exchange Board of India (SEBI). Mr. Harinarayan said that the valuation norms for the company has been finalised and sent to the Institute of Actuaries. Once Institute of Actuaries committee clears the valuation norms, it will be sent to SEBI and then the market regulator would take a final call. Before issuing the final norms, IRDA, which has been working on the guidelines along with SEBI, is likely to come out with a draft for public comments. The Insurance Regulatory and Development Authority (IRDA) is a national agency of the Government of India, based in Hyderabad. It was formed by an act of Indian Parliament known as IRDA Act 1999, which was amended in 2002 to incorporate some emerging requirements. Mission of IRDA as stated in the act is "to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto."

Will index funds behave themselves?

The mutual fund industry seems to be waking up to the virtues of index investing. IDFC Mutual Fund is launching one and IDBI Mutual Fund is launching another. But index funds have not covered themselves with glory so far. Not only do index funds do not accurately track the movements of their underlying benchmark indices, leading to what is called tracking error, but some funds make nonsense of index funds by trying to actively manage such funds, when all they are supposed to do is passively follow the index. This gives rise to “outperformers” among index funds—a contradiction in terms.
HDFC Index Fund managed a return of 21.13% over 10 years when the Nifty has gone up 17.10%. ICICI Prudential Index Fund managed a return of 21.48% over eight years with growth in the Nifty at 20.15% and UTI Nifty Fund managed returns of 13.38% over 10 years with growth in the Nifty at 12.92%.

This outperformance could be partially due to an element of active management. To enhance returns, ICICI Prudential Index Fund invested 15.48% of Rs96.6 crore in the futures market on 31 March 2010. UTI Nifty Fund too has put some money in futures and bank deposits. This shows how index funds are trying to manage money actively to outperform the benchmark and show greater returns. They are also known to be trying to time the market, something that explains underperfomance (fund managers are bad at timing) leading to tracking error in some cases.

Among the index funds, LIC MF Index Fund recorded a return of 1.01% against 24.24% of the underlying index, leading to a tracking error of 23.23% as on 26th April. Birla Sun Life Index Fund recorded a return of 9.83% as against 25.06% return of the index, leading to an error of 15.23%. — Zeeshan Mardani

Fee Based Model

The insurance watchdog did the right thing, asking life insurers to disclose the commission paid to agents selling unit-linked insurance plans (Ulips). This is a logical step after the cap on Ulip charges.

The move will bring in more transparency, discourage mis-selling of Ulips and help investors take informed decisions. The disclosure on commissions will also blunt the sting in the spat between the Insurance Regulatory and Development Authority (Irda) and market regulator Sebi over Ulips.

Mutual funds that Ulips compete with launched a vehement attack on insurers for charging hefty upfront commissions to drive Ulip sales. Irda has, therefore, been forced to tighten regulation. True, in an under-insured country like India, there has to be an incentive to market insurance products.

However, a commission as high as 40% of the premium on insurance covers defies logic. Insurance companies should lower commissions and eventually transit to a fee-based model.

A government committee on investor awareness has recommended a fee-based model for all financial products. The suggestion would allow an investor to negotiate charges directly with the agent. Ideally, this is the way a financial product like Ulip should be sold.

An agent who offers a service to the investor should charge a fee that is mutually agreed upon, and not solely fixed by the seller of the financial product. Sure, this would make the task of agents more difficult.

But they should reconcile to that correction. Sebi has already shown the way. It scrapped entry loads on mutual funds, paving the way for investors to negotiate charges directly with distributors.
  
The pension fund regulator has gone a step further and adopted a load-free model. However, such a model runs the risk of slow offtake. Fees are in order. Investors need choice and better disclosures in financial products to take informed decisions.

In a country where many do not understand the difference between term insurance and investment-linked insurance, the regulator should go all out to enhance disclosure that would serve to raise the level of financial literacy as well.