Indian managers reflect on year of positive change by Sebi

India's securities regulator has increased industry consultation and responded to concerns by introducing a number of key amendments and proposals, raising fund managers’ optimism.
Indian managers reflect on year of positive change by Sebi

Indian mutual fund managers have given securities regulator Sebi and its new chairman, U.K. Sinha, a positive report card as he nears completion of his first year at the helm.

Sinha joined the Securities and Exchange Board of India last February, initially for a three-year term, when he took over from C.B. Bhave. In many ways he was entering the eye of a storm.

On August 1, 2009, Sebi banned fund houses from charging investors upfront loads in order to lower fund costs and eliminate the incentive for distributors to churn client portfolios.

Fund managers quickly complained that they had been given no time to prepare (the action was enforced in three months). They also seethed over lack of regulation for distributors, and longed to improve their restricted access to pension and insurance money.

But managers appear to be warming to what they see as positive changes introduced by Sinha, previously chairman of UTI Asset Management Company, after what was considered a low-profile start.

One of the biggest pluses, they say, has been increased industry consultation. “Certainly a two-way communication process has been established and the industry viewpoint is being taken on board,” says Ashu Suyash, India country head for FIL Fund Management, based in Mumbai. “As long as you see discussion heading in the right direction, that’s a very good thing.”

Puneet Chaddha, CEO of HSBC AM (India), agrees. “With U.K.’s appointment as chairman we are seeing a lot more dialogue and that fills me with a sense of optimism about the industry. It is worth remembering that [Sinha] has not been helped by the overall mood prevailing in capital markets, not just in India, but across the world.”

Prior to the recent announcement that foreign nationals would be allowed to invest directly in Indian equities, Suyash points to two positive changes that have been made over the past year; one to rules on how total expense ratios (TERs) can be used, and another on the introduction of charges that can be paid to distributors -- Rs100 for a transaction of Rs10,000 and above, and Rs150 for every new investor.

“Sebi said you can choose to pay upfront or trail and that as long as you are within your TER you are free to charge it to the fund,” she notes. “This way the investor is not paying more, and at least it allows you to make a call as an asset manager about how you want to run your business.”

But while the revival of a transaction change is seen as a positive move, it would also be fair to say that the distributor community views it as too small. "I think they feel this is a very small step and just does not compensate for the withdrawal of the entry load two years ago," says one manager.

Certainly the transaction charge is seen as more helpful to distributors and investors in smaller towns where the cost of customer acquisition is not so high. Nevertheless, Suyash opts to praise Sebi for acting in response to distributor and investor concerns.

“I think it’s unfair to focus on the sums being so small,” she says. “You need to look at the fact that Sebi looked at this in response to what both the distribution and asset management segments were asking for. In the spirit of keeping investor interests at heart, they would not want to increase overall charges in a big way. But within the framework they have proved to be more flexible.”

Further, Sebi has taken action on the issue of distributor regulation, releasing a circular on August 22 asking asset management firms to conduct due diligence on regulators and putting in a framework for them to follow – a form of indirect regulation, if you like.

There are also formative discussions taking place about the possible establishment of a Self Regulatory Organisation (SRO) for the distribution industry, which is seen as a step forward.

“As long as distributor regulation comes in some form, it does not matter if the starting point is that of an SRO or a pure regulator,” says Suyash. “There is nothing to suggest an SRO framework cannot work.”

Chaddha of HSBC adds: “I think an SRO would be really useful because it could help to bring consistent policy for financial products across asset classes. My guess is it will have more than an even chance of success.”

Moreover, Suyash points to previous asset manager frustrations over the difficulty of leveraging their portfolio manager talent pool, where again changes were introduced last August.

“There has been a change in regulation on that, and subject to meeting some criteria, the manager of a domestic mutual fund can also manage offshore assets. That is a very big change. It shows that conceptually Sebi has become a lot more open-minded.”

Asked what would be on her wish-list for 2012, Suyash says the past year has been challenging for the mutual fund industry, not only due to volatility in financial markets but also adapting to the changes brought about by Sebi. She says she would like to see more positive and supportive changes in the year ahead, with action on multiple share classes including those for institutional customers.

She is also hopeful that mutual funds will eventually be allowed to offer approved pension plans, although she does not expect action on this in the near-term.

“I have heard Mr Sinha mention it in several of his interviews that he is keen to see pension-product-type ideas come from the mutual fund industry and he is keen to take the agenda forward.” She cites target funds, pure equity funds and multi-asset funds as ideas.

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