ANALASIS OF

AXIS MUTUAL FUND

ACKNOWLEDGEMENT
The present work is an effort to throw some light on Axis Mutual Fund. The work would not have been possible to come to the present shape without the able guidance, supervision and help to me by number of people. With deep sense of gratitude I acknowledge the encouragement and guidance received by my organizational guide (--nam !uid--" and other staff members. I convey my heartful affection to all those people who helped and supported me during the course, for completion of my ro!ect "eport.

DECLARATION

I hereby declare that the pro!ect work entitled AXIS Mutual Fund# is an authentic work carried out by me at $A%a&na sin!' under worthy and esteemed guidance of, $anaging %irector $r iyush &upta This work has not been submitted to any other university for 'ward of any $(' rogramme or any other programme.

INT(ODUCTION

INT(ODUCTION
'+I, $utual -und, the largest private sector $utual -und company in India with an asset base of "s #.,.// crores, will be the leading -und $anager for &overnment of India0s newly created 1ational Investment -und21I-3. 'nnouncing this '+I, 'sset $anagement 4ompany $anaging %irector and 4hief 56ecutive 7fficer24573 8 9 ,inha told newsmen here this evening that besides the '+I, $utual -und, the other two leading financial institutions which were shortlisted for the massive !ob were ,tate (ank of India2,(I3 and the :ife Insurance 4orporation2:I43 of India. ;e said the new fund had been created by the 4entre with a view to investing the entire disinvestment fund into the 1I- corpus and reinvest them in health, education and other social causes through a calculated manner. ,ince the scheme was still in its preliminary stage, the government was yet to create a separate corpus for the fund, which was announced only last month. "eferring to the corporate plan of '+I, $utual -und whose ownership had recently changed hands following the purchase of its #. per cent stake each by the country0s four leading banks and financial institutions like ,(I, (ank of (aroda2(7(3, un!ab 1ational (ank2 1(3 and the :I4 last month with a total capital infusion of "s 1#)< crores, $r ,inha said under the new management they were planning to leverage their own capabilities with a much higher target oriented growth. '+I, '$4 457, however, categorically ruled out the possibility of any clash of interest among the new stake holders of the company in view of their similar business intereste in terms of $utual -und. "eplying to a related =uery he said though each of these institutions had their own mutual fund businesses, it would not clash in any manner with that of '+I, mutual -und since the agreement among them would prevent them from doing so. In the wake of over )) per cent growth in the Indian $utual -und industry since 'pril this year, $r ,inha said it had enabled the '+I, $utual -und to increase its 'sset base by over "s .,.// crores during this period from "s #/,/// crores achieved till

$arch. > We are confident to maintain a similar growth path in the coming years too.> 'bout the huge potential and the actual position, $r ,inha claimed that '+I, $utual -und had already been en!oying about <? per cent domestic market share of the country0s around one crore investors in mutural fund products. > It is only the tip of an ice berg with about five crore more people awaiting to invest in the country0s burgeoing mutual fund industry with full realisation of its risk factotrs, he said. 'bout their product portfolios, $r ,inha said at present a total of .< products were running successfully catering to different demands of the people. >We are now planning to introduce three more products primarily in e=uity market area by ne6t week>, $r ,inha said replying to another =uery. 'fter becoming a private company last month, '+I, $utual -und is mulling aggressive foray with new products catering to investors across all risk profiles. We are going to kick@start the initiative by announcing three new products within a week. The schemes will be open for subscription in Aanuary,B said 8.9. ,inha, managing director and chief e6ecutive officer, '+I, $utual -und. We will offer both pure e=uity and balanced schemes to cater to investors with various risk profiles,B he added. The countryCs largest fund house currently manages "s #.,.// crore worth of assets and has an investor base of <?.? lakh across ./ schemes. The mutual fund industry has so far been able to tap only a tiny fraction of the potential investors in the country D the whole industry is serving !ust one crore investors,B elaborated ,inha. (eing the pioneer asset management company in the country, '+I, will take initiatives to increase the reach of mutual funds to more people,B he added. '+I, 'sset $anagement 4ompany became a private company last month with the four sponsors, :ife Insurance 4orporation of India, ,tate (ank of India, un!ab 1ational (ank and (ank of (aroda paying back the government its e=uity worth "s 1,#)<.E. crore in the company. 5ach sponsor now owns a #. per cent stake in the

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company and under the terms of the new agreement, the owners will not be allowed to change their shareholding pattern. We are also keen to increase our e6posure in the overseas market through the offshore funds,B said ,inha. '+I, $utual -und is also e6ploring investment opportunities in emerging sectors like the knowledge process outsourcing, te6tiles and biotech through the private e=uity and venture capital arm, '+I, Fenture -unds,B said %. ,. ". $urthy, e6ecutive director, '+I, 'sset $anagement 4ompany. 'nd, the move has also started paying off. I($ has struck a preferred relationship with us because of our investments in the technology products and companies,B said "a!akumar, managing director and chief e6ecutive officer, '+I, Fenture -unds. The computer giant is also weighing options to pick up a stake in '+I, Fenture -unds. '+I, Fenture -unds floated a G1./@million fund in 'pril. The fund has received encouraging responses from top investors across West 'sia, ,ingapore and 5urope. The fund has mobilised G1*/ million as soft commitment from the investors and we are e6pecting to close it with a total collection of G1H/ million by $arch ne6t year,B "a!akumar added. The &overnment of India has shortlisted '+I,, along with :I4 and ,(I, as the fund managers for the 1ational Investment -und D a composite fund constructed with the proceeds disinvestment of public sector units. The returns generated by this fund will be used for social sector pro!ects. I($ is eyeing a stake in '+I, Fenture, a 1// percent subsidiary of '+I, 'sset $anagement 4o. 'ccording to the highly placed sources, '+I, $utual -und ruled out a strategic deal in the immediate future, they referred to a number of top international outfits that have shown interest in the venture fund0s recent initiatives. '+I, venture firmCs $anaging %irector, 9 5 4 "a!akumar said, I($ is indeed interested in striking a >preferred relationship> with the '+I, $- subsidiary. ;e, however, mentioned that no stake sale is on the cards.B ;e said, >We intended to raise G1./ million, but are now hopeful of mobilizing G1H/ million or so.B The funds so raised will be allocated to promising companies operating

in what are typically called emergingB businesses, such as, biotechnology, knowledge process outsourcing and te6tiles. ' battery of high@power public sector fund managers could take the field in the proposed 1ew ension ,ystem 21 ,3, with the ension -und "egulatory and %evelopment 'uthority 2 -"%'3 taking a positive view on all the ,tate@owned entities that have till date e6pressed interest in handling pension accumulations. 'mong the ,8s that have approached the interim -"%' to e6press their intent of seeking a ension -und $anager 2 -$3 licence are ,(I, :I4, and un!ab 1ational (ank. '+I, $utual -und has also e6pressed its intent to participate as a fund manager in the 1 ,, though till recently it had not formally approached the regulator. 8nder the -"%' (ill, the regulator would be mandated to licence >at least one> public sector fund manager under the 1 ,. ;owever, the authority is of the opinion that all the ,8 entities that have sought to play a role have more than ade=uate credentials to handle the pension contributions. >5ven for ,8s there would be no limit. Why will I restrict the number of ,8 fund mangersI The reach, the manpower, the financial strength of the public sector entities that have approached us is hard to match,> %. ,warup, 4hairman of the interim -"%', told (usiness :ine. The -"%'0s open mind on the number of ,8 fund mangers could go a long way in allaying the lingering concerns of the :eft parties that have e6pressed their fears over pension accumulations being handed over to private fund managers. The choice of opting for private or public sector fund managers would be left to the individual subscribers. J The &overnment recently decided to incorporate an amendment to the -"%' (ill to include a clause that >at least one of the pension fund managers shall be a &overnment company or a wholly@owned &overnment company or &overnment companies.>

The decision was conveyed to the :eft parties at a meeting to iron out differences over the pension reforms. 5arlier, a arliamentary ,tanding 4ommittee had asked the &overnment to

incorporate a specific clause that would make it mandatory to have at least one ,8 fund manager in the 1 ,. The 4ommittee had said that the presence of a ,8 entity would be >in the interest of the subscribers.> Though it had appeared that political consensus had been reached on the -"%' (ill, it now seems that certain issues remain to be ironed out before the (ill gets arliament0s nod. (esides fears over private fund managers handling pension contributions, the :eft parties have also said that there might be a need to ensure minimum guaranteed returns to subscribers to ensure income security in old age. '+I, $utual -und has announced a ta6@free dividend of ./ per cent under its '+I, %ynamic 5=uity -und, for which the record date is %ecember #?. '+I, $utual -und has announced a ta6@free dividend of ./ per cent 2"s . per unit on a face value of "s 1/3 in its open@end e=uity -und @ '+I, %ynamic 5=uity -und. This is the second dividend declared by the scheme during this calendar year. The last dividend declared by the scheme was #. per cent in -ebruary, #/1*. With this dividend pay out, the scheme has distributed a total dividend of ?. per cent 2"s ?../ per unit on face value of "s 1/3 during calendar year #/1*. 'll unit holders registered under the dividend option of '+I, %ynamic 5=uity -und as on %ecember #?, #/1* will be eligible for this dividend. 'lso investors who !oin the dividend option of the scheme on or before the record date will be eligible for the dividend. '+I, %ynamic 5=uity -und was launched in ,eptember #//< as an open@ended e=uity scheme. The ob!ective of the scheme is to generate capital appreciation by primarily investing in e=uityKe=uity related instruments. 's a defensive strategy arising out of market conditions, the scheme may also invest in debtKmoney market instruments. J E

'+I, %ynamic 5=uity -und is positioned as an aggressively managed e=uity fund primarily focussed on mid capK small cap companies. ' number of investment opportunities have been identified which will generate handsome returns for the unit holders going forward. The fund continues to be bullish on the Indian e=uity markets over a #@) year horizon on the back of strong &% growth momentum and the resultant corporate earnings growth numbers. 7ver the last one yearL '+I, %ynamic 5=uity -und has yielded *H.E< per cent as against )).#H per cent given by its benchmark ,M 41+@ 1ifty, as on %ecember ., #/1*. 5arlier, only insurance companies were floating unit@linked plans. 1ow, mutual funds, too, have these. Is the line between units and mutual funds blurringI (efore answering this =uestion, one should ask oneself if unit@linked plans offered by insurance companies are the same as investing in similar plans of mutual funds. $ost people believe unit@linked plans offered by insurance companies are superior products compared with $-s. This is because insurance companies have positioned this product as a savings product, which offers the benefit of insurance as well as market@ related returns. (efore we get into the nitty@gritty of the issue, let us first understand what the differences between insurance and mutual funds are. -irst, insurance is a transfer techni=ue whereby the insured 2investor3 transfers his risk of financial loss to another party, the insurance company or insurer. The insurance company, in turn, makes good the losses arising due to an uncertain event and distributes the costs of insuring these loses among all of its policyholders. Therefore, the primary aim of insurance products is to help in risk management, in the handling of an uncertain event. Therefore, people who put money in insurance companies for the purpose of earning good returns are going against the fundamental purpose for which insurance companies came into e6istence i.e., risk management. $-s, on the other hand, refer to a process of pooling of investments that are invested in the capital market by professional fund managers, to generate market@related returns for investors. In light of the above, any product which is predominantly investment@oriented should be a mutual fund product, as these funds are better e=uipped and have the skill to manage such products.

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The core activity of a mutual fund is to invest money on behalf of its investors and generate market@related returns. The term Ninsurance coverC that is provided by some mutual funds is purely a value@added service to investors. It is pertinent to note that mutual funds are not e=uipped to provide insurance cover, as it is not their core businessL they buy the insurance cover for their unit@holders from an insurance company. This is unlike insurance companies, who invest the money themselves, rather than asking an asset management company to do so. In our country, insurance products had always been sold with a savings element in them. 7ver the past few years, 8:I s of insurance products have become popular owing to the boom in the e=uity market. ;owever, the first unit@linked insurance product i.e., '+I, 8:I , was launched by a mutual fund in 1E?1. 'lthough the first 8:I was launched by a mutual fund, it has not been possible for mutual funds to compete in this market, due to the absence of a level playing field. The limits on e6penses, the rules and regulations, the level of transparency, all are skewed in favour of insurance companies, making it difficult for mutual funds to compete. It is immaterial who launches 8:I products, but what are re=uired are uniform rules and regulations. In the absence of these, insurance companies will continue to poach in a territory alien to them. 'nd, perhaps, get away, as the mutual funds may not raise a hue and cry, as their sponsors may also have an insurance company in their stable. In fact, insurance companies should concentrate more on Nrisk management productsC, which is their core competence, and leave the floor open to mutual fund houses to manage investment products. There is a lot of scope for launch of such products and it is ironical that not many insurance companies are focussing on term assurance products and other risk products without any savings element, which is their core competence. 7n the other hand, with e=uity schemes of mutual funds also ta6 e6empt D almost on par with insurance productsDmutual funds should launch more 8:I s, with the insurance companies providing term assurance cover. Investors will be very much benefited, as they get lower e6pense ratios, professional fund management, better transparency and also insurance cover provided by insurance companies. It will be a win@win situation for all the players. president, AXIS Asset DThe writer is vice-

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I($ is eyeing a stake in '+I, Fenture, a 1// per cent subsidiary of '+I, 'sset $anagement 4o. While highly placed sources at '+I, $utual -und ruled out a strategic deal in the immediate future, they referred to a number of top international outfits that have shown interest in the venture fund0s recent initiatives. 9.5.4. "a!akumar, $anaging %irector, '+I, Fenture, told (usiness :ine that I($ is indeed interested in striking a >preferred relationship> with the '+I, $- subsidiary. ;e, however, mentioned that no stake sale is on the cards. J '+I, Fenture0s latest efforts at mobilising commitments are now e6pected to cross its targets, it is pointed out. >We intended to raise G1./ million, but are now hopeful of mobilising G1H/ million or so,> said "a!akumar. The funds so raised will be allocated to promising companies operating in what are typically called >emerging> businesses, said %.,.". $urthy, 56ecutive %irector, '+I, $-, adding that these may include biotechnology, knowledge process outsourcing and te6tiles. 'n earlier fund, $urthy further informed has seen significant growth 24'&"3 of about *< per cent, marked by ma!or returns in one or two cases. >These have been multi@baggers,> he remarked. >' $utual -und is an ideal investment vehicle where a number of investors come together to pool their money with common investment goal. 5ach $utual -und with different type of schemes is managed by respective 'sset $anagement 4ompany 2'$43. 'n investor can invest his money in one or more schemes of $utual -und according to his choice and becomes the unit holder of the scheme. The invested money in a particular scheme of a $utual -und is then invested by fund manager in different types of suitable stock and securities, bonds and money market instruments. 5ach $utual -und is managed by =ualified professional man, who use this money to create a portfolio which includes stock and shares, bonds, gilt, money@market instruments or combination of all. Thus $utual -und will diversify your portfolio over a variety of investment vehicles. $utual -und offers an investor to invest even a small amount of money.

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>$utual -unds schemes are managed by respective 'sset $anagement 4ompanies sponsored by financial institutions, banks, private companies or international firms. The biggest Indian '$4 is '+I, while 'lliance, -ranklin Templeton etc are international '$40s. >$utual -unds offers several benefits to an investor such as potential return, li=uidity, transparency, income growth, good post ta6 return and reasonable safety. There are number of options available for an investor offered by a mutual fund. ,ourceO Website of >eastindiavyapaar.com> Mutual Funds - Investment Objectives and Valuation Policies W'at a& Mutual Funds) ' $utual fund is an organization that invests in a diversified portfolio of financial securities on behalf of a pool of subscribers to its schemes. These securities can be in the form of e=uity, debt instruments, money market instruments etc., or a mi6 of these securities, depending on the scheme ob!ectives.

W'* is it su+' a !,,d id a t, in- st in Mutual Funds) Di- &si.i+ati,n / $utual -unds invest their corpus in diversified portfolioCs which reduces the risk contained in the investment. This also means that you can invest a small sum of "s..///K@ and still be a part of a portfolio where the market value of single scrip might be much more than the total investment. ( s a&+'/ These mutual funds perform an e6tensive research of the company before making an investment decision giving you the benefit of e6pert advice. Li0uidit*/ These funds are e6tremely li=uid, some of them even have features like across@the@counter redemption. This feature is especially useful at times when the market is rising or falling. 1&,. ssi,nall* Mana! d/ These funds are managed by professionals who have the re=uired e6pertise in buying and selling stocks. 's a result they make better decisions on entering and e6iting a particular stock, which is very crucial for the overall 1)

performance of a portfolio. $oreover, mutual fund investment also rids the investor of maintaining records, eliminates hassles with the broker for payment, delivery and other arduous back office tasks. Sa-in!s ,n t&ansa+ti,n +,sts/ 's purchases and sales are done in bigger =uantities, the funds also get the advantages of lesser brokerage and other reduced transaction costs. Tax Ad-anta! s/ In India these funds become even more attractive because of the ta6 advantages, like inde6ation benefits , long term capital gains ta6 , ta6 free dividends and much more. Investment Objective (Regulation: 43) The moneys collected under any scheme of a mutual fund shall be invested only in transferable securities in the money market or in the capital market or in privately placed debentures or securitised debts. rovided that moneys collected under any money market scheme of a mutual fund shall be invested only in money market instruments in accordance with directions issued by the "eserve (ank of IndiaL rovided further that in case of securitised debts such fund may invest in asset backed securities and mortgaged backed securities. Investment, & Borrowing, Restriction (Regulation: 1. !

'ny investments to be made under regulation *) shall be invested sub!ect to the investment restriction specified in the ,eventh ,chedule.

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'3 The mutual fund having an aggregate of securities which are worth "s.1/ crores or more, as on the latest balance sheet date, shall sub!ect to such instructions as may be issued from time to time by the (oard settle their transactions entered on or after Aanuary 1., 1EEH only through dematerialised securities.

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The mutual fund shall not borrow e6cept to meet temporary li=uidity needs of the mutual funds for the purpose of repurchase, redemption of units or payment of interest or dividend to the unit holders.

rovided that the mutual fund shall not borrow more than #/P of the net asset of the scheme and the duration of such a borrowing shall not e6ceed a period of si6 months. ). *. The mutual fund shall not advance any loans for any purpose. The mutual fund may lend securities in accordance with the ,tock :ending ,cheme of the (oard. O%ti,n T&adin! (( !ulati,n/ 23" The funds of a scheme shall not in any manner be used in option trading or in short selling or carry forward transactions. rovided that mutual funds shall enter into derivatives transactions in a recognised stock e6change for the purpose of hedging and portfolio balancing, in accordance with the guidelines issued by the (oard. Und &4&itin! ,. S +u&iti s (( !ulati,n/ 25" $utual funds may enter into underwriting agreement after obtaining a certificate of registration in terms of the ,ecurities and 56change (oard of India 28nderwriters3 "ules and ,ecurities and 56change (oard of India 28nderwriters3 "egulations, 1EE) authorising it to carry on activities as underwriters. 1. Ex%lanati,n/ -or the purpose of these regulations, the underwriting

obligation will be deemed as if investments are made in such securities. #. The capital ade=uacy norms for the purpose of underwriting shall be the net

asset of the scheme. rovided that the underwriting obligation of a mutual fund shall not at any time e6ceed the total net asset value of the scheme. M t',d ,. -aluati,n ,. in- stm nts (( !ulati,n/ 26"

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5very mutual fund shall compute and carry out valuation of its investments in its portfolio and publish the same in accordance with the valuation norms specified in 5ighth ,chedule.

C,m%utati,n ,. N t Ass t 7alu (( !ulati,n/ 28" 1. 5very mutual fund shall compute the 1et 'sset Falue of each scheme by

dividing the net assets of the scheme by the number of units outstanding on the valuation date. #. The 1et 'sset Falue of the scheme shall be calculated and published at least

in two daily newspapers at intervals of not e6ceeding one weekO rovided that the 1et 'sset Falue of any scheme for special target segment or any monthly income scheme which are not mandatorily re=uired to be listed in any stock e6change under "egulation )#, may publish the 1et 'sset Falue at monthly or =uarterly intervals as may be permitted by the (oard. 1&i+in! ,. Units (( !ulati,n/ 29" 1. The price at which the units may be subscribed or sold and the price at which

such units may at any time be repurchased by the mutual fund shall be made available to the investors. #. units. ). While determining the prices of the units, the mutual fund shall ensure that the The mutual fund, in case of open ended scheme, shall at least once a week

publish in a daily newspaper of all India circulation, the sale and repurchase price of

repurchase price is not lower than E)P of the 1et 'sset Falue and the sale price is not higher than 1/?P of the 1et 'sset Falue. rovided that the repurchase price of the units of a close ended scheme shall not be lower than E.P of the 1et 'sset FalueO

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rovided further that the difference between the repurchase price and the sale price of the unit shall not e6ceed ?P calculated on the sale price. *. The price of units shall be determined with reference to the last determined

1et 'sset Falue as mentioned in sub@regulation 2)3 unless, a. b. the scheme announces the 1et 'sset Falue on a daily basisL and the sale price is determined with or without a fi6ed premium added to the future net asset value which is declared in advance. Mutual Funds - S+,% .,& G&,4t' and D - l,%m nt in India $utual -und Industry in its true spirit rooted in a free market and oriented towards competitive functioning with the dedicated goal of service to the investors can be said to have settled in India only in 1EE). ;owever the industry took its roots much earlier with the setting up of the 8nit Trust In India 2'+I,3 in 1E<* by the &overnment of India. %uring the last )< years, '+I, has grown to be a dominant player in the industry with assets of over "s.?#,))).*) 4rores as of $arch )1, #///. The '+I, is governed by a special legislation, the 8nit Trust of India 'ct, 1E<). In 1EH? public sector banks and insurance companies were permitted to set up mutual funds and accordingly since 1EH?, < public sector banks have set up mutual funds. 'lso the two Insurance companies :I4 and &I4 established mutual funds. ,ecurities 56change (oard of India 2,5(I3 formulated the $utual -und 2"egulation3 1EE), which for the first time established a comprehensive regulatory framework for the mutual fund industry. ,ince then several mutual funds have been set up by the private and !oint sectors. The 8nit Trust of India 4hairman $. %amodaran today ruled out the possibility of dumping e=uities in its flagship scheme 8,@<* as it might have an adverse effect on the market, but threatened to sell non@performing shares to competitor companies at a higher price. '+I, will not dump the shares it is holding !ust to achieve that ob!ective 2increasing the debt e6posure in 8,@<*3, but was working out schemes to get ma6imum returns from both non@performing and performing assets,B %amodaran told 1"I investors here.

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7ne of the factors holding the market down now may be the feeling that '+I, may download shares to meet redemptions once it accepts 1'F@based listing ne6t month. (ut we are not going to sell to meet fund demands,B he said. The '+I, chief, however, threatened to sell unattractive shares to their competitors at attractive prices. '+I, will offer its stake in companies yielding nothing, to their rivals if these companies themselves did not buy back the shares, he said, adding that we are concerned only with investorsC interests.B %amodaran assured the 1"I investors in the &ulf that 8,@<* was firmly on the road to recovery and suggested that investors stay with the fund for better returns. ;e told reporters that the 8,@<*, which will be traded on the basis of its net asset value 21'F3 from Aanuary 1 #//#, was being restructured along with other schemes to reduce the e=uity e6posure and increase debt e6posure. %amodaran also said '+I, will not launch assured@return close@ended schemes though it may have monthly income schemes with variable returns. ;e said the '+I, board will consider the recommendations of the $alegam 4ommittee on restructuring IndiaCs largest mutual fund at the end of this month or early ne6t month. ;e also clarified that '+I, has not yet approached Infosys Technologies with any proposal to convert its entire e=uity holding in the IT company into 'merican %epository "eceipts 2'%"s3 for offloading them in the international markets. %amodaran said there is no proposal to convert its ..< per cent holding in the it ma!or to '%"s and market abroad to realise a higher value. 1TI

G&,4t' ,. Mutual Fund :usin ss in India The Indian $utual fund business has passed through three phases. The first phase was between 1E<* and 1EH?, when the only player was the 8nit Trust of India, which had a total asset of "s. <,?//K@ crores at the end of 1EHH. The second phase is between 1H

1EH? and 1EE) during which period H funds were established 2< by banks and one each by :I4 and &I43. The total assets under management had grown to "s. <1,/#HK@ crores at the end of 1EE* and the number of schemes were 1<?. The third phase began with the entry of private and foreign sectors in the $utual fund industry in 1EE). 9othari ioneer $utual fund was the first fund to be established by the private sector in association with a foreign fund. The share of the private players has risen rapidly since then. Within a short period of seven years after 1EE) the growth statistics of the business of $utual -unds in India is given in the table belowO

N t Ass ts ,. Mutual Funds as at ;l<=;<>=== ?S,u&+ / W @sit ,. SE:IA The net assets of all domestic schemes of mutual funds were "s.1,/?,E*<.1/ crores as on $arch )1, #/// as against "s. <H,1E)./H crores as on $arch )1, 1EEE . The details are given below O

'mount 2"s 4rs3 '+I, ublic ,ector rivate ,ector Total ?#,))).*) 1/,***.?H #.,1<?.HE 1,/?,E*<.1/

ercentage 2P3 <?.// E.<H #).)# 1//.//

%uring the year 1EEE@#///, the share of '+I, in the total assets of the mutual funds industry has declined to <?P from ??.EP in 1EEH@EE. 1et assets of other public sector mutual funds have also shown a decline from 1#./EP in 1EEH@EE to E.<HP in 1EEE@ #///. ;owever, net assets of private sector mutual funds have increased from E.E?P in 1EEH@EE to #).)#P in the year 1EEE@#///.

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There are )* private $utual -unds in the fray and they have seized about #.P of the market share in the brief period of ? years, mobilising above "s.#./// 4rores from the public S+,% .,& D - l,%m nt ,. Mutual Fund :usin ss in India ' $utual -und is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. India has a burgeoning population of middle class now estimated around )// million. ' typical Indian middle class family can have li=uid savings ranging from "s.# to "s.1/ :acs today. Investments in (anks are li=uid and safe, but with the falling rate of interest offered by (anks on %eposits, it is no longer attractive. 't best a part can be saved in bank deposits, but what is the other sources of investment for the common manI $utual -und is the ready answer. Fiewed in this sense globally India is one of the best markets for $utual -und (usiness, so also for Insurance business. This is the reason that foreign companies compete with one another in setting up insurance and mutual fund business units in India. The sheer magnitude of the population of educated white collar employees provides unlimited scope for development of $utual -und (usiness in India. The alternative to mutual fund is direct investment by the investor in e=uities and bonds or corporate deposits. 'll investments whether in shares, debentures or deposits involve riskO share value may go down depending upon the performance of the company, the industry, state of capital markets and the economyL generally, however, longer the term, lesser the riskL companies may default in payment of interestK principal on their debenturesKbondsKdepositsL the rate of interest on an investment may fall short of the rate of inflation reducing the purchasing power. While risk cannot be eliminated, skillful management can minimise risk. $utual -unds help to reduce risk through diversification and professional management. The e6perience and e6pertise of $utual -und managers in selecting fundamentally sound securities and timing their purchases and sales, help them to build a diversified portfolio that minimises risk and ma6imises returns. T e !dvantages o" Investing in a Mutual Fund The advantages of investing in a $utual -und areO

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1&,. ssi,nal Mana! m nt The investor avails of the services of e6perienced and skilled professionals who are backed by a dedicated investment research team which analyses the performance and prospects of companies and selects suitable investments to achieve the ob!ectives of the scheme.

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Di- &si.i+ati,n $utual -unds invest in a number of companies across a broad cross@section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. Qou achieve this diversification through a $utual -und with far less money than you can do on your own.

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C,n- ni nt Administ&ati,n Investing in a $utual -und reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies. $utual -unds save your time and make investing easy and convenient.

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( tu&n 1,t ntial 7ver a medium to long@term, $utual -unds have the potential to provide a higher return as they invest in a diversified basket of selected securities.

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L,4 C,sts $utual -unds are a relatively less e6pensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.

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Li0uidit* In open@ended schemes, you can get your money back promptly at net asset value related prices from the $utual -und itself. With close@ended schemes, you can sell your units on a stock e6change at the prevailing market price or avail of the facility of direct repurchase at 1'F related prices which some close@ended and interval schemes offer you periodically.

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T&ans%a& n+* Qou get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager0s investment strategy and outlook.

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Fl xi@ilit* Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience.

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C',i+ ,. S+' m s $utual -unds offer a family of schemes to suit your varying needs over a lifetime.

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B=<

W ll ( !ulat d 'll $utual -unds are registered with ,5(I and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of $utual -unds are regularly monitored by ,5(I. In the following chapters we propose to discuss all relevant information about $utual -unds in India, the regulatory and legal structure governing them that a common investor ought to know. The literature is mostly drawn from the website of ,5(, but suitably tabulated to provide ready information. The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by '+I, in the year 1E<). Though the growth was slow, but it accelerated from the year 1EH? when non@'+I, players entered the industry. In the past decade, Indian mutual fund industry had seen a dramatic imporvements, both =ualitywise as well as =uantitywise. (efore, the monopoly of the market had seen an ending phase, the 'ssets 8nder $anagement 2'8$3 was "s. <?bn. The private sector entry to the fund family rose the '8$ to "s. *?/ bn in $arch 1EE) and till 'pril #/1*, it reached the height of 1,.*/ bn. utting the '8$ of the Indian $utual -unds Industry into comparison, the total of it is less than the deposits of ,(I alone, constitute less than 11P of the total deposits held by the Indian banking industry. The main reason of its poor growth is that the mutual fund industry in India is new in the country. :arge sections of Indian investors are yet to be intellectuated with the concept. ;ence, it is the prime responsibility of all mutual fund companies, to market the product correctly abreast of selling. The mutual fund industry can be broadly put into four phases according to the development of the sector. 5ach phase is briefly described as under.

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:&i . Cist,&*

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:&i . Cist,&*/ Fi&st 1'as - B952-86 8nit Trust of India 2'+I,3 was established on 1E<) by an 'ct of arliament. It was set up by the "eserve (ank of India and functioned under the "egulatory and administrative control of the "eserve (ank of India. In 1E?H '+I, was de@linked from the "(I and the Industrial %evelopment (ank of India 2I%(I3 took over the regulatory and administrative control in place of "(I. The first scheme launched by '+I, was 8nit ,cheme 1E<*. 't the end of 1EHH '+I, had "s.<,?// crores of assets under management. S +,nd 1'as - B986-B99; (Ent&* ,. 1u@li+ S +t,& Funds" 5ntry of non@'+I, mutual funds. ,(I $utual -und was the first followed by 4anbank $utual -und 2%ec H?3, un!ab 1ational (ank $utual -und 2'ug HE3, Indian (ank $utual -und 21ov HE3, (ank of India 2Aun E/3, (ank of (aroda $utual -und 27ct E#3. :I4 in 1EHE and &I4 in 1EE/. The end of 1EE) marked "s.*?,//* as assets under management. T'i&d 1'as - B99;->==5 (Ent&* ,. 1&i-at S +t,& Funds" With the entry of private sector funds in 1EE), a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. 'lso, 1EE) was the year in which the first $utual -und "egulations came into being, under which all mutual funds, e6cept '+I, were to be registered and governed. The erstwhile 9othari ioneer 2now merged with -ranklin Templeton3 was the first private sector mutual fund registered in Auly 1EE). The 1EE) ,5(I 2$utual -und3 "egulations were substituted by a more comprehensive and revised $utual -und "egulations in 1EE<. The industry now functions under the ,5(I 2$utual -und3 "egulations 1EE<. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and ac=uisitions. 's at the end of Aanuary #//<, there were )) mutual funds with total

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assets of "s. 1,#1,H/. crores. The 8nit Trust of India with "s.**,.*1 crores of assets under management was way ahead of other mutual funds. F,u&t' 1'as - sin+ F @&ua&* >==5 This phase had bitter e6perience for '+I,. It was bifurcated into two separate entities. 7ne is the ,pecified 8ndertaking of the 8nit Trust of India with '8$ of "s.#E,H). crores 2as on Aanuary #//<3. The ,pecified 8ndertaking of 8nit Trust of India, functioning under an administrator and under the rules framed by &overnment of India and does not come under the purview of the $utual -und "egulations. The second is the '+I, $utual -und :td, sponsored by ,(I, 1(, (7( and :I4. It is registered with ,5(I and functions under the $utual -und "egulations. With the bifurcation of the erstwhile '+I, which had in $arch #/// more than "s.?<,/// crores of '8$ and with the setting up of a '+I, $utual -und, conforming to the ,5(I $utual -und "egulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. 's at the end of ,eptember, #/1*, there were #E funds, which manage assets of "s.1.)1/H crores under *#1 schemes C,n+ %t/ T' & a& man* ntiti s in-,l- d and t' dia!&am @ l,4 illust&at s t'

,&!anisati,nal s t u% ,. a mutual .und/

O&!anisati,n ,. a Mutal Fund

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F atu& s/ 8ni=ue -eatures of '+I, their Impact on its -unctioning R56tract from the "eport of >4orporate ositioning> 4ommitteeS In the initial stages, '+I, had been performing a hybrid role of both a financial institution and a mutual fund. ;owever, over the last few years, its role as a financial institution has significantly diminished and it has positioned itself purely as the largest mutual fund in the country. There is also a significant trend emerging which suggests that financial institutions will gradually wither away or merge into universal banks. In this scenario, commercial banks and mutual funds will emerge as the primary institutions for the mobilisation of household savings. This reinforces the need for '+I, to evolve as a pure mutual fund. 't the same time, consideration has to be given to the fact that '+I, has promoted and holds controlling interest in a number of institutions outside the pure mutual fund industry. 's noted earlier, '+I,0s management structure is at variance with the structure prescribed for mutual funds under ,5(I regulations. These regulations provide for four separate entities, namely a ,ponsor, an Independent Trustee, an 'sset $anagement 4ompany and the -und. It is necessary that '+I, as the largest player in the $utual -und industry should, as recommended by the Faghul 4ommittee, lend itself to ,5(I0s regulatory !urisdication and conform to the form of structure prescribed in ,5(I regulations. 's stated earlier, out of ?) domestic schemes, <? schemes have already been brought under ,5(I regulations and apart from 8,@<* and ,8,@EE, the remaining schemes have finally suspended sales andKor are nearing termination. It only remains for the structure of '+I, also to be made ,5(I compliant. While the present structure of '+I, provides for separate 'sset $anagement 4ommittees for 8,@<*, e=uity schemes and for incomeKdebt schemes, the degree of control e6ercised and direction imparted by these 4ommittees appears to be restricted and inade=uate. The key mandate of the 4ommittees is to review performance of unit schemes of '+I, and provide guidance. The 4ommittees discharge this role of independent review of scheme performance through the mechanism of periodic meetings. &iven the limitation of a >review committee> format, the 4ommittees have not found it possible to resolve >embedded> problems stemming from >historical> decisions. The 4ommittees, therefore, cannot replace 'sset $anagement 4ompanies. #?

There is therefore need for an independent Trustee and an independent '$4, as provided under ,5(I regulations with wider powers of control and direction. '+I, has no identified ,ponsor but the institutions, which contributed to the initial capital of "s.. crores and, crores in 1EEE, may be considered as ,ponsoring Institutions. ,5(I regulations impose certain responsibilities and obligations on sponsors and it would be difficult to discharge these responsibilities and obligations when there are a large number of sponsors. It is therefore necessary that the ,ponsor should be a separate company. It is suggested that this company can be formed with the initial shareholders being the ,ponsoring Institutions who will convert the whole or part of their present holdings in the initial capital of "s.. crores and the additional contribution of "s.**.../ crores made in Aune 1EEE into the capital of the ,ponsoring 4ompany. This conversion can be made at the 1'F of the units when 8,@<* becomes 1'F based. It is desirable that no single member of the ,ponsoring Institutions ultimately holds more than #.P of the ultimate capital of the ,ponsoring 4ompany, particularly since many of them already own or have participation in '$4s managing other mutual funds. With the increase in mutual fund players in India, a need for mutual fund association in India was generated to function as a non@profit organisation. 'ssociation of $utual -unds in India 2'$-I3 was incorporated on ##nd 'ugust, 1EE.. '$-I is an ape6 body of all 'sset $anagement 4ompanies 2'$43 which has been registered with ,5(I. Till date all the '$4s are that have launched mutual fund schemes are its members. It functions under the supervision and guidelines of its (oard of %irectors. 'ssociation of $utual -unds India has brought down the Indian $utual -und Industry to a professional and healthy market with ethical lines enhancing and maintaining standards. It follows the principle of both protecting and promoting the interests of mutual funds as well as their unit holders.

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T' ,@D +ti- s ,. Ass,+iati,n ,. Mutual Funds in India The 'ssociation of $utual -unds of India works with )/ registered '$4s of the country. It has certain defined ob!ectives which !u6taposes the guidelines of its (oard of %irectors. The ob!ectives are as followsO

This mutual fund association of India maintains a high professional and ethical standards in all areas of operation of the industry.

It also recommends and promotes the top class business practices and code of conduct which is followed by members and related people engaged in the activities of mutual fund and asset management. The agencies who are by any means connected or involved in the field of capital markets and financial services also involved in this code of conduct of the association.

'$-I interacts with ,5(I and works according to ,5(Is guidelines in the mutual fund industry.

'ssociation of $utual -und of India do represent the &overnment of India, the "eserve (ank of India and other related bodies on matters relating to the $utual -und Industry.

It develops a team of well =ualified and trained 'gent distributors. It implements a programme of training and certification for all intermediaries and other engaged in the mutual fund industry.

'$-I undertakes all India awarness programme for investors inorder to promote proper understanding of the concept and working of mutual funds.

't last but not the least association of mutual fund of India also disseminate informations on $utual -und Industry and undertakes studies and research either directly or in association with other bodies.

T' s%,ns,& &s ,. Ass,+iati,n ,. Mutual Funds in India :anE S%,ns,& d

,(I -und $anagement :td. (7( 'sset $anagement 4o. :td. 4anbank Investment $anagement ,ervices :td. '+I, 'sset $anagement 4ompany vt. :td.

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Instituti,ns

&I4 'sset $anagement 4o. :td. Aeevan (ima ,ahayog 'sset $anagement 4o. :td.

1&i-at S +t,& Indian/@

(ench$ark 'sset $anagement 4o. vt. :td. 4holamandalam 'sset $anagement 4o. :td. 4redit 4apital 'sset $anagement 4o. :td. 5scorts 'sset $anagement :td. A$ -inancial $utual -und 9otak $ahindra 'sset $anagement 4o. :td. "eliance 4apital 'sset $anagement :td. ,ahara 'sset $anagement 4o. vt. :td ,undaram 'sset $anagement 4ompany :td. Tata 'sset $anagement rivate :td.

1& d,minantl* India F,int 7 ntu& s/

(irla ,un :ife 'sset $anagement 4o. :td. %, $errill :ynch -und $anagers :imited ;%-4 'sset $anagement 4ompany :td.

1& d,minantl* F,& i!n F,int 7 ntu& s/

'(1 '$"7 'sset $anagement 2I3 :td. 'lliance 4apital 'sset $anagement 2India3 vt. :td. %eutsche 'sset $anagement 2India3 vt. :td. -idelity -und $anagement rivate :imited -ranklin Templeton 'sset $gmt. 2India3 vt. :td. ;,(4 'sset $anagement 2India3 rivate :td. I1& Investment $anagement 2India3 vt. :td. $organ ,tanley Investment $anagement vt. :td.

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rincipal 'sset $anagement 4o. vt. :td. rudential I4I4I 'sset $anagement 4o. :td. ,tandard 4hartered 'sset $gmt 4o. vt. :td '+I, $utual -und ties up with %ena (ank for distributing its $- schemes '+I, $utual -und 2'+I, $-3 and %ena (ank today announced a strategic

tie@up for distribution of '+I, $- schemes. 8nder the agreement, %ena (ank will offer the entire bou=uet of '+I, $-0s schemes across the bank0s selected branches S %t m@ & B>G >=B2/ '+I, $utual -und 2'+I, $-3 and %ena (ank today announced a strategic tie@up for distribution of '+I, $- schemes. 8nder the agreement, %ena (ank will offer the entire bou=uet of '+I, $-0s schemes across the bank0s selected branches. resently '+I, $- 2with assets under management of over "s.#./// crore3 reaches out to its investors through its wide distribution network comprising <. -inancial 4enters 28-4s3, #?1 4hief "epresentative offices, .H 4hief 'gents, over 1E/// '$-I certified -inancial 'dvisors and through tie@ups with several (anks and %epartment of ost. With today0s tie@up, '+I, $- is further enhancing its distribution capabilities. '+I, $- will now also be offering its schemes initially through H/ branches of %ena (ank including *1 -in$art branches across India . 'nnouncing the '+I, $-0s tie@up with %ena (ank, %r " ; atil , 4hairman, '+I, '$4 said, >This initiative reflects '+I, $-0s strategy to rapidly e6pand in the retail market and value@add its access network to complement the $utual -und0s growth strategy in the Indian mutual fund sector. With this tie@up millions of customers of %ena (ank will get an opportunity to invest in various schemes of '+I, $- closer to their doorstep at the branches where they do their banking transactions.> >%ena (ank has got a dominant presence in &u!arat and $aharashtra which happen to be important retail markets for '+I, $-.> he added 7n the occasion, ,hri $ F 1air , 4hairman and $anaging %irector, %ena (ank said, The signing of our 'greement today is a very happy occasion for both %ena (ank and '+I, $utual -und. It is a significant milestone for the (ank and it is the first tie

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up the (ank has made to offer various $utual -und products to its customers. The (ank will endeavour to cross sell its products also with this tie up. ,hri $ F 1air said, >In a rapidly changing scenario, the lender @ borrower relationship which (anks traditionally had with customers is giving way to a different kind of business relationship and the (anks are now offering a variety of financial services to the customers to meet their changing aspirations. The tie up between %ena (ank and '+I, $- is a step towards converting the bank branch into a financial supermarket which caters to all the financial needs of the customer by providing banking, insurance, as well as investment services at one stop.>

>There is immense potential for marketing of mutual funds and the tie up

would help to tap this potential. Today0s agreement brings together two strong and vibrant brands in a strategic alliance, which will combine the strengths of both organisations for mutual benefit. We are looking at the tie up as an opportunity to bring more customers into our fold and to e6pand our horizons.> he added A@,ut AXIS MF '+I, $utual -und was carved out of 8nit Trust of India as a ,5(I registered mutual fund by repealing the 8nit Trust of India 'ct 21E<)3 on 1st -ebruary #//<. '+I, $utual -und 2'+I, $-3 manages the pure $utual -und schemes, which are fully ,5(I compliant and in line with the best global practices, while, the ,pecified 8ndertaking of the 8nit Trust of India 2,88TI3 manages schemes which involve the commitment of the &overnment of India. A@,ut D na :anE %ena (ank, over a period of more than si6 and half decades, has successfully leveraged and integrated the modern technology with traditional values to provide a range of products and services that strengthen e6isting relationships with its customers and seek to build new ones. -ounded on the principles of integrity, high standard of efficiency, a sense of service and a national outlook, the (ank has through the years nurtured and established enduring relationship with its customers with e6emplary service and professional competence.

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$oving proactively with the times and in its efforts for greater customer

convenience, %ena (ank has introduced many technology@based products like $ulti@ 4ity 4he=ue facility, 'ny (ranch (anking, $obile (anking etc. The (ank has also opened *1 %ena -in$arts, which are e6clusive one@stop shops for all retail loan products of the (ank, across the country. The signing of the 'greement with '+I, '$4 will enable the (ank to market all mutual fund products of '+I, $- through its branches, in addition to its core banking activities and insurance services. The (ank has a network of over 11// branches and satellite offices across the country and the total volume of business of the (ank is nearly "s.)#/// crore at present D .initi,n ,. Im%,&tant T &msHC,n+ %ts in Mutual Fund Indust&* (efore proceeding to consider the salient provisions of ,5(I regulations governing mutual funds, it is necessary to get familiar with the basic terms and phraseology used in $utual -und literature. N t Ass t 7alu (#NA7#"/ The performance of a particular scheme of a mutual fund is denoted by 1et 'sset Falue 21'F3. $utual funds invest the money collected from the investors in securities markets. In simple words, 1et 'sset Falue is the market value of the securities held by the scheme. ,ince market value of securities changes every day, 1'F of a scheme also varies on day to day basis. The 1'F per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. -or e6ample, if the market value of securities of a mutual fund scheme is "s #// lakhs and the mutual fund has issued 1/ lakhs units of "s. 1/ each to the investors, then the 1'F per unit of the fund is "s.#/. 1'F is re=uired to be disclosed by the mutual funds on a regular basis @ daily or weekly @ depending on the type of scheme. ,ale riceO Is the price you pay when you invest in a scheme. 'lso called 7ffer rice. It may include a sales load. "epurchase riceO Is the price at which a close@ended scheme repurchases its units and it may include a back@end load. This is also called (id rice. "edemption riceO Is the price at which open@ended schemes repurchase their units and close@ended schemes redeem their units on maturity. ,uch prices are 1'F related.

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,ales :oadO Is a charge collected by a scheme when it sells the units. 'lso called, 0-ront@end0 load. ,chemes that do not charge a load are called 01o :oad0 schemes. "epurchase or 0(ack@end0 :oadO Is a charge collected by a scheme when it buys back the units from the unit@holders. What are the different types of mutual fund schemesI ,chemes according to $aturity eriodOO ' mutual fund scheme can be classified into open@ended scheme or close@ended scheme depending on its maturity period. 7pen@ended -undK ,chemeO 'n open@ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fi6ed maturity period. Investors can conveniently buy and sell units at 1et 'sset Falue 21'F3 related prices which are declared on a daily basis. The key feature of open@end schemes is li=uidity. 4"I,I:0s composite performance ranking 24 "3 measures the performance for each of the open@ended scheme of $utual -und. There are four parameters considered to measure the performance of a mutual fund such as "isk@ad!usted returns of the scheme0s 1'F, %iversification of ortfolio, :i=uidity and 'sset ,ize. 4lose@ended -undK ,chemeO ' close@ended fund or scheme has a stipulated maturity period e.g. .@? years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock e6changes where the units are listed. In order to provide an e6it route to the investors, some close@ended funds give an option of selling back the units to the mutual fund through periodic repurchase at 1'F related prices. ,5(I "egulations stipulate that at least one of the two e6it routes is provided to the investor i.e. either repurchase facility or through listing on stock e6changes. These mutual funds schemes disclose 1'F generally on weekly basis. ,chemes according to Investment 7b!ectiveO ' scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment

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ob!ective. ,uch schemes may be open@ended or close@ended schemes as described earlier. ,uch schemes may be classified mainly as followsO &rowth K 5=uity 7riented ,chemeO The aim of growth funds is to provide capital appreciation over the medium to long@ term. ,uch schemes normally invest a ma!or part of their corpus in e=uities. ,uch funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. &rowth schemes are good for investors having a long@term outlook seeking appreciation over a period of time. Income K %ebt 7riented ,chemeO The aim of income funds is to provide regular and steady income to investors. ,uch schemes generally invest in fi6ed income securities such as bonds, corporate debentures, &overnment securities and money market instruments. ,uch funds are less risky compared to e=uity schemes. These funds are not affected because of fluctuations in e=uity markets. ;owever, opportunities of capital appreciation are also limited in such funds. The 1'Fs of such funds are affected because of change in interest rates in the country. If the interest rates fall, 1'Fs of such funds are likely to increase in the short run and vice versa. ;owever, long term investors may not bother about these fluctuations. (alanced -undO The aim of balanced funds is to provide both growth and regular income as such schemes invest both in e=uities and fi6ed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest */@</P in e=uity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. ;owever, 1'Fs of such funds are likely to be less volatile compared to pure e=uity funds. $oney $arket or :i=uid -undO These funds are also income funds and their aim is to provide easy li=uidity, preservation of capital and moderate income. These schemes invest e6clusively in safer short@term instruments such as treasury bills, certificates of deposit, commercial paper and inter@bank call money, government securities, etc. "eturns on these schemes fluctuate much less compared to other funds. These funds

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are appropriate for corporate and individual investors as a means to park their surplus funds for short periods. &ilt -undO These funds invest e6clusively in government securities. &overnment securities have no default risk. 1'Fs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes. Inde6 -undsO Inde6 -unds replicate the portfolio of a particular inde6 such as the (,5 ,ensitive inde6, ,M 1,5 ./ inde6 21ifty3, etc These schemes invest in the securities in the same weightage comprising of an inde6. 1'Fs of such schemes would rise or fall in accordance with the rise or fall in the inde6, though not e6actly by the same percentage due to some factors known as >tracking error> in technical terms. 1ecessary disclosures in this regard are made in the offer document of the mutual fund scheme. There are also e6change traded inde6 funds launched by the mutual funds which are traded on the stock e6changes. What are sector specific fundsKschemesI @ These are the fundsKschemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. harmaceuticals, ,oftware, -ast $oving 4onsumer &oods 2-$4&3, etroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectorsKindustries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectorsKindustries and must e6it at an appropriate time. They may also seek advice of an e6pert. What are Ta6 ,aving ,chemesI @ These schemes offer ta6 rebates to the investors under specific provisions of the Income Ta6 'ct, 1E<1 as the &overnment offers ta6 incentives for investment in specified avenues. e.g. 5=uity :inked ,avings ,chemes 25:,,3. ension schemes launched by the mutual funds also offer ta6 benefits. These schemes are growth oriented and invest pre@dominantly in e=uities. Their growth opportunities and risks associated are like any e=uity@oriented scheme What is a :oad or no@load -undI @ ' :oad -und is one that charges a percentage of 1'F for entry or e6it. That is, each time one buys or sells units in the fund, a charge

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will be payable. This charge is used by the mutual fund for marketing and distribution e6penses. ,uppose the 1'F per unit is "s.1/. If the entry as well as e6it load charged is 1P, then the investors who buy would be re=uired to pay "s.1/.1/ and those who offer their units for repurchase to the mutual fund will get only "s.E.E/ per unit. The investors should take the loads into consideration while making investment as these affect their yieldsKreturns. ;owever, the investors should also consider the performance track record and service standards of the mutual fund which are more important. 5fficient funds may give higher returns in spite of loads. ' no@load fund is one that does not charge for entry or e6it. It means the investors can enter the fundKscheme at 1'F and no additional charges are payable on purchase or sale of units. 4an a mutual fund impose fresh load or increase the load beyond the level mentioned in the offer documentsI utual funds cannot increase the load beyond the level mentioned in the offer document. 'ny change in the load will be applicable only to prospective investments and not to the original investments. In case of imposition of fresh loads or increase in e6isting loads, the mutual funds are re=uired to amend their offer documents so that the new investors are aware of loads at the time of investments. What is a sales or repurchaseKredemption priceI The price or 1'F a unitholder is charged while investing in an open@ended scheme is called sales price. It may include sales load, if applicable. "epurchase or redemption price is the price or 1'F at which an open@ended scheme purchases or redeems its units from the unitholders. It may include e6it load, if applicable. What is an assured return schemeI 'ssured return schemes are those schemes that assure a specific return to the unitholders irrespective of performance of the scheme. ' scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or '$4 and this is re=uired to be disclosed in the offer document.

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Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. ,ome schemes assure returns one year at a time and they review and change it at the beginning of the ne6t year. 4an a mutual fund change the asset allocation while deploying funds of investorsI 4onsidering the market trends, any prudent fund managers can change the asset allocation i.e. he can invest higher or lower percentage of the fund in e=uity or debt instruments compared to what is disclosed in the offer document. It can be done on a short term basis on defensive considerations i.e. to protect the 1'F. ;ence the fund managers are allowed certain fle6ibility in altering the asset allocation considering the interest of the investors. In case the mutual fund wants to change the asset allocation on a permanent basis, they are re=uired to inform the unitholders and giving them option to e6it the scheme at prevailing 1'F without any load. ;ow to invest in a scheme of a mutual fundI $utual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms. -orms can be deposited with mutual funds through the agents and distributors who provide such services. 1ow a days, the post offices and banks also distribute the units of mutual funds. ;owever, the investors may please note that the mutual funds schemes being marketed by banks and post offices should not be taken as their own schemes and no assurance of returns is given by them. The only role of banks and post offices is to help in distribution of mutual funds schemes to the investors. Investors should not be carried away by commissionKgifts given by agentsKdistributors for investing in a particular scheme. 7n the other hand they must consider the track record of the mutual fund and should take ob!ective decisions. 4an non@resident Indians 21"Is3 invest in mutual fundsI Qes, non@resident Indians can also invest in mutual funds. 1ecessary details in this respect are given in the offer documents of the schemes.

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;ow much should one invest in debt or e=uity oriented schemesI 'n investor should take into account his risk taking capacity, age factor, financial position, etc. 's already mentioned, the schemes invest in different type of securities as disclosed in the offer documents and offer different returns and risks. Investors may also consult financial e6perts before taking decisions. 'gents and distributors may also help in this regard. ;ow to fill up the application form of a mutual fund schemeI 'n investor must mention clearly his name, address, number of units applied for and such other information as re=uired in the application form. ;e must give his bank account number so as to avoid any fraudulent encashment of any che=ueKdraft issued by the mutual fund at a later date for the purpose of dividend or repurchase. 'ny changes in the address, bank account number, etc at a later date should be informed to the mutual fund immediately. What should an investor look into an offer documentI 'n abridged offer document, which contains very useful information, is re=uired to be given to the prospective investor by the mutual fund. The application form for subscription to a scheme is an integral part of the offer document. ,5(I has prescribed minimum disclosures in the offer document. 'n investor, before investing in a scheme, should carefully read the offer document. %ue care must be given to portions relating to main features of the scheme, risk factors, initial issue e6penses and recurring e6penses to be charged to the scheme, entry or e6it loads, sponsor0s track record, educational =ualification and work e6perience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed, etc. When will the investor get certificate or statement of account after investing in a mutual fundI

$utual funds are re=uired to despatch certificates or statements of accounts within si6 weeks from the date of closure of the initial subscription of the scheme. In case of )E

close@ended schemes, the investors would get either a demat account statement or unit certificates as these are traded in the stock e6changes. In case of open@ended schemes, a statement of account is issued by the mutual fund within )/ days from the date of closure of initial public offer of the scheme. The procedure of repurchase is mentioned in the offer document. ;ow long will it take for transfer of units after purchase from stock markets in case of close@ended schemesI

'ccording to ,5(I "egulations, transfer of units is re=uired to be done within thirty days from the date of lodgment of certificates with the mutual fund. 's a unit@holder, how much time will it take to receive dividendsKrepurchase proceedsI ' mutual fund is re=uired to despatch to the unit@holders the dividend warrants within )/ days of the declaration of the dividend and the redemption or repurchase proceeds within 1/ working days from the date of redemption or repurchase re=uest made by the unitholder. In case of failures to despatch the redemptionKrepurchase proceeds within the stipulated time period, 'sset $anagement 4ompany is liable to pay interest as specified by ,5(I from time to time 21.P at present3. 4an a mutual fund change the nature of the scheme from the one specified in the offer documentI Qes. ;owever, no change in the nature or terms of the scheme, known as fundamental attributes of the scheme e.g. structure, investment pattern, etc. can be carried out unless a written communication is sent to each unit@holder and an advertisement is given in one 5nglish daily having nationwide circulation and in a newspaper published in the language of the region where the head office of the mutual fund is situated. The unit@holders have the right to e6it the scheme at the prevailing 1'F without any e6it load if they do not want to continue with the scheme. The mutual funds are also re=uired to follow similar procedure while converting the scheme form close@ended to open@ended scheme and in case of change in sponsor.

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;ow will an investor come to know about the changes, if any, which may occur in the mutual fundI

There may be changes from time to time in a mutual fund. The mutual funds are re=uired to inform any material changes to their unit@holders. 'part from it, many mutual funds send =uarterly newsletters to their investors. 't present, offer documents are re=uired to be revised and updated at least once in two years. In the meantime, new investors are informed about the material changes by way of addendum to the offer document till the time offer document is revised and reprinted. It is for consideration whether '+I, should be wholly owned and managed by the &overnment through participation in the ,ponsoring 4ompany. 'lthough '+I, is not directly owned by the &overnment, the ma!ority of the ,ponsoring Institutions who contributed to the capital and the additional contribution and who elect the trustees are institutions which are owned or controlled by the &overnment. The 4hairman of the (oard of Trustees is also appointed by the &overnment. There is therefore a public perception of a &overnment umbrella which gives a measure of safety, security and implied guarantee to the unit@holders which is largely responsible for '+I,0s success as a savings institution. 't the same time, this perception imposes an implied responsibility on the &overnment for a possible bail@out of '+I, in the event of its failure to meet specific or implied commitments. &overnment did this by contributing to the ,8, ,cheme to the e6tent of "s.),)// crores following the recommendations of the %eepak arekh 4ommittee and there is a public perception that &overnment will need to do likewise to ensure that '+I, will meet its commitments to 8,@<* unit holders atleast to the e6tent of ),/// units out of their aggregate holdings. articipation by &overnment in the sponsoring company may strengthen the perception of implied responsibility of the &overnment for the due fulfillment of obligations by '+I, but this responsibility may be open@ended and &overnment may not wish to accept such a responsibility. ;owever, non@participation by &overnment in the sponsoring company may not by itself remove the perceived link between the

*1

&overnment and '+I, so long as &overnment continues to e6ercise powers such as the power to appoint the 4hairman of the (oard of Trustees under the '+I, 'ct. 't the same time, it is necessary to recognise that if the perceived link with the &overnment is suddenly removed, @ and certainly if it is removed before 8,@<* becomes 1'F based @ without providing an ade=uate substitute, public confidence in '+I, would be severely affected and can even lead to a flood of redemptions which could create a crisis both in '+I, and in the capital market. It is therefore necessary that if the &overnment does not participate in the ,ponsoring 4ompany, the participation of the ,ponsoring Institutions should remain >locked@in> atleast for the initial period. 'n option for consideration is whether in place of the &overnment a strategic partner cannot be introduced. If this partner is an established player in the market who en!oys confidence of unitholders because of his reputation and competence, the risk of loss of public confidence through the removal of the perceived &overnment link would be largely mitigated. 't the same time, having regard to the large amount of funds involved, the field for the identification of a strategic partner cannot be restricted only to Indian entities. If such a strategic partner is introduced, then it is necessary that &overnment should completely withdraw and leave it to the strategic partner to manage the fund sub!ect to the supervision and regulation of ,5(I as in the case of other mutual funds. To do otherwise would create the danger that &overnment may be perceived to be accountable for the proper functioning of '+I, without having any effective control. If on the contrary, &overnment attempts to effectively control the operations of '+I,, it will get unnecessarily involved in running a commercial operation for which it may not be able to impart the necessary skill and fle6ibility. ' complete withdrawal of the &overnment would also achieve the ob!ective of de@risking the &overnment from the operations of '+I,.

'+I,@ 'uto ,ector -undO The fund will invest in the stocks of companies engaged in the automobile and auto ancillary industry.

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'+I, @(anking ,ector -undO The fund will invest in the stocks of the companies K institutions engaged in the banking and financial services activities. '+I, ,8 -undO The fund will invest in the stocks of companies where the ,tate K 4entral &overnment of India owns the ma!ority of the holding or management control is vested with ,tateK4entral &overnment of India. ,alient -eatures of the '+I,@ Thematic -und

The scheme is open to resident individuals, institutions as well as to 1"Is and -IIs.

-ace value of units is "s.1/K@ $inimum amount of investment under each thematic fund is "s..///K@ and thereafter subse=uent minimum investment under a folio is "s.1///K@ per thematic fund.

,ale of units under each fund will be at face value during the initial offer period. 7n re@opening of the scheme, ,ale of units will be at 1/#P of 1'F. "epurchase will be at 1'F.

The primary ob!ective of the scheme is capital appreciation. ;owever the scheme may also distribute income to the unitholders. 8nitholders will have an option to reinvest income distribution, if any, at e6@dividend 1'F. The benchmark of '+I,@:arge 4ap -und is (,5 ,ense6, '+I,@$id 4ap -und is 41+ $idcap #// Inde6, '+I,@(asic Industries -und is (,5 1// Inde6, '+I,@ 'uto ,ector -und is (,5 ,ense6, '+I, (anking ,ector -und is (,5 ('195+ and '+I,@ ,8 -und is (,5 ,8 Inde6. 'utomatic Trigger 7ption and ,witchover facility from one fund to another are available.

The -und $anagers of the si6 thematic funds are O '+I,@ :arge 4ap -und @ ,hri $anish 9umar '+I,@$id 4ap -und @ ,hri Finay 9ulkarni '+I,@(anking ,ector -und @ ,hri ,an!ay %ongre '+I,@(asic Industries -und @ ,hri ,an!ay ,inha

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'+I,@ 'uto ,ector -und @ ,hri ,an!ay ,inha '+I,@ ,8 -und @ ,hri ,an!ay ,inha

W'* s',uld ,n in- st in Mutual Funds t'&,u!' AXIS :anE) W m t *,u& n ds/ We believe that every one has specific needs and priorities. Qour needs could vary from buying a house, getting your daughter married to providing for your childCs education. Qou might even want to travel the world. 'll your needs are very important for us. We can help to fulfill your needs to reality by helping you select schemes, which would be consonance with your needs. W 4,&E t,4a&ds @uildin! an IIn- stm nt Cultu& J/ It would be our constant endeavor to inculcate saving and organized investing habits in you. We will help you plan your investments and build a healthy mutual fund portfolio, which would be an optimal solution for your needs. 4ultivating an investment culture will not only help you but also your family. W 4ill E % *,u u%dat d/ ' newsletter, which will keep you informed of the latest happenings in the stock markets, economy and important events, apart from giving you the 1'F and other relevant information about your schemes will be sent you every month. :atest 1'F of the schemes can also be found out from our various branches. W +an @ *,u& IOn St,% Finan+ial S,luti,nJ/ 'part from subscribing to $utual fund schemes through us, you can also take advantage of our banking services and a whole range of financial products. :ike @ 'T$ card , credit card, personal loan products, depository services, loan against unitsKshares etc. and see your financial needs satisfied under one roof. Wit' AXIS :anE- $utual -und services, you can consult with your own Investment 'dvisor and invest in a $utual -und ,cheme that is right for you. ' great opportunity, to get organized and make your investment more in line with your real needs.

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(isE Fa+t,&s/ 'll the investments in the securities market are sub!ect to market risks and the 1'F of schemesKplans may go up or down depending upon the factors and forces affecting securities market. ast performance is not necessarily indicative of the future. lease read the offer document before investing T*% s Wide variety of $utual -und ,chemes e6ist to cater to the needs such as financial position, risk tolerance and return e6pectations etc. The table below gives an overview into the e6isting types of schemes in the Industry. TK1ES OF MUTUAL FUND SCCEMES :* St&u+tu&
o o o

7pen @ 5nded ,chemes 4lose @ 5nded ,chemes Interval ,chemes

:* In- stm nt O@D +tio o o o

&rowth ,chemes Income ,chemes (alanced ,chemes $oney $arket ,chemes

Ot' & S+' m s

o o

Ta6 ,aving ,chemes ,pecial ,chemes Inde6 ,chemes ,ector ,pecfic ,chemes

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SCO1E OF TCE STUDK

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SCO1E OF TCE STUDK

'+I, 4risis M 'fter ;ow the 4risis 7riginated What was the 4risis that 7vertook '+I, during 1EEE to #//# $r.Qogi 'ggarwal, columnist of >india@syndicate.comK> further points out in his illuminating articles published online@ >The figure of "s ..H1 for the net asset value 21'F3 of 8nit@<* marked a nadir for '+I, and revealed to a shocked public !ust how deep the rot had set in the government run financial sector. >The facts as revealed by the government appointed Tarapore 4ommittee and the other committees which preceded it show a trail of bungling, structural flaws and '+I, officials using public money in an >imprudent> manner to help various controversial and powerful companies in stock e6change dealings that cost the '+I, several thousands of crores and severely eroded investor wealth. What they reveal is not !ust incompetence but a flouting of all prudential norms to favour certain individuals and companies. >While the Tarapore 4ommittee saw no reason to believe in any >breach of confidentiality> leading to the large scale redemptions in 8nit@<* during 'pril and $ay #//1 when around "s .,/// crore was taken out by big corporates and banks from 8nit@<*, it severely criticized the way the scheme worked. ' fundamental flaw was that 8nit@<* lived beyond its means, rewarding unitholders with dividends beyond its capabilities and propping up the price of 8nits well beyond their real worth. >'+I, could keep going because new people were always willing to put their money in 8nit@<*, thus paying for the dividends and helping hide the real state of affairs. The classic case which comes to mind is that of the onzi scam in the west in the early part of the last century, in which investors were promised and paid huge returns by the simple e6pedient of having new investors come in so that the kitty was always full. so long as the inflow from fresh investors was large enough to pay for the hefty returns promised.

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>The Tarapore 4ommittee commented, >The pricing mechanism was clearly faulty and had all the ingredients of a ponzi scheme under which new entrants and those continuing in the scheme had to bear the burden of redemption at relatively high prices.> The government run financial sector had clearly failed in its responsibilities by trying to meet up to unrealistic e6pectations which it had created in the middle class constituency. >'t the same time the government0s constant instructions to the '+I, to prop up or help this or that business house led to bad investment decisions to the detriment of unitholders. It is noteworthy that matters seem to have worsened from mid@1EEH onwards, when the present government took office and when , ,ubramanayam was appointed chairman. Inter scheme transfers between different '+I, funds were one reason for the drain on 8nit@<*s resources. These !umped ten times from around "s 1,/// to "s #,/// crore per year in the period preceding to "s 1/,/// to "s #/,/// crore a year thereafter. >These transfers were used to prop up other '+I, schemes at the cost of the 8nit@<*. To illustrate consider the followingO In %ecember #/// 8nit@<* got "s ),))) crore from other '+I, schemes for #)/ sale transfers. These were reversed the ne6t month but for this the 8nit@<* had to shell out "s ),**? crore. This paper e6ercise meant a loss of "s 11< crore for 8nit@<* which went to boost the revenues of other '+I, schemes. >The '+I,s decision to offer unitholders of upto .,/// units the option of reselling their unit back to '+I, at a price of "s 1/ in Aanuary #//# rising by 1/ paise each month till $ay #//< only involves a postponement of a difficult choice. 8nless the sense6 rises to an unrealistic level of around ?,/// 2from the present of appro6imately ),*//3 the 1'F of 8nit <* cannot be above "s 1/. ,ince the government is committed to buying back all units at "s 1/ in $ay #//< there would be sharp redemptions at that time. %epending on how the stockmarket behaves estimates of the government0s liability to bail out '+I, at that time range from "s <,/// crore to "s H,/// crore. >What is perhaps most scandalous is the manner in which '+I, was used to prop up share prices of certain companies in a dubious manner. The top management consistently ignored the advice of its e=uity research cell. The Tarapore 4ommittee

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found that in all 1E cases it picked for e6amination there were signs of >imprudence>. These companies included such as ;imachal -uturistic, %,T ,oftware, entamedia &raphics, Ispat Industries, Aindal Fi!ayanagar, 5ssar 7il and 5ssar ,teel, and "eliance and "eliance etro. >' ma!ority of these deals were through private placement and off@market deals making them less transparent and the value of these deals in the three years to Aune #//1 was around "s 1H,/// crore. The committee noted, >there are a number of cases where the chairman0s powers have been e6ceeded,> and >investments have been made in one company of a group while there was default in another company of the group.> >-urther, the '+I, invested around "s #,.// in the e=uity of thinly traded or unlisted companies from which it will be very difficult for the '+I, to e6it. $any of these investments 2it0s perhaps more accurate to call them >gifts>3 were made at the behest of the political masters though the 4ommittee does not go into this. In one famous case '+I, was used to bail out brokers involved inthe 4alcutta ,tock 56change crisis of $arch #//1 by purchasing B<; milli,n s'a& s ,. DSL S,.t4a& .,& (s >3<B+&,& < In the ne6t article we give the recommendations as made by the %eepak 4ommittee arekh

Im%,&tan+ ,. stud*
'+I, 4risis M 'fter The "oad $ap for "estructure of '+I, "ecommendations of the 4orporate ositioning 4ommittee The structure of '+I, should be in line with ,5(I regulations as applicable to mutual funds. 'ccordingly there should be a i. ii. iii. ,ponsor, ' Trustee 4ompany and 'n 'sset $anagement 4ompany 2'$43.

*E

The ,ponsor should be a ,ponsoring 4ompany in which */P of the share capital should be held by the institutions which hold the initial capital of '+I, of "s.. crores and which have made in 1EEE, the additional contribution of "s.**... crores pursuant to the %eepak arekh 4ommittee recommendations.2the ,ponsoring Institutions3. </P of the share capital of the ,ponsoring 4ompany should be held by a ,trategic artner who is a recognised player in the market and whose reputation and competence are e6pected to give the re=uired degree of confidence to the unitholders. The field for the selection of the ,trategic artner need not be restricted to Indian entities. The suggested share capital of the ,ponsoring 4ompany should be "s.../ crores of which "s.##/ crores will be subscribed by the ,ponsoring Institutions and "s.))/ crores by the ,trategic artner. To make the desired contributions, each of the ,ponsoring Institutions should convert part or whole of their e6isting holdings in 8nit@<* forming part of the initial capital of "s.. crores and the additional contribution of "s.**.... crores into shares of the ,ponsoring 4ompany. 's some of the ,ponsoring Institutions also own '$4s which manage mutual funds competing with '+I,, no single ,ponsoring Institution should hold more than #.P of the share capital of the ,ponsoring 4ompany. To ensure that the confidence of the unit@holders should not be adversely affected by a sudden withdrawal of the &overnment umbrella, there should be a 0lock@in0 period of three years during which the ,ponsoring Institutions may transfer their shareholding in the ,ponsoring 4ompany amongst themselves but not to the ,trategic artner or to third parties. ' Trustee 4ompany should be incorporated as a wholly@owned subsidiary of the ,ponsoring 4ompany. It is suggested that the Trustee 4ompany should have a capital of "s.. crores.

'+I, should convert itself into an '$4 and conse=uently the e6isting infrastructure and organisation of '+I, which presently form part of 8,@<* will become the infrastructure and organisation of the '$4.

./

The '$4 will compensate 8,@<* for the infrastructure taken over by the issue of bonds carrying a market rate of return and with appropriate redemption terms to be determined taking into account the '$40s e6pected cash flows. -or this purpose, '+I,0s fi6ed assets which currently have a book value of around "s.H./ crores will be valued at their fair market value and bonds will be issued for that amount. The capital of the '$4 should be ade=uate not merely to finance the investment needed in the future infrastructure but also to provide a cushion as a source of comfort to the investors and when needed, an ability to infuse li=uidity into the fund in the event of a crisis. It is therefore suggested that the '$4 should have a capital of "s. 1/// crores considering that '+I, has investible funds of over "s../,777 crores. It is necessary that control over the large funds held by '+I, 2and particularly having regard to the large block of shares held by '+I, in individual companies3 should not rest with a single individual or group. It is also necessary that there should be an element of public accountability of '+I,. It is therefore suggested that the shareholding of the ,ponsoring 4ompany in the capital of the '$4 should be restricted to */P and the balance </P should be offered to the public. In accordance with ,5(I regulations, the '$4 would be entitled to charge management fees to the different schemes. This income, after payment of e6penses and interest on the bonds to be issued to 8,@<* and transfer to the %evelopment "eserve -und at the current rate should be sufficient to service the share capital. There should be a single '$4 to manage all the schemes of '+I,. It is necessary that 8,@<* is made 1'F based before the restructuring of '+I, is attempted. It is also necessary that before 8,@<* is made 1'F based, provision is made for the contingent liability arising out of the gap, if any, between the available assets in 8,@ <* and guaranteed price to individual unitholders0 holdings upto )/// units announced in Auly #//1.

It is e=ually necessary that provision is made for the contingent liability arising as a result of the gap between the present value of the future liability .1

To reduce the size of this gap, the following steps should be taken The portfolios of these schemes should be recast as soon as it is practically possible, to ensure that the portfolio consists only of &overnment securities and debt instruments and all investments in e=uity are disposed off. In respect of schemes where only one year0s return is assured, the returns assured should be strictly in line with the earning capacity of the schemes. The Income Ta6 'ct should be amended to provide that dividends received on assured return schemes floated before 1st Aune 1EEE would not be entitled to e6emption of ta6 under ,ection 1/2))3 and correspondingly, no ta6 would be levied on the fund under ,ection 11." on dividends distributed to unitholders. The %evelopment "eserve -und should be transferred to the '$4 free of consideration after valuing the investments of the fund at their fair market value. sub@number omitted The prospective ,trategic artner should be invited to =uote the value at which '+I,0s infrastructure and organisation should be converted into the '$4. If this value e6ceeds the value of the assets of the schemes, the e6cess should be credited to the various schemes in an appropriate manner. If however the value falls short of the value of the assets of the schemes, the shortfall, if not met by the holders of initial capital of '+I, andKor &overnment, will need a reduction of the benefits under the assured return schemes in an appropriate manner.

The '+I, 'ct should be repealed and replaced by a new enactment. In enacting this 'ct, it should be ensured that the &overnment is totally distanced from '+I, and transaction costs 2e.g. stamp duties, ta6es etc.3 are minimised, if not eliminated and the .wnership of the assets vests in the '$4 at the lowest possible cost. If the '+I, 'ct were not to be repealed but merely amended, there is a danger that the &overnment may be left with residual responsibilities under the 'ct,

.#

which would result in a public perception of continued &overnment accountability. In such a situation, it may become necessary to give '+I, a fully &overnment character with senior@most positions in '+I, being manned by &overnment officers. 4learly this is not a preferred outcome but it is mentioned only to emphasise the fact that accountability cannot be divorced from day to day management responsibility. ( -i 4 ,. Lit &atu& (Q ':: accounts, #/1* has been a wonderful year for investors in and managers of mutual funds. There has been a considerable increase in the assets under management of e=uity funds and profitability has thus increased for fund houses. Investors, too, have never had it so good. $any of the new mutual funds schemes in which investors poured substantial sums have performed reasonably well. 'nd the new schemes have not been stark under@ performers, as in earlier years. They have categorically reinforced the fact that mutual funds remain the most suitable avenue for retail investors to build wealth. Qet the mutual funds industry remains driven by the kind of marketing initiatives where the interest of the brokers is paramount. There are no debates on what could be done to save investors from the clutches of the brokers or on product development. Fisibly, there are no attempts to link product development to feedback from investors and market performance of funds. Inefficient products are left unaddressed, suggesting a lack of research into product performance. 1otably, communication about assessment of fund performance is simplistic and conse=uently, in many cases, misleading. These may be a conse=uence of the small size of the industry as of now. 's its size improves, investor interests may regain their rightful place. There is, however, reason to believe that the industry structure does not provide scope for developments. The mutual fund industry may be forced to focus on doing simple things, mainly managing inde6 funds better. Innovations that matter may be driven into the fold of private e=uity unless the incentive structure is re@worked. In ..i+i nt %&,du+tsO ' sore point about mutual funds is that inefficient products are !ust left to languish. ,ubstantial sums invested in sector funds, inde6 funds, bond

.)

funds, balanced funds and monthly income plans are under@performing. We are, however, yet to see the kind of restructuring necessary to make them more suitable to an investor0s portfolio. -or instance, indices such as (,5@1// and (,5@#// have consistently outperformed the ,ense6 and the 1ifty by about four percentage points per annum over the past three years. There is, however, no attempt to introduce inde6 funds at least on (,5@ 1//. The introduction of a (,5@1// Inde6 fund would at least provide investors with the option to switch from under@performing ,ense6 and 1ifty funds. There is no talk of such an inde6 fund now. (ut there may be when the market is in a bearish phase and investors0 risk aversion has increased. It may not make sense then, though. 'nother case is $onthly Income lans. They have been perennial under@performers. $onthly Income lans have, on average, recorded returns of E per cent over the past 1# months. This is below the 1/ per cent returns for 4risil $I (lended Inde6. The actual under@performance is higher as the 4risil Inde6 is based on 1ifty returns. If you replace 1ifty returns with average performance of diversified e=uity funds, the e6tent of under@performance would increase substantially. ;as anything ever been done to address this issueI 4ommunication relating to the performing class D diversified e=uity funds D too is highly simplistic. The answers to =uestions on what is behind performance D stock selection or higher risk taken by the fund D are unavailable. ' dispassionate en=uiry into e=uity fund performance may be beyond fund@houses. They could, however, indicate to investors how much additional risk is taken by the fund@houses, such as that increased investments in mid@cap and small@cap stocks contributed to performance. -und of funds is a practically stillborn concept. There is also no attempt to improve the efficiency of balanced funds or market them better. (alanced funds and -und of -unds should occupy pride of place in a retail investor0s portfolio. (ut that is not the case.

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In+ nti- st&u+tu& O This is how it looks when you take a snapshot of the mutual fund industry now. (ut it could change for the better. 'fter all, the mutual fund industry even now controls less than # per cent of household assets. The incentive structure for managers could militate against such developments. $utual funds take home a flat fee based on volume of assets under management and not on performance. If size of assets increases because of performance, then indirectly fees will also rise. ;owever, if assets desert after performance, the loss to fund managers is heavy. There is nothing in the incentive structure to drive a fund manager to do the best for retail investors. There is definitely a case for working out a fee structure that pays fund managers a flat fee plus additional compensation for performance over a three or five@year period. $any talented fund managers have already left for the harsh performance@based but lucrative world of private e=uity investing. It may not take much to retain or regain talented fund managers. $aybe even a mere ten per cent of e6cess gains over a benchmark would be enough. Without sharing at least a small part of the gains, mutual fund investors can neither hope for better research nor can they hope to retain the best performing managers. 's talent flees, in !ust 1/ years, investors will be forced to seek the safe havens of low@ cost inde6 funds. erforming diversified e=uity funds or balanced funds would become a thing of the past. 5nthusiasm of fund@houses would then be sustained only until product launches and only until that product category registers returns. 's seasons change, the focus of marketing initiatives will change. Inefficient products will continue to languish as they do now. The mutual fund industry has been on a good run and, at least as of now, can boast of e6tremely talented people in its ranks. The status "uo is, however, not the recipe for continuing the good show. ,5(I, '$-I, fund@houses and investors need to usher in changes that help the Indian mutual fund industry achieve a uni=ue position in the world of investing. The &overnment in order to protect the interests of #/@million@odd investors of 8nit Trust of India 2'+I,3 announced a structural reform package, covering a "s 1*,.<1@ crore bail@out for the 8,@<* and all assured return schemes and eventual privatisation of '+I,0s schemes. ..

To start with, '+I, would be split into two entities @ @ '+I,@I and '+I,@II. '+I,@I would cover the 8,@<* and the $onthly Income lan 2$I 3 schemes, while the various net asset value@based schemes will be hived off to '+I,@II. The latter would also include the units of 8,@<* issued after Aanuary #//#, when the scheme became 1'F@based. -urther, while '+I,@I will managed by a &overnment@appointed administrator and team of officially@nominated advisors, '+I,@II will be headed by a professional chairman and board of trustees. The brand e=uity of '+I,, too, will go with '+I,@II, which will eventually be disinvested or privatised. The bifurcation will be done through The 8nit Trust of India 2Transfer of 8ndertaking and "epeal3 (ill, #//#, to repeal the '+I, 'ct, the -inance $inister, $r Aaswant ,ingh, told newspersons here after the 4abinet 4ommittee on 5conomic 'ffairs cleared the '+I, package. Investors who redeem 8,@<* units even after $ay #//< will continue to get the administered repurchase price of "s 1# per unit up to .,/// units and "s 1/ per unit beyond .,/// units, following the &overnment0s decision to provide open ended@ support to old investors of the scheme. The move is e6pected to ease the redemption pressure in 'pril and $ay #//<. Ta6 concessions will be e6tended for the 8,@<* scheme @ @ on dividend income and capital gains @ @ to make it attractive for unit holders to remain within the scheme. The &overnment will also reset the interest at a lower level in five $I schemes, where only the principal amount is assured and the dividend can be reset. -oreclosure of some of the $I schemes is also being considered, sub!ect to this being permitted under ,5(I regulations. (oth '+I,@I and '+I,@II would be structured as per ,5(I regulations. The total asset value of all '+I,@run schemes aggregates to "s *#,/// crore as on Aune )/ @ @ "s 1?,?H* crore for the 1'F@based schemes and about "s #.,/// crore for the 8,@<* and other assured return schemes.

.<

>The decision to spilt the fund into two entities forms the cru6 of the structural reform package for '+I,. The ob!ective is to have a working, healthy mutual fund run by a professionally@managed team,> the -inance ,ecretary, %r ,. 1arayan, said. 'ccording to him, the &overnment has now moved two steps forward after the decision taken by the 445' last year to provide full assistance to the 8,@<* scheme. The first is the move to allow open@ended redemption for investors in 8,@<* and the second is the commitment to bridge the shortfall in the assured return schemes. The current shortfall in 8,@<* is estimated at "s <,/// crore, of which the '+I, has already been provided cash support of "s H// crore and another "s .// crore is in the pipeline. The pro!ected liability of the balance "s ./// crore will be met through the issuance of bonds tradable in the market. ' similar mechanism will be worked out for assured return scheme where the estimated liability is around "s H,.<1 crore. >The &overnment is fencing out the liabilities in the 8,@<* scheme and other assured return schemes. 'n investor who holds on to the 8,@<* unit beyond $ay #//< can only sell it back to the '+I, and it cannot be re@circulated in the market. We may, however, consider allowing these units to be recirculated at 1'F,> said %r 1arayan. '+I,@I would effectively cease to e6ist once all investors move out of the 8,@<* and the assured return schemes. The basket of assets and liabilities of '+I, will be transferred to the two entities after the repeal of the '+I, 'ct. 4ommenting on the decision of the &overnment %r.9urian, 4hairman, 'ssociation of $utual -unds in India 2'$-I3 and former trustee of '+I,. in an interview to (usiness :ine 4orrespondent on /H./E.#//# has stated as underO The '+I, development is a welcome one and gives a positive signal to the industry, investors and market because the uncertainty with regard to solving the problem of the institution is over. ,ince 1EEH, '+I, has been passing through a difficult situation. Than came the #//1 problem. 1ow, various committees and recommendations later, the problem has been solved. I think it is to the credit of the &overnment even though it has taken a pretty long time to do so.

.?

'":I'$51T has given its nod for the bifurcation of 8nit Trust of India into two companies @'+I,@I and '+I,@II @ with the "a!ya ,abha on Tuesday giving its assent on /).1#.#//# to the '+I, 2Transfer of 8ndertakings3 (ill, #//# by a voice vote. The (ill has already been passed by the :ok ,abha. 'ddressing the "a!ya ,abha, the -inance $inister, $r Aaswant ,ingh, assured that the &overnment would meet its commitments to the investors. The -inance $inister said that '+I,@I will not float any new scheme and all e6isting commitments would be met by the &overnment, while '+I,@II would be started as a ,5(I regulated, asset managed and market competing scheme. ;e assured the ;ouse that there would be no retrenchment of '+I, employees. >'ll of them would be put on the '+I,@II attendance register with an option that they could take si6 months to decide if they wanted to take voluntary retirement.> '+I, $utual -und has come into e6istence with effect from 1st -ebruary #//<. '+I, 'sset $anagement 4ompany presently manages *# 1'F based domestic ,5(I compliant schemes and * 7ffshore funds having a corpus "s.1.,#*) crore from about 1/ million investor accounts. The Important -ollow@ups for '+I, $utual -unds are Ad' & n+ t, @ st %&a+ti+ s/ Status and Futu& A! nda B< Int&,du+ti,n The I7,47 has set out three ob!ectives@@protection of investors, ensuring fair, transparent and efficient market and reduction of systemic risk@@which securities regulations need to address.< -urther, to enhance the ability of the regulatory system to attain these ob!ectives, the I7,47 has also laid down a set of guiding principles. 2see 'nne6ure II3. 's we have discussed in the last section, the reform initiatives taken in the past decade have addressed these ob!ectives in varying degrees, which have resulted in the emergence of a more modern and competitive securities market. In this section, we attempt to evaluate the e6isting regulatory framework broadly using the I7,47 principles as criteria and to identify problem areas, which call for future reform initiatives to strengthen the current system. This chapter is divided into five sections. The second section deals with regulatory issuesO the regulators0 mandate, .H

their autonomy, powers and capacity to enforce regulation and their coordination to make regulations effective. ,elf@regulation as well as prudential issues are also discussed under this section. The third section outlines the legal issues concerning the securities market. The fourth section deals with crosscutting themes relating to the regulated market, namely, market infrastructure, and issues relating to primary market and transparency. The challenges facing the mutual fund industry are discussed in the fifth section. The discussion in this chapter provides some e6amples of current practices, recognizing that these practices will and should change as the markets change and as technology and improved coordination among regulators make other strategies available. >< ( !ulat,&* Issu s #$% The Regulator The regulatory responsibility of the securities market is vested in the ,5(I, the "(I, and two government departments@@%epartment of 4ompany 'ffairs and %epartment of 5conomic 'ffairs. Investigative agencies such as 5conomic 7ffences Wing of the government and consumer grievance redressal forums also play a role. The ,5(I, established under the ,5(I 'ct, is the ape6 regulatory body for the securities market. (esides regulation, the ,5(I0s mandate includes responsibilities for ensuring investor protection and promoting orderly growth of the securities market. The "(I, on the other hand, is responsible for regulation of a certain well@defined segment of the securities market. 's the manager of public debt, the "(I is responsible for primary issues of &overnment ,ecurities. The "(I0s mandate also includes the regulation of all contracts in government securities, gold related securities, money market securities and in securities derived from these securities. To foster consistency of the regulatory processes, the ,5(I is mandated to regulate the trading of these securities on recognized stock e6changes in line with the guidelines issued by "(I. 'lthough there is a clear division of regulatory responsibilities between "(I and ,5(I, and efforts have been made to make the regulatory process consistent, the distribution of regulatory responsibilities among a number of institutions can potentially create confusion among the regulated as to which body is responsible for a particular area of regulation.

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To ensure operational independence and accountability in the e6ercise of functions and powers by the regulators, ,5(I and "(I have been constituted as autonomous bodies and are established under separate acts of the arliament. (oth regulators are accountable to the arliament through 4entral &overnment and the regulations framed by them are re=uired to be laid before arliament by the 4entral &overnment. ? There is also a system of independent !udicial review of the decisions of ,5(I and "(I. 'lthough the ,5(I and the "(I are operationally independent, the government can issue directions to both in policy matters. #$# &n'orcement o' Securities Regulation The ,5(I has powers to carry out routine inspections of market intermediaries to ensure compliance with prescribed standards. It also has investigation powers similar to that of a civil court in terms of summoning persons and obtaining information relevant to its en=uiry. 'ction is taken on the basis of investigation. The enforcement powers of ,5(I include issuance of directions, imposition of monetary penalties, cancellation of registration and even prosecution of market intermediaries. To ensure effective and credible use of enforcement powers, the ,5(I has adopted measures such as development of a stock watch system, uniform price bands and establishment of a $arket ,urveillance %ivision.H While ,5(I has powers of direct surveillance of the stock e6changes, members of stock e6changes and other market intermediaries registered with it, ,5(I has no powers over listed companies. -urther, the present penalty levels in many cases are not high enough to effectively deter market players from regulatory violations. In particular, the amount of monetary penalty for non@compliance with respect to disclosure, information re=uirements, insider trading and market manipulation is very inade=uate. To cite an e6ample, a ma6imum monetary penalty of only "s.1, ///K@ can be imposed in case of failure to comply with the provisions of listing agreement. ,imilarly, under the ,5(I 'ct the penalty for insider trading and non@disclosure of ac=uisition of shares and takeovers is only "s.. lakh. The &roup believes that there is a need to allow ,5(I enhanced authority
U

and powers to impose penalty

commensurate with the gravity of the violation 2i.e., disgorgement powers3. E 'n additional problem relates to delays in taking action against those who commit frauds. ' number of companies, which had collected funds in the past through public

</

issues, cannot even be traced. To take action against such companies and bring their %irectors to book, a number of initiatives have been taken including the establishment of 4entral 4oordination and $onitoring 4ommittee 244$43, with ,ecretary, %4' and 4hairman, ,5(I as its co@chairmen. ;owever, only limited success has been achieved. 4learly, the enforcement procedures are cumbersome, time@consuming and involve too many agencies. There is a need to streamline the procedures to =uickly detect frauds and take appropriate remedial measures. In addition to the problem stated above, the slow response in case of frauds results from long delays arising from the obligation to follow due process. 's a regulatory body has to be accountable for its action, by implication, it gives the alleged institution an opportunity to show cause why action should not be taken. There is a need to streamline the procedures relating to due process. 'lso, dealing with cases of suspected fraud often re=uires freezing the situation, while the legal process is being pursued. This happens in India, but the decision to freeze the situation often takes time. #$3 %oo&e'ation in Regulation Farious segments of the domestic financial market are getting increasingly integrated. There have also been progressive linkages between the domestic and international capital markets. 's a result, the regulatory interventions or their absence in one market tend to have repercussions in other markets that are more serious and more widespread than in the past. -urther, with the emergence of more and more financial supermarkets and growing comple6ity of financial transactions, there are increasing instances of the same market intermediary coming under the purview of multiple regulatory bodies. These factors have raised the potential for regulatory gaps as well as overlaps, thereby underlining the need for greater cooperation among various regulators. 4urrently, coordination among domestic regulators is occurring through the ;igh :evel &roup on 4apital $arkets 2;:&4$3 comprising the "(I, ,5(I, the I"%' and -inance $inistry. The ;:&4$ has set up two ,tanding 4ommitteesO one for regulatory coordination and the other for coordination in matters relating to the development of debt markets. The 4ommittee meets periodically to e6change

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information and views. (esides, to address specific issues such as %v system or asset securitization, the "(I and ,5(I have been coordinating through the institution of working groups. The &roup observes that there is scope to further strengthen the coordination efforts. There may be merit in formalizing the ;:&4$ by giving it a legal status. (esides, the ;:&4$ needs to meet more fre=uently and its functioning needs to be made more transparent. 'lso, a system needs to be devised to allow designated functionaries 2not necessarily only at the top level3 to share specified market information on a routine and automatic basis. 's regards coordination with regulators in other countries, the "(I has put in place a system of e6change of need@based information in respect of international operations. ;owever, the powers of ,5(I to assist foreign regulators or to enter into $78s or other cooperation arrangements are not e6plicitly provided by legislation, although ,5(I has signed a $o8 with the ,ecurities 56change 4ommission of the 8,'. ;ence, the &roup is of view that necessary legislative changes need to be made to enhance ,5(I0s scope in this regard. #$ Sel'-Regulation The ,5(I 'ct provides for promotion and regulation of ,"7s 2i.e., stock e6changes3. The stock e6changes are empowered to make rules and regulations for their members and for regulating the conduct of respective members. ;owever, self@regulation is not always effective, because the current ownership and governance structures of many stock e6changes allow scope for conflict of interest. 1/ These e6changes are owned and managed by members who en!oy e6clusive trading rights. In the broker@owned e6changes, brokers elect their representatives to regulate activities of the e6change, including those of the brokers themselves. This raises fairness issues, because the members of stock e6change governing boards have access to valuable information about market participants. 5limination of such conflict of interest through demutualization, which implies separation of ownership of e6change from the right to trade on it, can promote fairness and reinforce investor protection. -urther, the slow evolution of the 'ssociation of $utual -unds of India 2'$-I3 as a ,"7 has meant continuation of substantial regulatory burden on ,5(I. In this regard, the &roup suggests that ,5(I assist the '$-I to develop into a full@fledged ,"7. ,imilarly, in money and government securities markets, -i6ed Income $oney $arket

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and %erivatives 'ssociation of India 2-I$$%'3 and rimary %ealers 'ssociation of India 2 %'I3 are operating as industry level associations, who are gradually taking on the role of ,"7s. There is as yet no regulatory oversight of the "(I over these emerging ,"7s. ;owever, to facilitate these associations to emerge as full@fledged ,"7s, the "(I is engaging them in a consultative process, which needs to be further intensified. 7n their part, to promote integrity of the markets, -I$$%' and %'I need to establish a comprehensive code of conduct and best practices in securities transactions and also have a mechanism to enforce such codes. The "(I can play a supportive role here. #$( )rudential issues With a view to contain risk, secure market integrity and protect the interest of investors, the regulators have prescribed elaborate margining and capital ade=uacy standards. In addition, intra@day trading limit and e6posure limits have been prescribed. (rokers are sub!ect to various types of margins, viz., daily margins, marked@to@market margin, ad hoc margin and volatility margin. In case of e6cessive volatility or perceived higher risk, e6changes have been given the fle6ibility of imposing higher margins.11 ;owever, one lacuna that continues relates to the absence of margin re=uirement for institutional trades. The &roup recommends that this lacuna be addressed. ;< L !al Issu s *$% Institution-speci'ic regulations The legal framework constrains the "(I from e6ercising uniform powers vis@a@vis different groups of players, even though the activity regulated is the same because of a peculiar legal arrangement. The amended ,ecurities 4ontract "egulation 'ct 2,4"'3 has conferred on the "(I the responsibility of regulation of &overnment securities and money markets, but not the necessary enforcement powers to regulate these markets. To regulate these markets, the "(I therefore resorts to its regulatory authority over the ma!or participants in these markets such as banks, financial institutions and primary dealers through separate institution@specific legislation. With respect to banks, the "(I has statutory powers of inspection, investigation, surveillance and enforcement under (anking "egulation 'ct, 1E*E. 's regards financial institutions, the regulatory powers are available to the "(I under the "(I <)

'ct 1E)*. The "(I0s regulatory powers over -Is are not as comprehensive as over banks. With regard to rimary %ealers, the "(I e6ercises regulatory powers on the basis of guidelines issued by "(I and $78s signed between %s and "(I on a contractual basis. This underlines the need for 2a3 the same legislation to include both regulatory responsibilities and the authority to carry them out and 2b3 the focus to shift from institution@specific regulation to market@specific regulation. *$# +ultiplicit, o' Acts The problem of multiplicity of regulators, as referred to earlier, emerges from the e6istence of multiplicity of 'cts governing securities market regulation. The legal framework comprises inter alia the ,5(I 'ct, ,ecurities 4ontract "egulation 'ct 2,4"'3, Indian 4ontracts 'ct, 4ompanies 'ct, ublic %ebt 'ct, the "(I 'ct and the (anking "egulation 'ct. ,ome acts came into being to create regulatory institutions 2,5(I 'ct and "(I 'ct3, some to regulate contracts 2,4"' and Indian 4ontracts 'ct3 and yet others to regulate issue of government securities 2 ublic %ebt 'ct3. 'lthough the scope of the 'cts is well defined, problems of interpretation have led to confusion. There is therefore a need to simplify and streamline the legal framework. In this conte6t, the &roup believes that consolidating the ,4"' and the ,5(I 'ct in line with the recommendations of the %hanuka 4ommittee, will be very helpful. 2< Ma&E t issu s It is important to recognize the trade@off between over@regulation and high cost of compliance. 7ver@regulation may minimize market friction, but can potentially kill a market. To dilute this tradeoff, it is important to modernize the microstructure. 2$icrostructure relates to the manner in which a market is organized and the trading and post@trading technology the market adopts.3 's regulations become more and more comple6, certain regulatory ob!ectives can be more easily attained through changes in microstructure rather than further addition to regulatory law. $% +ar-et In'rastructure $%$% Screen-Based Trading S,stem 's enunciated in 4hapter II, the e=uities market has witnessed a =uantum improvement in trading technology during the 1EE/s as it moved away from the open@

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outcry system of trading to a computer screen@based trading. The new technology has not only increased transparency in trading, but also facilitated the integration of different trading centers into a single trading platform. ermitting of internet trading has enabled investors across the globe to route orders through the internet for e6ecution on the Indian stock e6changes. In contrast to the e=uities market, the government securities market and the market for money market instruments are largely negotiated markets. 'lthough the 1,5 established a wholesale debt market segment for e6change trading, members generally use this segment only for reporting trades undertaken by them in the negotiated market, rather than trading on the e6change. $%$# Rolling Settlement The stock e6changes in India have traditionally followed account period settlement system, which tends to distort the price discovery process since it combines the features of cash as well as futures markets. In contrast, the current international practice is predominantly rolling settlement 1# on a TV) basis, which introduces certainty of trades and reduces risk and delay in settlement. (eginning last year, compulsory rolling settlement has been introduced in a limited number of scrips on a TV. basis. The slow progress toward the introduction of rolling settlement is on account of 2a3 lack of availability of electronic funds transfer across the country and 2b3 a general apprehension that such a move will reduce li=uidity in the market. 5ven though a more effective payment and clearing system through a wider availability of 5-T is important for switch@over to rolling settlement , the &roup is of the view that even the current payment infrastructure can support a faster phasing@in. -urther, the view that rolling settlement per se will drain li=uidity from the market is not borne out by international e6perience. The &roup also suggests that "(I and ,5(I e6pedite their scrutiny of the recent recommendations made by the !oint task force of I7,47 and (I, on securities settlement systems, for early implementation. $%$* .epositories and demateriali/ation To ensure transferability of securities with speed, accuracy and security, the %epositories 'ct was passed in 1EE<, which provided for the establishment of securities depositories and allowed securities to be dematerialized. -ollowing the legislation, two depositories 21,%: and 4%,:3 have so far been established. -urther,

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the compulsory dematerialization of shares for trading purpose has been introduced in a phased manner with the aim of synchronizing the settlement of trade and transfer of securities irrespective of geographical locations, and eliminating the ills associated with paper@based securities system such as delay in transfer, bad delivery, theft and forgery. 'lthough the process of compulsory dematerialization is nearing completion, its full benefits have not been reaped because of slow progress in introduction of rolling settlement. With the appropriate infrastructure in place, there is now scope for taking further advantage of depositories to promote retailing of government securities. The "(I has taken a step in the right direction by allowing 1,%: and 4%,: to have a second ,&: account for depository participants who in turn can hold in custody government securities on behalf of the final investors. This will facilitate holding of government securities in demat form. $%$ 0learing 0orporations The stock e6changes supervise the buying and selling activities of brokers, but financial settlements are guaranteed by a clearing corporation, which creates a settlement guarantee fund to ensure settlement of trades irrespective of default by trading members. This arrangement, by nearly eliminating counterparty risk, has given a tremendous boost to investor confidence in India. -urther, in contrast to the current Indian system of each stock e6change having its own clearing corporation or clearing bank, it may be appropriate to have perhaps only two clearing corporations in line with international practice, which would support many stock e6changes. ,uch an arrangement would allow the clearing agency to have an overall view of gross e6posures of traders across the stock e6changes and would be much better geared to manage risks. $%$( .eliver, vs$ )a,ment In the government securities market, %v was introduced in 1EE* for transactions put through the ,&: accounts maintained in "(ICs ublic %ebt 7ffice 2 %73, which has greatly helped in reducing the principal risk. The ,pecial -und -acility introduced last year has to a certain e6tent reduced risk of non@settlement due to gridlock. The 'dvisory &roup on ayments and ,ettlement ,ystems 2;eaded by ,hri $.&. (hide3

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has made some suggestions for improving the payments and settlement systems and this &roup would concur with these suggestions. In the e=uity market there is currently no %v . The &roup notes that ,5(I and "(I are !ointly trying to evolve a mechanism, which would seamlessly link the depositories with the payment system through the clearing corporationK clearing agency to ensure %v . The &roup recommends that establishment of such a mechanism is e6pedited. $%$1 Straight-through )rocessing: ,traight@through rocessing 2,T 3 involves verification through Internet of 2i3 the

selling client0s % account for security balances following a sell orderL and 2ii3 the buying clients0 bank accounts for cash balances following a buy order. This system can eliminate nearly all settlement and payment risk. The significant changes taking place in technological and trading environment worldwide are driving the global securities industry towards ,T . ;owever, at present, all the pre@re=uisites for ,T are not yet available in India. While automated trading and dematerialization have been largely achieved, the limited availability of 5-T and absence of "T&, have constrained the introduction of ,T . These constraints are likely to be eliminated in the near future.

$# )rimar, Issues and Transparenc, $#$% )rivate )lacement +ar-et ;igh costs of regulatory compliance associated with public issues of debt have made issuers prefer the private placement market. The private placement market has registered tremendous growth in the last few years. In 1EEEK#///, private placements accounted for H* percent of total resources mobilized by the corporate sector. reponderance of private placement can potentially strip the market of its ability to discipline issuers and thereby enhance systemic risk. 7nce investors have used the private placement route, they cannot signal their changing evaluation of the business prospects of the issuers, because there is no market in which they can sell. The dominance of private placement in primary issue market possibly reflects an absence

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of regulatory level playing field in the sense that public issues may be over@regulated while private placements could be under@regulated. ,ome recent initiatives such as the amendment to the 4ompanies 'ct, making it mandatory for companies issuing debentures through private placement route to set up debenture redemption reserves as in the case of public issues, can partially restore the balance. 1) These initiatives need to be complemented by simultaneous efforts to ease some of the regulations governing public issues. $#$# 0orporate disclosure With a view to enabling investors to take informed decisions as well as to promote transparency, regulations have over the years become more stringent by re=uiring disclosure to be more fre=uent and wider in scope. 4urrently, disclosure in India e6tends to material having a bearing on the price of a security, and entities who either have significant interest in a company or seek management control. ' company offering securities is re=uired to make a public disclosure of all relevant information through its offer documents. 'fter a security is issued to the public and subse=uently listed on a stock e6change, the issuing company is re=uired to make continuous disclosures, including through publication of yearly audited balance sheets and =uarterly un@audited financial results. $oreover, the disclosure of material information, which could have a bearing on the performance of the company, has to be made available to the public immediately. 'mong the drawbacks, the NtimingC and NcontentsC of disclosure of material events that impact prices are not unambiguously specified and followed. "ecently, it has been decided that companies would be re=uired to make decisions regarding dividend bonus and rights announcements or any other material event within 1. minutes of the conclusion of the board meeting where the decisions are taken. In terms of contents of disclosure, the following initiatives are necessaryO 2i3 group company disclosures may be limited to top . companies by market capitalization or turnover, to avoid cumbersome e6ercise of gathering information from all companies falling under the definition of promoter groupL and 2ii3 risk factors need to be given in greater detail as per international practices, although management perceptions of risks need not be given.

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$#$* Transparenc, in the de2t mar-et 's regards transparency in trading, the debt market is lagging behind the e=uity market. The cash market in debt securities throughout the world prefers to operate through negotiated deals either through telephone or an electronic dealing system like (loomberg. This is because unlike the e=uity market, the bond market participants are generally wholesale institutional investors who put in large deals at a time, which may not always be possible through the screen based order driven system. It is only in the futures market that the principles of anonymity, price time priority, nationwide market and settlement guarantee are known to work. 's stated earlier, wholesale institutional investors have yet to show ade=uate inclination to use the anonymous order matching system for e6ecuting their debt securities transactions. 8nder the circumstances, ,5(I has taken initiatives to foster transparency through regulatory fiat by prohibiting negotiated deals on the e6changes in respect of listed corporate debt securities and prescribing that all such trades would be e6ecuted on the basis of price and order matching mechanism of stock e6changes as in the case of e=uities. ;owever, negotiated deals are still continuing, albeit outside the e6change, and there is no market dissemination of information on such transactions. ,ince almost all deals in the government securities market are settled through the ,ubsidiary &eneral :edger 2,&:3, the daily dissemination of such information 2albeit with a one day lag3 has proved to be important in the price discovery process.3 This, together with the data available from the 1,50s Wholesale %ebt $arket 2W%$3 segment has contributed to greater transparency in the secondary market for government securities. Transparency will be further boosted by the current initiative to put in place an electronic negotiated dealing system for the ,&: participants, which will disseminate information on a near real time basis. 3< Mutual Funds ,5(I is the principal regulator of the mutual fund industry. $utual funds in India are constituted in the form of trusts. The fundCs sponsor e6ecutes the trust deed, which outlines the liabilities and obligations of the trustees in relation to the unitholders. The day@to@day operations of the fund are carried out by the asset management company 2'$43.
1*

The board of trustees oversees the fundCs activities and enters into a

management agreement with the '$4.

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,5(I has put in place standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme. 5ligibility criteria have been set in terms of net worth, track record and internal management procedure. The regulations lay down disclosure re=uirements, procedures for calculating and declaring net asset values 21'F3 of mutual fund schemes, accounting standards and a code for advertisements. "egulations are also prescribed to ensure arms@length relationship between the trustees and the '$4. ,5(I is responsible not only for registration and authorization of schemes, but also for inspection of registered mutual funds and remedial action against any regulatory infraction. %isclosure standards of mutual funds have been under regulatory focus. ,5(I re=uires disclosure to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investorCs interest in the scheme. "egulations have prescribed specified format for offer documents as well as a disclosed basis for asset valuation and the pricing and the redemption of units in a mutual fund. With a view to make unitholders aware of the securities in which the funds have been invested by the mutual fund, it has been made mandatory for mutual funds to send to all unitholders a complete statement of the scheme portfolio on a half@yearly basis. The mutual fund industry has played a significant role in mobilization of domestic savings. ,ubstantial progress has been made in strengthening regulation and improving transparency in the mutual fund industry through the $utual -unds "egulations of 1EE< and subse=uent amendments. ;owever, a number of challenges still remain, which are outlined below. The '+I, is the largest mutual fund in India, which was set up by an 'ct of the arliament 2the '+I, 'ct, 1E<)3. 's such it is bound by the '+I, 'ct and not by mutual funds regulations, although under a voluntary arrangement, ,5(I oversees all the investment schemes launched by '+I, since 1EE*. The organizational structure of the '+I, differs from other mutual funds in two additional ways. -irst, there is no separate '$4 with an independent (oard of %irectors. ,econd, there has been no separation of management groups managing schemes launched prior to 1EE*L regulations apply only to schemes established after 1EE*. 4urrently, there are four '+I, schemes@@8,@<*, 8:I @?1, 4"T,@H1 and 444-@E)@@which do not comply with ,5(I regulations. The 8,@<*, the flagship scheme of the '+I, and the largest scheme in India, does not have a disclosed basis for asset valuation or pricing of units

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although it has plans to move towards this.

1.

(ringing the '+I, under ,5(I0s

purview as well as the introduction and implementation of international accounting principles across the mutual fund industry will help promote fairness and stability of the sector. 4urrently, regulations appropriately re=uire that the sale and redemption of funds should be based on their 1'Fs, which have to be computed according to specified rules. ;owever, there is scope for further improvement in one significant areaO '$4s still have considerable room for discretion in adopting valuation of thinly traded or non@traded securities, as regulations specify only broad guidelines. There is a need to reduce the '$4s0 discretion in this regard. -inally, a couple of issues relating to prudential norms and corporate governance need to be e6amined. "egulations provide that a fund0s ownership in any single company should not e6ceed 1/ percent of a company0s voting shares, although there is no upper limit on the total holdings of voting and non@voting shares of any single company. -urther, there appears to be no restriction on corporate investment in a mutual fund0s units.

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G,- &nm nt (,l ,n Mutual Funds

?#

G,- &nm nt (,l ,n Mutual Funds

Mutual "unds to be mo'e t'ans&a'ent -inance $inister Qashwant ,inha called upon the mutual funds to focus on product innovation, e=uity research, risk management and market reach, and endeavour to instil greater confidence among investors. ;e was addressing the si6th annual seminar of the mutual fund industry in (ombay on Thursday. 4iting "(I data and the ,5(I 14'5" survey, ,inha said out that less than H per cent of households channelise their savings into capital markets and that !ust 1 per cent of household investment is in e=uity markets. ,inha felt that higher transparency and good corporate governance by mutual funds could attract greater =uantity of household savings, which they could cost effectively deploy in the capital markets. ,inha said that inade=uate institutional mechanisms may be the reason for households shying away from the market. ;e said all that the retail investor looked for was to ma6imise return on investments, while the market volatility had placed some constraints. ;e opined that mutual funds should spread their findings of e=uity research, educate the investors and raise their level of awareness. This would have an impact and then capital market investment can become a reasonable proposition for retail investors. "eferring to the stock market, ,inha said that the popular perception of bulls and bears impacting the market has undergone a sea change. ;e felt that a better way to correct short@term volatility is to place more emphasis on investments that could be governed by medium@ and long@term views based on scientific research. ;e asserted these developments will enable mutual funds to create greater confidence in the mind of investors. The finance minister stressed that market manipulation can be ended and e6cess volatility arrested if there is more market depth. $utual funds have to increase their

?)

market reach to rural areas as :ife Insurance 4orporation has done and bring such money into the market and create that depth. ,inha looked forward to receiving specific proposals from "(I and ,5(I on the need to create a level@playing field for the mutual funds vis@W@vis foreign institutional investors. This would not only strengthen the mutual fund industry but also help the domestic savings to be channelled into the capital markets through mutual funds. $utual funds have a primary responsibility of creating investor awareness and offer a sustainable return over a medium to long@term period. -inally, the finance minister recalled that the prime minister had set forth an ob!ective to double the per capita income which would translate into achieving a growth rate of E per cent. 7n this basis, the savings rate of #. per cent of &% is inade=uate as seen against the stiff &% growth target of E per cent. The only way to meet the growth target is to broadbase the investor segment by taking it retail and by bringing more household savings into capital markets, ,inha indicated. (imal Aalan, "(I &overnor, pointed out that mutual funds can provide financial and macro@economic stability. Towards this end, he urged mutual funds to offer products which cover the entire spectrum of risk@return profile in order to meet wide@ranging saving habits among Indians. 56pressing unease with assured return schemes, he saidO >We have to build risk@ management systems which are able to create a good asset@liability match in portfolio taking into account the time profile of the scheme.> % " $ehta, chairman, ,5(I, while sketching the growth of the mutual fund industry, pointed out that the participation of the households in the mutual fund industry is still low, considering the size of savings flow and offers scope for growth. ;e said that the competition, regulatory initiatives and product choice in the mutual fund industry should result in greater amounts of investor funds being intermediated through the mutual fund industry, rather than being directly invested in the capital markets.

?*

;e indicated that investor confidence in the industry will go up only when operational freedom of mutual funds and levels of compliance of the players go up. ;e also outlined the initiatives ,5(I is taking, through the various committees. 'mong the issues under active consideration areO

"eduction in the processing of investor applications in the initial offer period to *# days from E/ daysL

8se of unclaimed funds lying with mutual funds for investor educationL 4reation of level playing field between mutual funds and -IIs in the conte6t of international investing

-ormulation a code of conduct and development of best practices in the industryL

,tandardisation of portfolio disclosuresL $odification in the structure of mutual funds to company form of organisationL and

ublication of the annual reports of asset management companies.

;e said that the Indian markets are very safe, despite the growing volatility that has been seen in the recent period. '+I, chairman, , ,ubramanyam said that the =uality of investor services in the

industry has grown over the years. ;e said there is a scope to increase the penetration and volumes in the mutual fund industry by reaching out to more investors. ;e noted that technology has significantly altered the manner in which mutual funds conduct their business. In the conte6t of globalisation of capital markets, he pointed out that risk management has become critical for mutual funds. ;e also indicated that corporations will have to adopt best practices in information disclosure and dissemination. ;e said that as stakeholders in companies in which they invest, mutual funds have the responsibility to ensure acceptable standards of disclosures. They have a constructive role to play in creating an environment that help in adoption of best practices and

?.

good governance. This will go a long way in enhancing shareholder value leading to enhancement of unit@holder value. ' 9urien, chairman, 'ssociation of $utual -unds of India, mentioned that it is for

the first time that the finance minister, the "(I governor and the ,5(I chairman came together on a common platform to address mutual funds. This is indicative of high growth prospects, he opined. ;e suggested that the pension fund segment be opened to the mutual fund industry. The mutual fund industry gets together every year to take stock of the past and future strategies, keeping the investor0s preferences in sharp focus. '+I,, the industry leader, the '+I, Institute of 4apital $arkets and '$-I have taken the initiative to create the right forum for meaningful discussions on the issue. I1 a report that is not distinguished by particularly sharp insights, the Aoint arliamentary 4ommittee 2A 43 which conducted a prolonged in=uiry into the stock market meltdown of $arch #//1, provides one useful nugget. The scandal that rocked the markets in 1EE#, it observes, was one of great depth and intensity, in which a relatively small number of people were involved. The $arch #//1 episode, in comparison, was one of great width and e6panse. It involved a large cast of characters, though none was as deeply implicated as the key players of 1EE#. The observation comes e6actly nine years after a predecessor body submitted a voluminous report on the 1EE# scam and recommended a number of remedial measures. When ;arshad $ehta, (hupen %alal and various others fought their epic battles on the bourses in 1EE#, liberally dipping into bank treasuries for ammunition, the government had a number of alibis availableO the "eserve (ank of India 2"(I3 was burdened by an outmoded system of overseeing the integrity of funds management by banks, the ,ecurities and 56change (oard of India 2,5(I3, though in e6istence for four years, was not armed with statutory powers to check abuses in the stock markets, and the government for its part had mistakenly been looking at the options available in controlling the financial sector rather than in governing it. The institutional lacunae were bridged within months. The "(I had a fully automated audit system in place before 1EE# had run its course and ,5(I was invested with the re=uisite statutory powers by an act of arliament. The philosophical problem of altering the outlook of the government was also addressed in substance over the ?<

decade, with the respect for the free play of market forces becoming entrenched within official circles. ;ow then did #//1 bring a virtual replay of the 1EE# scam, with perhaps more damaging long@term conse=uencesI This is a =uestion the more recent A 4 fails to address seriously, rendering its report an e6ercise in evasion. The A 4 observes, rather portentously, that all its findings and recommendations would be futile if the implementation process were to falter. 'nd to ensure that its recommendations are put into practice, the A 4 chose to e6amine what was the fate of the recommendations of its predecessor body in 1EE). 'nd the record here is fairly dismal. The A 4 found that inspections by the "(I, when they were conducted, were cursory. There was >a lack of concern> and >strict action> was taken only when matters >went out of hand>. ,5(I for its part seemed absent without leave when its presence was most re=uired. The A 40s in=uiries revealed that ,5(I0s nominee directors on the 4alcutta ,tock 56change 24,53 (oard established a record of sorts in absenting themselves from supervisory meetings. In the period preceding the payments crisis that paralysed the 4,5 in $arch #//1, one of the ,5(I nominees had not attended even one of the #< meetings held during his tenureL another attended a mere three out of 1), though the third nominee had a more respectable record of attending #. of <# meetings. ,5(I0s record of absence is considered crucial by the A 4, since, in its narrow reading, the 4,5 crisis was a direct outcome of the failure to enforce margin money re=uirements on share transactions. ,5(I0s negligence was compounded by the deliberate design of a cabal of brokers on the 4,5. (ut this is an aspect that the A 4 chooses not to probe too deeply. What could possibly account for the impunity with which brokers operate, and where could they be obtaining the funds and the guidance for their periodic speculative rampages through the boursesI There are several !unctures at which the A 4 points towards the ne6us between big business houses and the broker community. (ut having broached the sub!ect, it retreats into e6treme diffidence, unwilling to get tangled up in the issue. The A 4 reveals that following the recommendations of its predecessor body, a >special cell> was set up in $umbai, headed by the %irector@&eneral of Income Ta6, ??

$umbai, and comprising representatives from the "(I, the %epartment of 4ompany 'ffairs 2%4'3 and the 4entral (ureau of Investigation 24(I3, to e6amine and monitor the role of big business houses in the stock markets. The cell died an early death. The ,5(I 4hairman was the first to spurn it, arguing that no useful purpose would be served by nominating a ,5(I representative to serve on it. In $ay 1EE., after the cell had met precisely five times in a life of 1? months, it sent a representation to the 4entral (oard of %irect Ta6es 24(%T3, seeking the deployment of ade=uate manpower to fulfil its mission. The 4(%T replied that given its limited mandate, the cell could function with the available manpower. There was no further meeting of the cell until $arch #//1, when a newly minted broker coterie unfurled its own re@ enactment of 1EE# on the nation0s bourses. K tan 1a& E'< 's it went about its in=uiries, the A 4 asked the %irector@&eneral of Income Ta6, $umbai, to e6amine afresh the possibility of collusion between the broker lobby and big business houses. The reply was perfunctoryO there was no reason in the prevalent circumstances, said the official concerned, to believe that there was any such ne6us. >1o cases were found,> the A 4 records, >where funds were placed by industrial houses directly with the brokers enabling them to play... 2the market3 with a view to create artificial booms or depressions so as to book abnormal profits to the detriment of the common investor.> 's a body with wide@ranging powers of summoning evidence, the A 4 could not obviously remain content with this evasion of reality. (ut its own in=uiries were, by all accounts, clouded by a wilful desire to mystify rather than illuminate. 'fter identifying no fewer than ?#? scrips which witnessed rapid and une6plained rises in values in the months preceding $arch #//1, and 1EE which witnessed a rapid fall in prices following the discovery of the scam, the A 4 asked ,5(I for detailed e6planations. The outcome was inconclusiveO the A 4 has identified no fewer than 1. companies where there is evidence to believe that the collusive ne6us between brokers and promoters could have had a serious impact on market behaviour. These include well@known companies like Xee Telefilms, "anba6y and :upin :aboratories, as well as companies that have deservedly entered the annals of infamy, like 4yberspace Infosys, ;imachal -uturistic and %,T ,oftware. $7,T revealingly, the A 4 has virtually disowned its responsibility to ascertain the true picture, offering an alibi that must seem rather lame. 's the A 4 e6plains in the

?H

rather tortured synta6 that its report is suffused withO >,5(I furnished four sets of interim reports inclusive of its investigation regarding scrips of certain corporate bodies. The 4ommittee0s insistence for ,5(I0s final findings regarding the role of promotersKcorporate bodies in the price manipulation of the scrips yielded yet another set of reports, most of which were again of interim nature and were received as late as 1ovember #//#. %ue to non@availability of final report from ,5(I, the 4ommittee could not have the opportunity to take oral evidence of these corporate bodies. The 4ommittee urge ,5(I, the %epartment of 4ompany 'ffairs and other investigative agencies to e6pedite and complete their investigations...> This must seem a rather disappointing abdication of responsibility by the A 4, especially since it is followed by the definitive finding that >there are valid reasons to believe that the corporate house@broker@bank@-IIs 2foreign institutional investor3 ne6us played havoc in the Indian capital market =uite sometime 2sic3 now through fraudulent manipulations of prices at the cost of the small investors>. (ut there is also a telling admission thrown in that the abdication of responsibility is a direct conse=uence of the A 40s failure to e6ercise its powers appropriatelyO >This 4ommittee were severely handicapped in the matter of making any purposeful recommendations because of non@availability of re=uired support from concerned regulatory and other bodies with necessary material.> (y any criterion, this admission of helplessness by a committee of arliament, which has endowed the regulatory authorities with all their powers, must seem e6traordinary. 'nd by any reasonable evaluation, the material that the A 4 had to draw its inferences from was nowhere near as meagre as it has made out. ,5(I had submitted a series of voluminous reports early in #//#, which went into a microscopic e6amination of the many dubious transactions that culminated in the short@lived bull run in the markets after the 8nion (udget was presented in -ebruary #//1. The picture it drew was fairly clearO though the (udget in itself provided rather a scant basis for a broad@based investment fervour, a small cartel of bull operators sought to utilise the momentary euphoria it had engendered to drive up prices and li=uidate the long e6posures they had taken. It was a self@defeating e6ercise since a rival cartel of bear operators knew from prolonged observation, !ust where the vulnerabilities of the bulls lay. ,hrewd short@selling in the e6pectation of profits to be made on the downside of the markets, rapidly pushed prices down.

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(ut the bulls had by then gone too far out on a limb. In a climactic contest between bulls and bears, stock markets nationwide plunged into an acute payments crisis, necessitating their closure for an e6tended period. The A 4 concludes that 9etan arekh, >big bull> reincarnate and the acknowledged kingpin of the buying frenzy, >was a key person involved in all dimensions of the stockmarket scam... as also in payments problem in the 4,5 and the crash of $adhavpura $ercantile 4ooperative (ank>. arekh created >various layers> in his transactions, making it >difficult to link the source of fund 2sic3 with the actual user of fund>. ;e admitted during testimony before the A 4, >that his entities did build huge positions in the market in select scrips 2and3 grossly over committed themselves to the market>. The estimated loss suffered by arekh was underwritten entirely by banks and the corporate bodies that he had mulcted for funds. 'nd even if the corporate bodies were party to his wrongdoing and have no entitlement to compensation on this account, the A 4 urged that >e6peditious action> be taken to recover the money owed to the banks. The task will not be easy by any reckoning. In=uiries by the 4(I have revealed the wide dispersal of arekh0s illicitly earned monies, from ,witzerland to the (ahamas. The whole process of issuing letters rogatory through the Indian !udiciary has only !ust begun. utting the entire burden of blame on one person would obviously do little for the credibility of the A 4. Qet its understanding of the role of the regulatory authorities and the -inance $inistry is almost laughably naive. ,5(I for instance has been faulted for being blind to rampant price@rigging in the markets, but this is an offence of little else than negligence in the A 40s estimation. The figures here are revealing. "esource mobilisation in domestic capital markets through public issues of shares peaked in 1EE*@E. at "s.)/,H// crores. The figure has since been falling rapidly, registering no more than "s.?,111 crores in #//1@/#. In the same period, the funds raised through private placement of shares in the primary market have surged, from a modest "s.11,1?* crores in 1EE*@E., to "s.<*,E./ crores in #//1@/#. ,econdary market turnover however, has been the real growth area, from "s.1<#,E/. crores in 1EE*@E. to an astounding "s.#,HH/,EE/ crores in #///@/1. 7nce the scam was discovered the figure plummeted rapidly, to "s.HE.,H#< crores in #//1@/#.

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In this conte6t, ,5(I0s actions have been perfunctory or worse. The number of cases it has taken up for investigation in any one year has remained broadly the same D </ in 1EE.@E< and <H in #///@/1, though there was an une6plained increase in 1EE<@E? to 1##. The number of cases it has completed investigations in, has fluctuated between 1H and </ in these years. 'nd the number of cases in which it has imposed sanctions has cumulatively been 1H1, with a mere 1H being registered in #///@/1, when the abuses were rising to a crescendo. The A 4 passes over this record of default or even possible complicity with a formulaic strictureO >The track record of ,5(I in punishing the wrongdoers in stock market 2sic3 has been unsatisfactory. %uring the last ten years, ,5(I could initiate prosecution proceedings on insider trading in only one case and on fradulent and unfair trade practices in !ust seven cases. Its record of taking action against violators has been e=ually unimpressive.... Though ,5(I0s plea for more powers to strengthen its effectiveness cannot be faulted, the 4ommittee got an impression that ,5(I was not fully enforcing the powers already vested with it.> ':: this, in the conte6t of the magnitude of the crisis that the stock markets went through, must seem rather ritualistic. There has obviously been a strong urge at work to protect the regulators whose actions presumably are conditioned by signals sent by the political establishment. When the country0s largest mutual fund, the 8nit Trust of India, has abused its trusteeship function for public savings and partaken in an unwholesome fashion in the stock market scam, the costs of this political evasion would inevitably be a loss of credibility and legitimacy. ,ince Auly #//1, when the '+I, suspended redemptions under its flagship 8, <* scheme, the -inance $inistry has announced a ma!or overhaul of the mutual fund and infused fresh funds in an effort to restore its financial health. (ut these schemes, which are essentially being enforced with ta6@payers0 money, remain partial in their scope and halting in their effect. 'nd the stakes involved here are substantial. 's the %eepak arekh committee, which went into the '+I,0s functioning in less turbulent times, observedO >With over two crore unit holders, public confidence in 8, <* is a virtual pro6y of public confidence in the Indian financial system.> 'fter over a year of mulling over the findings of the ,.,. Tarapore committee, which went into the 8, <* debacle in fair detail, the A 4 has managed to come out with

H1

conclusions that must seem ludicrous. $. . ,ubramanian and $.$. 9apur, respectively the 4hairman and 56ecutive %irector of the fund during the troubles, have been severely indicted. 'nd even though criminal proceedings have been launched against them, the A 4 has also recommended departmental action against others within the organisation. T;5,5 apart, the A 4 has managed little else than a mild reprimand, couched in ambivalent and circumlocutory language, of the -inance $inistry, only naming the then -inance ,ecretary '!it 9umar. The main burden of negligence is placed on '+I,0s principal promoter, the Industrial %evelopment (ank of India. 'lthough the A 4 urges the institution of criminal proceedings against the predatory operators who managed to strip '+I, of its funds for short@term speculative gain, it glosses over the fact that many of them have put themselves at a safe distance from the reach of the Indian !udicial process. The small investor and the senior citizen whose entire sustenance was dependent on '+I, schemes, could well ask what the purpose of the entire A 4 e6ercise was. It has not enforced accountability, it has failed to evolve new norms for those charged with the custody of public funds, and =uietly ac=uiesced in placing the burden for the revival of '+I, on the ta6@payer. 'n e6ercise to safeguard public funds against future depredators has ended up as another waste of public money. M,n * Ma&E t D - l,%m nts Mutual Funds *#. "esource mobilisation by $utual -unds improved during 1EE?@EH. The number of offer documents of mutual funds filed with ,5(I increased substantially from )# in 1EE<@E? to </ in 1EE?@EH. The amount mobilised through new schemes and subscriptions to open ended schemes including 8nit <* of '+I, also increased. Indeed the gross mobilisation of resources by all mutual fund schemes during the year was around "s. 1),/// crores which was for the first time higher than the resources mobilised by the primary market. 5ven net of redemptions in open ended schemes the resources mobilised by the mutual funds during the year was higher than the resources raised through primary market. These improvements were partly in response to the regulatory changes brought about by ,5(I following the publication of the $utual -unds #/// "eport and the notification of new regulations. The emphasis of these new regulations is on empowerment of investors, greater compliance of regulations by

H#

mutual funds, obligations of trustees as frontline regulators, improved disclosure standards in offer documents through the introduction of standard offer document, standardisation of valuation norms for investments and computation of 1F'. The regulations also sought to address the areas of misuse of funds by introducing prohibitions and restrictions on affiliate transactions and investment e6posures to companies belonging to the group of sponsors of mutual funds.

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SE:I GUIDELINE (EGA(DING AXIS

H*

MUTUAL FUND

IOSCO Guidin! 1&in+i%l s This anne6ure sets out )/ principles of securities regulation, which are based upon three ob!ectives of securities regulation. These areO
o o o

The protection of investorsL1< 5nsuring that markets are fair, efficient and transparentL The reduction of systemic risk.

The )/ principles need to be practically implemented under the relevant legal framework to achieve the ob!ectives of regulation described above. The principles are grouped into eight categories. A< 1&in+i%l s ( latin! t, t' ( !ulat,& The responsibilities of the regulator should be clear and ob!ectively stated. The regulator should be operationally independent and accountable in the e6ercise of its functions and powers The regulator should have ade=uate powers, proper resources and the capacity to perform its functions and e6ercise its powers$

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 The regulator should adopt clear and consistent regulatory processes. The staff of the regulator should observe the highest professional standards including appropriate standards of confidentiality. :< 1&in+i%l s .,& S l.( !ulati,n < The regulatory regime should make appropriate use of ,elf"egulatory 7rganizations 2,"7s3 that e6ercise some direct oversight responsibility for their respective areas of competence, to the e6tent appropriate to the size and comple6ity of the markets. ,"7s should be sub!ect to the oversight of the regulator and should observe standards of fairness and confidentiality when e6ercising powers and delegated responsibilities. C< 1&in+i%l s .,& t' En.,&+ m nt ,. S +u&iti s ( !ulati,n The regulator should have comprehensive inspection, investigation and surveillance powers. The regulator should have comprehensive enforcement powers. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program. D< 1&in+i%l s .,& C,,% &ati,n in ( !ulati,n The regulator should have authority to share both public and nonpublic information with domestic and foreign counterparts. "egulators should establish information sharing mechanisms that set out when and how they will share both public and non@public information with their domestic and foreign counterparts.

H<

 The regulatory system should allow for assistance to be provided to foreign regulators who need to make in=uiries in the discharge of their functions and e6ercise of their powers. E< 1&in+i%l s .,& Issu &s There should be full, timely and accurate disclosure of financial results and other information that is material to investors0 decisions. ;olders of securities in a company should be treated in a fair and e=uitable manner. 'ccounting and auditing standards should be of a high and internationally acceptable =uality. F< 1&in+i%l s .,& C,ll +ti- In- stm nt S+' m s The regulatory system should set standards for the licensing and the regulation of those who wish to market or operate a collective investment scheme. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets. "egulation should re=uire disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor0s interest in the scheme. "egulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme. G< 1&in+i%l s .,& Ma&E t Int &m dia&i s "egulation should provide for minimum entry standards for market

intermediaries.

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 There should be initial and ongoing capital and other prudential re=uirements for market intermediaries. #) $arket intermediaries should be re=uired to comply with standards for internal organization and operational conduct that aim to protect the interests of clients and under which management of the intermediary accepts primary responsibility for these matters. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk. C< 1&in+i%l s .,& t' S +,nda&* Ma&E t The establishment of trading systems including securities e6changes should be sub!ect to regulatory authorization and oversight. There should be ongoing regulatory supervision of e6changes and trading systems which should aim to ensure that the integrity of trading is maintained through fair and e=uitable rules that strike an appropriate balance between the demands of different market participants. "egulation should promote transparency of trading. "egulation should be designed to detect and deter manipulation and other unfair trading practices. "egulation should aim to ensure the proper management of large e6posures, default risk and market disruption. The system for clearing and settlement of securities transactions should be sub!ect to regulatory oversight, and designed to ensure that it is fair, effective and efficient and that it reduces systemic risk.

The "eport is sub!ect to comments from ,5(I.

1

The (ombay ,tock 56change is over a hundred years old.

HH

%uring the 1EE/s, this meant that public sector mutual funds and other financial

entities supported the government0s divestment program.

)

' member places an order on the computer stating the =uantities of securities and

the price at which he wants to transact and the order is e6ecuted when it finds a matching sale or buy order from a counter@party. It is possible for market participants to see the full market, which has made the market more transparent.
*

5arlier, brokers routinely inflated 2deflated3 the prices at which they bought 2sold3

shares for their clients, thus earning a hidden margin.

.

&overnment debt constitutes about three@fourth of the total outstanding debt. International 7rganization of ,ecurities 4ommissions, 1EEH, 7b!ectives and rinciples of ,ecurities "egulation, ,eptember.

<

-or e6ample, the regulations framed by the ,5(I under the ,5(I 'ct are re=uired to arliament, and conse=uently published in the

be laid before each house of the

&azette of India, thereby facilitating a clear and consistent regulatory process.

H U

This division oversees the surveillance activities of the stock e6changes. 8nder implementationO The -inance $inister has announced on $arch 1), #//1 in

the arliament that the &overnment intends to propose legislative changes to >further strengthen the provisions in the ,5(I 'ct, 1EE# to ensure investor protection>.
E

To give an e6ample of powers of disgorgement, the 8, ,ecurities 56change

4ommission can penalize the guilty by up to three times its profit made or loss avoided through a regulatory violation. Incidentally, the "(I has disgorgement powers.
1/

$ost of the e6changes are incorporated as >'ssociation of

ersons>, possibly

because of the ta6 benefits and ease of compliance that such a form entails.
U

8nder implementationO 7n $arch 1), #//1 the -inance $inister announced in the arliament that administrative steps would be taken, and legislative changes would be

proposed, if re=uired, in order to corporatize stock e6changes by which ownership, management and trading membership would be segregated from each other. The process is currently under way.
11

In case of primary and satellite dealers in government securities, the "(I has

prescribed detailed prudential guidelines.

1#

8nless the funds move =uickly@@that is on the same day or at best the ne6t day@@

traders will face li=uidity problem. ;ence electronic funds transfer is critical to the HE

introduction of rolling settlement. 4urrently, 5-T facility is available in 1* centers. The "(I is mandated to facilitate electronic movement of funds through the entire banking system within a year.
U

8nder implementationO ,5(I has since decided to e6tend rolling settlement to more

than #// stocks with relatively high li=uidity on a nationwide basis from Auly #, #//1. These shares, which account for over E. percent of daily market transactions, are to be traded only in rolling settlement mode. $eanwhile, on 'pril #<, #//1 a ,ebi group on rolling settlement has recommended that from Auly #, #//1 the approved deferral products including 'utomated :ending and (orrowing $echanism, (orrowing and :ending of ,ecurities ,ystem and 4ontinuous 1et ,ettlement cease to be available for all the scrips and that ,ebi and the e6changes should work towards introduction of individual stock derivatives@@such as options and futures of selected stocks@@which would substitute the hedging functions currently being performed by the above deferral products.
1)

-urther, issuance to more than ./ individuals will now deemed to be a public issue.

With this, it has become more difficult to disguise public issues as private placement.
1*

The fund0s sponsor must contribute at least */ percent of the net worth of the '$4. The 8,@<* has a corpus of about "s.#/, /// crore, about a fifth of the total assets constituted a committee 2the %eepak arekh 4ommittee3. The

1.

under management of all mutual funds. -ollowing financial trouble in the scheme, the '+I, recommendations of the committee are being implemented to restructure the 8,@<*.

E/

E1

SE:I GUIDELINE (EGA(DING AXIS MUTUAL FUND

E#

SE:I !uid lin s & !a&din! AXIS Mutual .und

,5(I has done an analysis of the unit holding pattern of mutual funds industry as on $arch )1, #//<. The details are given belowO@ AA MUTUAL FUNDS INDUST(K UNITCOLING 1ATTE(N

-rom the data collected from the mutual funds, the following has been observed i3 's on $arch )1, #//< there are a total number of 1.< crore investors accounts 2it is

likely that there may be more than one folio of an investor which might have been counted more than once and actual number of investors would be less3 holding units of "s. ?E,</1 crore. 7ut of this total number of investors accounts, 1..< crore are individual investors accounts, accounting for E?.*#P of the total number of investors accounts and contribute "s.)#,<E1 crore which is *1./?P of the total net assets. The total number of investors account is lower in comparison with the total number of investors accounts as on $arch )1, #//# as the above data includes information only of '+I, $utual -und 2which is registered with ,5(I on Aanuary 1*, #//<3. The data of the ,pecified 8ndertaking of '+I, 2not registered with ,5(I3 is not available with us. ii3 4orporates and institutions who form only #./*P of the total number of investors

accounts in the mutual funds industry, contribute a sizeable amount of "s.*.,*?/ crore which is .?.1#P of the total net assets in the mutual funds industry. iii3 The 1"IsK74(s and -IIs constitute a very small percentage of investors accounts

2/..*P3 and contribute "s.1**/.1Hcrore 21.H1P3 of net assets. The details of unitholding pattern are given in the following tableO UNITCOLDING 1ATTE(N OF MUTUAL FUNDS INDUST(K

4'T5&7"Q

NUM:E( OF M TO TOTAL NET IN7ESTO(S ACCOUNTS IN7ESTO(S ACCOUNTS E?.*# /..) /./1

ASSET M ASSET 7ALUE

TO

7ALUE ((S<C(O(E" )#,<E1.1# H?H..1 .<1.<?

TOTAL NET

Individuals 1"IsK74(s -IIs

1.,..?,./< H*,)11 #,/.H

*1./? 1.1/ /.?1

E)

4orporatesK InstitutionsK 7thers TOTAL )#*,E?E B3G958G832 #./* B==<== *.,*<E..) 69G5==<8; .?.1# B==<==

N N,t / 5rstwhile '+I, has been divided into '+I, $utual -und 2registered with ,5(I3 and the ,pecified 8ndertaking of '+I, 2not registered with ,5(I3. 'bove data contains information only of '+I, $utual -und. :A UNITCOLDING 1ATTE(N O 1(I7ATEH1U:LIC SECTO( MUTUAL FUNDS -rom the analysis of data on unitholding pattern of rivate ,ector $utual -unds and ublic ,ector $utual -unds, the following observations are madeO@ 1. 7ut of a total of 1.< crore investors accounts in the mutual funds industry, 2it is likely that

there may be more than one folio of an investor which might have been counted more than once and therefore actual number of investors may be less3 *#.E) lakh investors accounts i.e #?P of the total investors accounts are in private sector mutual funds whereas the 1.1? crore investors accounts ie.?)P are with the public sector mutual funds which includes '+I, $utual -und. ;owever, the private sector mutual funds manage ?1.#P of the net assets whereas the public sector mutual funds own only #H.HP of the assets #. '+I, $utual -und has E?. 1# lakh investors accounts which is </.H#P of the total

investors accounts in the mutual funds industry. %etails of unitholding pattern of private sector and public sector mutual funds are given in the following tablesO

UNITCOLDING 1ATTE(N OF 1(I7ATE SECTO( MFS 4'T5&7"Q NUM:E( OF M TO TOTAL NET IN7ESTO(S ACCOUNTS IN7ESTO(S ACCOUNTS ASSET M ASSET 7ALUE Individuals 1"IsK74(s -IIs *//1H*1 )H*1< 1)1? E).#) /.HE /./) 1?E.<.*H ?#)./# .#H..1 )1.<H 1.#H /.E) TO

7ALUE ((S<C(O(E"

TOTAL NET

E*

4orporatesK InstitutionsK 7thers TOTAL #./E?# 2>9>325 ..H. B==<== )?*<..E1 3556;<9> <<.11 B==<==

UNITCOLDING 1ATTE(N OF 1U:LIC SECTO( MFS (INCLUDING AXIS MF N" 4'T5&7"Q NUM:E( OF M TO TOTAL NET IN7ESTO(S ACCOUNTS IN7ESTO(S ACCOUNTS ASSET M ASSET 7ALUE Individuals 1"IsK74(s -IIs 4orporatesK InstitutionsK 7thers TOTAL ?*//? BB565;=8 /.<) B==<== H//).<# >>9>5<9B )*.E1 B==<== 11,...,<<. *.HE. ?*1 EH.E? /.)E /./1 1*?)*.<* 1...*E )).1< <*.#? /.<H /.1* TO

7ALUE ((S<C(O(E"

TOTAL NET

N N,t / 5rstwhile '+I, has been divided into '+I, $utual -und 2registered with ,5(I3 and the ,pecified 8ndertaking of '+I, 2not registered with ,5(I3. 'bove data contains information only of '+I, $utual -und. (isE Fa+t,&s $utual -unds and securities investments are sub!ect to market risks and there can be no assurance or guarantee that the ,chemes ob!ectives will be achieved. 's with any investment in securities, the 1et 'sset Falue of 8nits issued under the ,chemes may go up or down depending on the various factors and forces affecting the capital market. ast performance of the ,ponsorsK '$4K $utual -undK ,chemes and its affiliates do not indicate the future performance of the ,chemes of the $utual -und. The ,ponsors are not responsible or liable for any loss or shortfall resulting from the operations of the ,chemes beyond their contribution of "s.1/,///K@ each made by them towards setting of the $utual -und The 1ames of the ,chemes do not in any manner indicate either the =uality of the ,chemes or their future prospects and returns.

E.

Investors in the ,chemes are not being offered any guarantee K assured returns. lease read the 7ffer %ocuments carefully before investing. Statut,&* D tails In terms of The 8nit Trust of India 2Transfer of 8ndertaking and "epeal3 'ct #//# 2'ctB3, the assets and liabilities of the erstwhile 8nit Trust of India have been bifurcated into two parts the specified undertaking and the specified company. The 'dministrator of the ,pecified 8ndertaking of The 8nit Trust of India comprises of 8, <* and the assured return schemes 2most of which have since been converted into ta6 free bonds, the present investment is guaranteed by the &ovt. of India3 . The ,pecified 4ompany has been set up as a mutual fund viz. '+I, $-, comprising of all net asset value based schemes. '+I, $- has been structured in accordance with ,5(I 2$utual -unds3 "egulations, 1EE< The mutual fund was registered with ,5(I on Aanuary 1*, #//< under "egistration 4ode $-K/*HK/)K/1. SE:I ,Ea*s Fid lit* %lans Y -idelity Investments has received permission from ,5(I to launch e=uity funds in India. -idelity has already filed a draft prospectus with ,5(I for its maiden e=uity fund, -idelity 5=uity. The proposed fund will invest across sectors. The portfolio will comprise </@H/ stocks. The fund will ordinarily invest up to E. per cent of its assets in e=uities, but may invest up to #/ per cent in money market instruments. Y ,(I $utual -und has launched a mid@cap fund, $agnum $id4ap -und. It will invest in stocks with a market capitalisation of "s #//@#,/// crore. The minimum investment amount is "s .,///. The fund offers dividend and growth options. The offer closes on $arch 1?. Y rincipal $utual has declared dividend of 1// per cent on rincipal "esurgent

India 5=uity -und. The record date is -ebruary #*. Y ,undaram $utual has declared dividends of #/ per cent each on ,undaram ,elect -ocus and ,undaram &rowth. The record dates are $arch * and $arch 11 respectively. Y '+I, $utual -und has declared a maiden dividend of 1# per cent for '+I, (asic Industries -und and a dividend of #. per cent for '+I, &rowth and Falue -und. The record date for both the dividend payments is $arch 1/. The fund house has also

E<

declared a dividend of 1H per cent for '+I, (alanced -und. The record date is $arch 1?. Y -ranklin Templeton $utual -und has proposed a dividend for -ranklin India Ta6shield. The record date is $arch 1H. Y ;%-4 $utual proposes to declare dividend on ;%-4 rudence and ;%-4

(alanced -und. The record date for the dividend will be $arch 1H. Y -ranklin Templeton $utual has mopped up "s 1,E./ crore from the initial offering of -ranklin -le6icap. This is the largest amount mobilised by any open@end fund I 7. The fund will be open for an ongoing basis from $arch ?. SE:IPs n 4 +' +Es and @alan+ s S< 7aid*a Nat'an &I:T -unds, or &@,ec -unds, which invest in &overnment of India securities, have steadily gained in popularity in the last two years. The ,ecurities and 56change (oard of India has now issued new guidelines they should follow to provide for better checks and balances. The following are the salient features of the new re=uirementsO ublic debt offices of the "(I will issue monthly statements to mutual funds maintaining ,&:K4,&: accounts. $utual funds have to reconcile their balances with the monthly "(I reports. Internal audit, continuous checks by auditors and reports to audit committees form part of the re=uirements. The same report must also be placed before the boards of the asset management company and trustee companyK $utual funds will have to submit a compliance certificate to the "(I on a =uarterly basis, indicating adherence to these prescribed norms. Allian+ Ca%ital Ad-is,&O 'lliance 4apital $anagement ;olding :: has appointed (lackstone &roup : to advise it on its Indian operations. The latter will look at strategic options for the mutual fund business. There have been indications that 'lliance may want to wind up its mutual fund operations in India.

E?

F&anElin T m%l t,n Int &nati,nal FundO Templeton $utual -und is to launch -ranklin India International -und. This open@end fund will invest in foreign securities. The scheme will invest in -ranklin 8, &overnment -und, which has a track record of more than 1/ years and an asset base of G#.. billion. The initial offering period is between %ecember # and #/. The minimum investment amount is "s #.,/// and multiples of "s 1,/// thereafter. There is no entry load during this period. T m%l t,n MI1 di-id ndO Templeton $utual -und has declared a dividend of /.?. per cent for the $onthly %ividend 7ption of the Templeton $onthly Income lan. The dividend is for )1 days and the record date is 1ovember 11.

Dund

di-id ndO %undee $utual -und has announced monthly dividend of 1 per

cent for %undee ,overeign Trust and /.). per cent each for %undee 4orporate (ond -und and %undee ublic ,ector -und. DS1 T +' FundO %, $errill :ynch $utual -und has altered the investment strategy of the %, $errill :ynch Technology -und by deciding on the (,5 T5+9 Inde6 as the benchmark inde6. It will invest in stocks outside the inde6 too. ,ince this is a fundamental change, investors have an option to e6it the scheme at 1'F before %ecember 1). If they do not do so, they will be deemed to have accepted the change. N 4 :,: s+' m sO (o( $utual -und, sponsored by (ank of (aroda, plans to launch a &rowth -und and a (alanced -und with growth, dividend and dividend re@ investment options. The fund has filed with ,5(I for this purpose. D uts+' MF s+' m sO %eutsche (ank has launched its mutual fund with four products set to be launched. EH

The four schemes planned are %eutsche 'lpha 5=uity -und, %eutsche Insta 4ash -und, %eutsche remier (ond -und and %eutsche ,hort $aturity -und. 'll the income products will be managed by $r ,uresh ,oni, while the e=uity fund will be managed by $r (. . ,ingh. AXIS s%litO The &overnment has provided for more ta6 concessions in the process of splitting 8nit Trust of India 2'+I,3 into two parts Y '+I,@I, which will administer 8,@<* and other assured returns schemes of the '+I, for which government support is needed, will be e6empt from ta6 for five years. Y Ta6 e6emption will cover any income, profits and gains received by '+I,@I. Y 4apital gains ta6 has also been waived on all units issued and the unit schemes of '+I,@ I. Y ,tamp duty e6emption on transfer of net asset value of 1'F@based schemes to '+I,@II and assured returns schemes to '+I,@I has been provided. Y '+I,@I will reset interest rates and foreclose some assured return schemes with the approval of ,5(I. Y '+I, employees transferred to '+I,@II will en!oy the same benefits as before. These have been provided for in the 8nit Trust of India 2Transfer of 8ndertaking and "epeal3 (ill tabled in arliament. AXIS-I and AXIS-II CEOO $r $ %amodaran, the present 4hairman of '+I,, will head both '+I,@I and '+I,@II for now. AMFI d mandO %ividends declared by mutual funds should be e6empt from ta6 is the core demand made by the 'ssociation of $utual -unds of India 2'$-I3 to the -inance $inister as one more (udget nears. The '$-I has based its position on the 9elkar panel recommendation to e6empt dividend on e=uity shares from ta6. 8ni=ue -eatures of '+I, their Impact on its -unctioning R56tract from the "eport of >4orporate ositioning> 4ommitteeS In the initial stages, '+I, had been performing a hybrid role of both a financial institution and a mutual fund. ;owever, over the last few years, its role as a financial EE

institution has significantly diminished and it has positioned itself purely as the largest mutual fund in the country. There is also a significant trend emerging which suggests that financial institutions will gradually wither away or merge into universal banks. In this scenario, commercial banks and mutual funds will emerge as the primary institutions for the mobilisation of household savings. This reinforces the need for '+I, to evolve as a pure mutual fund. 't the same time, consideration has to be given to the fact that '+I, has promoted and holds controlling interest in a number of institutions outside the pure mutual fund industry. 's noted earlier, '+I,0s management structure is at variance with the structure prescribed for mutual funds under ,5(I regulations. These regulations provide for four separate entities, namely a ,ponsor, an Independent Trustee, an 'sset $anagement 4ompany and the -und. It is necessary that '+I, as the largest player in the $utual -und industry should, as recommended by the Faghul 4ommittee, lend itself to ,5(I0s regulatory !urisdication and conform to the form of structure prescribed in ,5(I regulations. 's stated earlier, out of ?) domestic schemes, <? schemes have already been brought under ,5(I regulations and apart from 8,@<* and ,8,@EE, the remaining schemes have finally suspended sales andKor are nearing termination. It only remains for the structure of '+I, also to be made ,5(I compliant. While the present structure of '+I, provides for separate 'sset $anagement 4ommittees for 8,@<*, e=uity schemes and for incomeKdebt schemes, the degree of control e6ercised and direction imparted by these 4ommittees appears to be restricted and inade=uate. The key mandate of the 4ommittees is to review performance of unit schemes of '+I, and provide guidance. The 4ommittees discharge this role of independent review of scheme performance through the mechanism of periodic meetings. &iven the limitation of a >review committee> format, the 4ommittees have not found it possible to resolve >embedded> problems stemming from >historical> decisions. The 4ommittees, therefore, cannot replace 'sset $anagement 4ompanies. There is therefore need for an independent Trustee and an independent '$4, as provided under ,5(I regulations with wider powers of control and direction. '+I, has no identified ,ponsor but the institutions which contributed to the initial capital of "s.. crores and the additional amount of "s.**... crores in 1EEE may be considered as ,ponsoring Institutions. ,5(I regulations impose certain

1//

responsibilities and obligations on sponsors and it would be difficult to discharge these responsibilities and obligations when there are a large number of sponsors. It is therefore necessary that the ,ponsor should be a separate company. It is suggested that this company can be formed with the initial shareholders being the ,ponsoring Institutions who will convert the whole or part of their present holdings in the initial capital of "s.. crores and the additional contribution of "s.**.../ crores made in Aune 1EEE into the capital of the ,ponsoring 4ompany. This conversion can be made at the 1'F of the units when 8,@<* becomes 1'F based. It is desirable that no single member of the ,ponsoring Institutions ultimately holds more than #.P of the ultimate capital of the ,ponsoring 4ompany, particularly since many of them already own or have participation in '$4s managing other mutual funds. It is for consideration whether '+I, should be wholly@owned and managed by the &overnment through participation in the ,ponsoring 4ompany. 'lthough '+I, is not directly owned by the &overnment, the ma!ority of the ,ponsoring Institutions who contributed to the capital and the additional contribution and who elect the trustees are institutions which are owned or controlled by the &overnment. The 4hairman of the (oard of Trustees is also appointed by the &overnment. There is therefore a public perception of a &overnment umbrella which gives a measure of safety, security and implied guarantee to the unit@holders which is largely responsible for '+I,0s success as a savings institution. 't the same time, this perception imposes an implied responsibility on the &overnment for a possible bail@out of '+I, in the event of its failure to meet specific or implied commitments. &overnment did this by contributing to the ,8, ,cheme to the e6tent of "s.),)// crores following the recommendations of the %eepak arekh 4ommittee and there is a public perception that &overnment will need to do likewise to ensure that '+I, will meet its commitments to 8,@<* unit holders atleast to the e6tent of ),/// units out of their aggregate holdings. articipation by &overnment in the sponsoring company may strengthen the perception of implied responsibility of the &overnment for the due fulfillment of obligations by '+I, but this responsibility may be open@ended and &overnment may not wish to accept such a responsibility. ;owever, non@participation by &overnment in the sponsoring company may not by itself remove the perceived link between the

1/1

&overnment and '+I, so long as &overnment continues to e6ercise powers such as the power to appoint the 4hairman of the (oard of Trustees under the '+I, 'ct. 't the same time, it is necessary to recognise that if the perceived link with the &overnment is suddenly removed, @ and certainly if it is removed before 8,@<* becomes 1'F based @ without providing an ade=uate substitute, public confidence in '+I, would be severely affected and can even lead to a flood of redemptions which could create a crisis both in '+I, and in the capital market. It is therefore necessary that if the &overnment does not participate in the ,ponsoring 4ompany, the participation of the ,ponsoring Institutions should remain >locked@in> atleast for the initial period. 'n option for consideration is whether in place of the &overnment a strategic partner cannot be introduced. If this partner is an established player in the market who en!oys confidence of unitholders because of his reputation and competence, the risk of loss of public confidence through the removal of the perceived &overnment link would be largely mitigated. 't the same time, having regard to the large amount of funds involved, the field for the identification of a strategic partner cannot be restricted only to Indian entities. If such a strategic partner is introduced, then it is necessary that &overnment should completely withdraw and leave it to the strategic partner to manage the fund sub!ect to the supervision and regulation of ,5(I as in the case of other mutual funds. To do otherwise would create the danger that &overnment may be perceived to be accountable for the proper functioning of '+I, without having any effective control. If on the contrary, &overnment attempts to effectively control the operations of '+I,, it will get unnecessarily involved in running a commercial operation for which it may not be able to impart the necessary skill and fle6ibility. ' complete withdrawal of the &overnment would also achieve the ob!ective of de@risking the &overnment from the operations of '+I,. ' =uestion for consideration is the size of the capital of the ,ponsoring 4ompany. This depends upon two ma!or factors namely, the contribution which the ,ponsoring 4ompany is re=uired to make to the 4apital of the 'sset $anagement 4ompany and the amount of funds the ,ponsoring Institutions are prepared to provide for this purpose. Taking into account both these factors, it is suggested that the initial capital

1/#

of the ,ponsoring 4ompany to be contributed by the ,ponsoring Institutions could be in the order of "s.##/ crores. The strategic partner could be re=uired to introduce into the capital a sum of "s.))/ crores whereby of the total capital of "s.../ crores, */P would be held by the ,ponsoring Institutions and </P would be held by the strategic partner. The holding of the ,ponsoring Institutions could be sub!ect to a 0lock@in0 of three years, though transfers between themselves would be possible. ,5(I regulations re=uire the formation of a (oard of Trustees or a Trustee 4ompany. The usual practice is to form a Trustee 4ompany which is owned by the ,ponsor but the composition of whose (oard of %irectors conforms to ,5(I regulations. It is suggested that a Trustee 4ompany be formed as a wholly@owned subsidiary of the ,ponsoring 4ompany. ,5(I regulations do not prescribe any minimum capital for the Trustee 4ompany but having regard to the onerous responsibilities prescribed under the regulations for a Trustee 4ompany, it is suggested that it has a capital of "s.. crores which will enable it to build up the necessary infrastructure to discharge those responsibilities.

1/)

1E(FO(MANCE E7ALUATION
1/*

OF AXIS MUTUAL FUND

1 &.,&man+

-aluati,n ,. AXIS Mutual Fund

2Aan 1), #/1*3

AXIS Mast & 7alu Fund d +la& s s +,nd +,ns +uti- tax-.&

'+I, $utual -und declares second consecutive dividend of 1//P 2"s 1/.// per unit on face value of "s.1/K@3 under '+I,@$aster Falue -und 2'+I,@Falue -und3. The record date for the dividend is -ebruary ?, #/1*. The dividend is ta6@free for the investors, so the post@ta6 return for the investors works out to be much higher. Investors who will !oin the scheme on or before -ebruary ?, #/1* will also be eligible for the dividend. The 1'F of the scheme as on Aanuary 1#, #/1* was "s.#?.H# 2 ost dividend distribution, 1'F will fall to the e6tent of the pay out3. %uring the calendar year #//<, '+I, $aster Falue -und had declared a total dividend of 1*/P 2"s 1*.// per unit on face value of "s.1/K@3. T' % &.,&man+ ,. t' s+' m is !i- n in t' ta@l @ l,4/

1/.

,cheme erformance as on %ecember )1, #/1* 21'F@ "s.#E..E3 erformance 4omparison with benchmark inde6 4ompounded 'nnualised "eturn 1'F 7ver last one year 7ver last three years 7ver last five years ,ince Inception #..)HP </.?#P 1?.H#P #H..#P 41+ #// **.<1P <1.1*P 1?.E<P #H.E#P $id 4ap

'ssuming that all pay outs during the period have been reinvested in the units of the scheme at the immediate e6@dividend 1'F ast erformance may nor may not be sustained in the future

'+I, $aster Falue -und is an open@ended e=uity oriented value fund, which was launched in Aune 1EEH as the close@ended fund and made open@ended from 1?th -ebruary #//<. The investment ob!ective of the scheme is to provide investors the benefits of capital appreciation and income distribution through investment in stocks that are relatively undervalued to their e6pected long@term earnings growth. The scheme will invest upto H/P of the net assets in the scrips having anyone or more of the following characteristics at the time of ac=uisitionO a3 :ow K5 ratio 2 5 ratio lower than the market 5 or the sector 53 7"

b3 'ttractive dividend yield 7" c3 :ow price to book value ratio 7" d3 4ompanies with positive 5conomic Falue 'dded 25F'3 8p to #/P of net assets is invested in e=uity K e=uity related instruments issued by blue chip companies with a potential for consistent growth and with management of high =uality and track record. ,hri Finay 9ulkarni, the -und $anager of the scheme said '+I,@$aster Falue -und is positioned as a pure value scheme with clearly defined investment criteria for investing in value stocks. The scheme invests in stocks that are relatively undervalued

1/<

to their intrinsic value and which will create wealth for the various stakeholders in the medium to long term.B &oing forward also the scheme will attempt to identify value stocks across the sectors, which are best placed to report strong earning momentum and are available at attractive valuation.B 'bout '+I, $- '+I, $utual -und was carved out of 8nit Trust of India as a ,5(I registered mutual fund by repealing the 8nit Trust of India 'ct 21E<)3 on 1st -ebruary #//<. '+I, $utual -und 2'+I, $-3 manages the pure $utual -und schemes, which are fully ,5(I compliant and in line with the best global practices, while, ,pecified 8ndertaking of the 8nit Trust of India 2,8'+I,3 manages schemes which involve the commitment of the &overnment of India.

:et us start the discussion of the performance of mutual funds in India from the day the concept of mutual fund took birth in India. The year was 1E<). 8nit Trust of India invited investors or rather to those who believed in savings, to park their money in '+I, $utual -und. -or )/ years it goaled without a single second player. Though the 1EHH year saw some new mutual fund companies, but '+I, remained in a monopoly position. The performance of mutual funds in India in the initial phase was not even closer to satisfactory level. eople rarely understood, and of course investing was out of =uestion. (ut yes, some #* million shareholders was accustomed with guaranteed high returns by the begining of liberalization of the industry in 1EE#. This good record of '+I, became marketing tool for new entrants. The e6pectations of investors touched the sky in profitability factor. ;owever, people were miles away from the praparedness of risks factor after the liberalization. The 'ssets 8nder $anagement of '+I, was "s. <?bn. by the end of 1EH?. :et me concentrate about the performance of mutual funds in India through figures. -rom "s. <?bn. the 'ssets 8nder $anagement rose to

1/?

"s. *?/ bn. in $arch 1EE) and the figure had a three times higher performance by 'pril #/1*. It rose as high as "s. 1,.*/bn. The net asset value 21'F3 of mutual funds in India declined when stock prices started falling in the year 1EE#. Those days, the market regulations did not allow portfolio shifts into alternative investments. There were rather no choice apart from holding the cash or to further continue investing in shares. 7ne more thing to be noted, since only closed@end funds were floated in the market, the investors disinvested by selling at a loss in the secondary market. The performance of mutual funds in India suffered =ualitatively. The 1EE# stock market scandal, the losses by disinvestments and of course the lack of transparent rules in the whereabout rocked confidence among the investors. artly owing to a relatively weak stock market performance, mutual funds have not yet recovered, with funds trading at an average discount of 1/#/ percent of their net asset value. The supervisory authority adopted a set of measures to create a transparent and competitve environment in mutual funds. ,ome of them were like rela6ing investment restrictions into the market, introduction of open@ended funds, and paving the gateway for mutual funds to launch pension schemes. The measure was taken to make mutual funds the key instrument for long@term saving. The more the variety offered, the =uantitative will be investors. 't last to mention, as long as mutual fund companies are performing with lower risks and higher profitability within a short span of time, more and more people will be inclined to invest until and unless they are fully educated with the dos and donts of mutual funds.

1/H

1/E

"esearch $ethodology

"esearch ;ypothesisO The concept of mutual funds in India dates back to the year 1E<). The era between 1E<) and 1EH? marked the e6istance of only one mutual fund company in India with "s. <?bn assets under management 2'8$3, by the end of its monopoly era, the 8nit Trust of India 2'+I,3. (y the end of the H/s decade, few other mutual fund companies in India took their position in mutual fund market. The new entries of mutual fund companies in India were ,(I $utual -und, 4anbank $utual -und, un!ab 1ational (ank $utual -und, Indian (ank $utual -und, (ank of India $utual -und.

11/

The succeeding decade showed a new horizon in indian mutual fund industry. (y the end of 1EE), the total '8$ of the industry was "s. *?/./* bn. The private sector funds started penetrating the fund families. In the same year the first $utual -und "egulations came into e6istance with re@registering all mutual funds e6cept '+I,. The regulations were further given a revised shape in 1EE<. 9othari ioneer was the first private sector mutual fund company in India which has now merged with -ranklin Templeton. Aust after ten years with private sector players penetration, the total assets rose up to "s. 1#1H./. bn. Today there are )) mutual fund companies in India. MaD,& Mutual Fund C,m%ani s in India A:N AM(O Mutual Fund '(1 '$"7 $utual -und was setup on 'pril 1., #/1* with '(1 '$"7 Trustee 2India3 vt. :td. as the Trustee 4ompany. The '$4, '(1 '$"7 'sset $anagement 2India3 :td. was incorporated on 1ovember *, #//<. %eutsche (ank ' & is the custodian of '(1 '$"7 $utual -und. :i&la Sun Li. Mutual Fund (irla ,un :ife $utual -und is the !oint venture of 'ditya (irla &roup and ,un :ife -inancial. ,un :ife -inancial is a golbal organisation evolved in 1H?1 and is being represented in 4anada, the 8,, the hilippines, Aapan, Indonesia and (ermuda apart from India. (irla ,un :ife $utual -und follows a conservative long@term approach to investment. "ecently it crossed '8$ of "s. 1/,/// crores.

:anE ,. :a&,da Mutual Fund (:O: Mutual Fund" (ank of (aroda $utual -und or (7( $utual -und was setup on 7ctober )/, 1EE# under the sponsorship of (ank of (aroda. (7( 'sset $anagement 4ompany :imited is the '$4 of (7( $utual -und and was incorporated on 1ovember ., 1EE#. %eutsche (ank '& is the custodian. CDFC Mutual Fund ;%-4 $utual -und was setup on Aune )/, #/// with two sponsorers nemely ;ousing %evelopment -inance 4orporation :imited and ,tandard :ife Investments :imited. CS:C Mutual Fund

111

;,(4 $utual -und was setup on $ay #?, #//# with ;,(4 ,ecurities and 4apital $arkets 2India3 rivate :imited as the sponsor. (oard of Trustees, ;,(4 $utual -und acts as the Trustee 4ompany of ;,(4 $utual -und. ING 7*s*a Mutual Fund I1& Fysya $utual -und was setup on -ebruary 11, 1EEE with the same named Trustee 4ompany. It is a !oint venture of Fysya and I1&. The '$4, I1& Investment $anagement 2India3 vt. :td. was incorporated on 'pril <, 1EEH. 1&ud ntial ICICI Mutual Fund The mutual fund of I4I4I is a !oint venture with rudential lc. of 'merica, one of the largest life insurance companies in the 8, of '. rudential I4I4I $utual -und was setup on 1)th of 7ctober, 1EE) with two sponsorers, rudential lc. and I4I4I :td. The Trustee 4ompany formed is rudential I4I4I Trust :td. and the '$4 is rudential I4I4I 'sset $anagement 4ompany :imited incorporated on ##nd of Aune, 1EE). Sa'a&a Mutual Fund ,ahara $utual -und was set up on Auly 1H, 1EE< with ,ahara India -inancial 4orporation :td. as the sponsor. ,ahara 'sset $anagement 4ompany rivate :imited incorporated on 'ugust )1, 1EE. works as the '$4 of ,ahara $utual -und. The paid@up capital of the '$4 stands at "s #..H crore. Stat :anE ,. India Mutual Fund ,tate (ank of India $utual -und is the first (ank sponsored $utual -und to launch offshor fund, the India $agnum -und with a corpus of "s. ##. cr. appro6imately. Today it is the largest (ank sponsored $utual -und in India. They have already launched ). ,chemes out of which 1. have already yielded handsome returns to investors. ,tate (ank of India $utual -und has more than "s. .,.// 4rores as '8$. 1ow it has an investor base of over H :akhs spread over 1H schemes. Tata Mutual Fund Tata $utual -und 2T$-3 is a Trust under the Indian Trust 'ct, 1HH#. The sponsorers for Tata $utual -und are Tata ,ons :td., and Tata Investment 4orporation :td. The investment manager is Tata 'sset $anagement :imited and its Tata Trustee 4ompany vt. :imited. Tata 'sset $anagement :imited0s is one of the fastest in the country with more than "s. ?,?/) crores 2as on 'pril )/, #/1*3 of '8$.

11#

9otak $ahindra $utual -und 9otak $ahindra 'sset $anagement 4ompany 29$'$43 is a subsidiary of 9$(:. It is presently having more than 1,EE,H1H investors in its various schemes. 9$'$4 started its operations in %ecember 1EEH. 9otak $ahindra $utual -und offers schemes catering to investors with varying risk @ return profiles. It was the first company to launch dedicated gilt scheme investing only in government securities. 8nit Trust of India $utual -und '+I, 'sset $anagement 4ompany rivate :imited, established in Aan 1*, #//<,

manages the '+I, $utual -und with the support of '+I, Trustee 4ompany rivete :imited. '+I, 'sset $anagement 4ompany presently manages a corpus of over "s.#//// 4rore. The sponsorers of '+I, $utual -und are (ank of (aroda 2(7(3, un!ab 1ational (ank 2 1(3, ,tate (ank of India 2,(I3, and :ife Insurance 4orporation of India 2:I43. The schemes of '+I, $utual -und are :i=uid -unds, Income -unds, 'sset $anagement -unds, Inde6 -unds, 5=uity -unds and (alance -unds. "eliance $utual -und "eliance $utual -und 2"$-3 was established as trust under Indian Trusts 'ct, 1HH#. The sponsor of "$- is "eliance 4apital :imited and "eliance 4apital Trustee 4o. :imited is the Trustee. It was registered on Aune )/, 1EE. as "eliance 4apital $utual -und which was changed on $arch 11, #/1*. "eliance $utual -und was formed for launching of various schemes under which units are issued to the ublic with a view to contribute to the capital market and to provide investors the opportunities to make investments in diversified securities.

,tandard 4hartered $utual -und ,tandard 4hartered $utual -und was set up on $arch 1), #/// sponsored by ,tandard 4hartered (ank. The Trustee is ,tandard 4hartered Trustee 4ompany vt. :td. ,tandard 4hartered 'sset $anagement 4ompany vt. :td. is the '$4 which was incorporated with ,5(I on %ecember #/,1EEE. -ranklin Templeton India $utual -und

11)

The group, -rnaklin Templeton Investments is a 4alifornia 28,'3 based company with a global '8$ of 8,G */E.# bn. 2as of 'pril )/, #/1*3. It is one of the largest financial services groups in the world. Investors can buy or sell the $utual -und through their financial advisor or through mail or through their website. They have 7pen end %iversified 5=uity schemes, 7pen end ,ector 5=uity schemes, 7pen end ;ybrid schemes, 7pen end Ta6 ,aving schemes, 7pen end Income and :i=uid schemes, 4losed end Income schemes and 7pen end -und of -unds schemes to offer. $organ ,tanley $utual -und India $organ ,tanley is a worldwide financial services company and its leading in the market in securities, investmenty management and credit services. $organ ,tanley Investment $anagement 2$I,$3 was established in the year 1E?.. It provides customized asset management services and products to governments, corporations, pension funds and non@profit organisations. Its services are also e6tended to high net worth individuals and retail investors. In India it is known as $organ ,tanley Investment $anagement rivate :imited 2$,I$ India3 and its '$4 is $organ ,tanley $utual -und 2$,$-3. This is the first close end diversified e=uity scheme serving the needs of Indian retail investors focussing on a long@term capital appreciation. 5scorts $utual -und 5scorts $utual -und was setup on 'pril 1., 1EE< with 56corts -inance :imited as its sponsor. The Trustee 4ompany is 5scorts Investment Trust :imited. Its '$4 was incorporated on %ecember 1, 1EE. with the name 5scorts 'sset $anagement :imited. 'lliance 4apital $utual -und 'lliance 4apital $utual -und was setup on %ecember )/, 1EE* with 'lliance 4apital $anagement 4orp. of %elaware 28,'3 as sponsorer. The Trustee is '4'$ Trust 4ompany vt. :td. and '$4, the 'lliance 4apital 'sset $anagement India 2 vt3 :td. with the corporate office in $umbai.

(enchmark $utual -und

11*

(enchmark $utual -und was setup on Aune 1#, #//1 with 1iche -inancial ,ervices vt. :td. as the sponsorer and (enchmark Trustee 4ompany vt. :td. as the Trustee 4ompany. Incorporated on 7ctober 1<, #/// and head=uartered in $umbai, (enchmark 'sset $anagement 4ompany vt. :td. is the '$4.

4anbank $utual -und 4anbank $utual -und was setup on %ecember 1E, 1EH? with 4anara (ank acting as the sponsor. 4anbank Investment $anagement ,ervices :td. incorporated on $arch #, 1EE) is the '$4. The 4orporate 7ffice of the '$4 is in $umbai. 4hola $utual -und 4hola $utual -und under the sponsorship of 4holamandalam Investment M -inance 4ompany :td. was setup on Aanuary ), 1EE?. 4holamandalam Trustee 4o. :td. is the Trustee 4ompany and '$4 is 4holamandalam '$4 :imited. :I4 $utual -und :ife Insurance 4orporation of India set up :I4 $utual -und on 1Eth Aune 1EHE. It contributed "s. # 4rores towards the corpus of the -und. :I4 $utual -und was constituted as a Trust in accordance with the provisions of the Indian Trust 'ct, 1HH#. The 4ompany started its business on #Eth 'pril 1EE*. The Trustees of :I4 $utual -und have appointed Aeevan (ima ,ahayog 'sset $anagement 4ompany :td as the Investment $anagers for :I4 $utual -und. &I4 $utual -und &I4 $utual -und, sponsored by &eneral Insurance 4orporation of India 2&I43, a &overnment of India undertaking and the four ublic ,ector &eneral Insurance 4ompanies, viz. 1ational Insurance 4o. :td 21I43, The 1ew India 'ssurance 4o. :td. 21I'3, The 7riental Insurance 4o. :td 27I43 and 8nited India Insurance 4o. :td. 28II3 and is constituted as a Trust in accordance with the provisions of the Indian Trusts 'ct, 1HH#. 'nalysis of %ataO AXIS Mutual Fund has come into e6istence with effect from 1st -ebruary #//<. '+I, 'sset $anagement 4ompany presently manages *# 1'F based domestic ,5(I compliant schemes and * 7ffshore funds having a corpus "s.1.,#*) crore from about 1/ million investor accounts. '+I, $utual -und has a track record of managing a

11.

variety of schemes catering to the needs of every class of citizenry over a period of )E years. It has a nationwide network consisting .* branch offices, ) '+I, -inancial 4entres 28-4s3 and representative offices in %ubai and :ondon. Ms< Anita MadanG Fund Mana! &G has over 1? years e6perience in the $- industry. ;er =ualifications include 4II' from :ondon, 4-', 4'II( and $sc 2$aths3. -rom 7ctober #//1, she has been managing the %-$ Income schemes. ,peaking with Anil Mas+a& n'as and SanE t D 1ad'* of India In"oline, $s 'nita $adan says profits may be booked at regular intervals and investors can look to re@ enter at lower levels again depending on their investment needs and investment horizon.

11<

St& n!t' and 4 aEn ss

11?

St& n!t' and 4 aEn ss ,. AXIS Mutual Fund

'+I, is a statutory corporation established under the 8nit Trust of India, 'ct 1E<) with a view to encouraging saving and investment and participation in the income, profits and gains accruing to the 4orporation from the ac=uisition, holding, management and disposal of securities. The 'ct came into force on 1st -ebruary 1E<*. The initial capital of '+I, was "s.. crores which has been contributed as underO "eserve (ank of India 2"(I3 "s.#../ crores :ife Insurance 4orporation of India 2:I43 "s./.?. crores ,tate (ank of India 2,(I3 and its subsidiary banks "s./.?. crores ,cheduled banks 2other than ,(I and its subsidiary banks3 and notified financial institutions "s.1.// crore The initial capital forms part of 8,@<* and the subscribers hold units in that ,cheme. In 1E?., the '+I, 'ct was amended and by virtue of the amendment, the Industrial %evelopment (ank of India 2I%(I3 took over the rights and responsibilities of "(I under the 'ct and the share of the initial capital held by "(I was transferred to and vested in I%(I. he general superintendence, direction and management of the affairs and business of '+I, rests in a (oard of Trustees which e6ercises all powers and does all acts and things which may be e6ercised or done by '+I,. The composition of the (oard of Trustees is as under O The 4hairman to be appointed by the 4entral &overnment in consultation with I%(I. 7ne trustee to be nominated by "(I.

11H

 -our trustees to be nominated by I%(I of whom not less than three shall be persons having special knowledge of, or e6perience in commerce, industry, banking, finance or investment. 7ne trustee to be nominated by :I4. 7ne trustee to be nominated by ,(I. Two trustees to be elected by other contributing institutions viz scheduled banks 2other than ,(I and its subsidiary banks3 and notified financial institutions. 'n e6ecutive trustee to be appointed by I%(I, provided that such an appointment may not be necessary if the 4hairman is whole@time. The (oard meets not less than si6 times a year and atleast once in two months. The 'ct provides that where the whole of the initial capital has been refunded to the contributory institutions, the 4entral &overnment may, after consultation with I%(I, by order, provide for reconstitution of the (oard. The 'ct also provides that regulations made by the (oard have to be with the prior approval of I%(I. There is an 56ecutive 4ommittee which, sub!ect to such general or special directions as the (oard may, from time to time, give, has the power to deal with any matter within the competence of '+I,. The 56ecutive 4ommittee consists of O@ The 4hairman of the (oard. The 56ecutive Trustee where such trustee has been appointed and Two other trustees nominated in this behalf by I%(I. The 56ecutive 4ommittee usually meets once in a month. The day@to@day business operations of '+I, are looked after by a full time 4hairman. ' team of 56ecutive %irectors and 4hief &eneral $anagers assists him. resently the (oard has created posts of eight 56ecutive %irectors and twelve 4hief &eneral $anagers though all posts have not been filled. The post of 56ecutive Trustee has remained vacant from 1st Aanuary #///.

11E

'+I, has a three@tier organisational set up with a 4orporate 7ffice, four zonal offices and fifty four branch offices. It has about *.1 crores unitholding accounts 2with more than one account held by a single person3 under ?) domestic schemes having investible funds at market value as on )/th Aune #//1 of "s..<,/.? crores. In addition, it has si6 off shore funds and four venture capital funds. Its management e6penses amount to about 1P of the investible funds. The (oard has powers to constitute such other committees whether consisting wholly of trustees or wholly of other persons or partly of trustees and partly of other persons as it thinks fit and for such purpose as it may decide. In $ay 1EE?, at the instance of ,5(I, the (oard constituted three 'sset $anagement 4ommittees for '+I,0s domestic schemes, one each for 8,@<* e=uity schemes and incomeKdebt schemes. 5ach 'sset $anagement 4ommittee consists of seven members of whom not less than five are independent outside e6perts. 1o person is a member of more than one committee. The 4ommittees0 scope of activity includes O@ 7verseeing and ensuring that each scheme addresses toKcomplies with the stated ob!ectives of the scheme, '+I, &eneral "egulations, ,5(I 2$utual -und3 &uidelines and the prudential investment norms laid down by the (oard of Trustees from time to timeL "eviewing scheme performance regularly and guiding fund managers on the future course of action to be adoptedL 4onsidering other key issues such as product designing, marketing, investor servicing, compliance, ta6ation and accounting policy. There is also an 'udit 4ommittee consisting of five trustees which reviews the systems and controls and interacts with the internal and e6ternal auditors. In addition

1#/

to (oard 4ommittees, there are a number of 4ommittees constituted of the e6ecutives of which the most important are O@ ' -irst@Tier 'udit 4ommittee which reviews the reports of all

sectionsKdepartments of '+I, and initiates necessary corrective action. 'n Investment Faluation 4ommittee which reviews the system and practice of valuation of securities. ' rimary $arket Investment 4ommittee for considering primary market

proposals. ' roperty $anagement 4ommittee to appraise proposals approved by the

(uilding 4ommittee. 'n Internal 4ommittee for settlement of dues. While the power to take decisions related to investment of the funds has been delegated by the (oard of Trustees to the 56ecutive 4ommittee and to a lesser e6tent to the 4hairman, e6posure limits have been laid down in '+I, &eneral "egulations, 1E<* and further restrictive limits have been specified by the (oard. The broad investment policy of each scheme is laid down under the provisions of each scheme approved by the (oard of Trustees or the 56ecutive 4ommittee. The (oard reviews the delegation of powers from time to time. -or investments in the primary market, there is a rimary $arket Investment

4ommittee consisting of * ,enior 56ecutives which vets all proposals and submits the same to the 4hairman with their recommendations. The secondary market transactions in e=uity as well as debt are decentralised to individual fund managers who decide on buy and sell strategy after consultation with research analysts. 'll stock market transactions are reported to the 56ecutive 4ommittee which gives overall direction in respect of secondary market transactions. "eport of secondary market transactions is also placed before the (oard. '+I, has promoted a number of associated companies and institutions. The details of its investment in those companiesKinstitutions are as under O@

1#1

(ook of 4ompanyKInstitution

Falue

Investment as P at )/K<K#//1 2"s. lakhs3 ;olding

'+I, (ank :td

H,E1#

<1 1// 1// ?H 1//

'+I, ,ecurities 56change :td. ),1?* '+I, Investor ,ervices :td '+I, Investment 'dvisory 1/// #*? 1*<

,ervices :td. '+I, International :td.

In addition, it has participated with other institutions in promoting a number of capital market intermediaries like The ,tock ;olding 4orporation of India :td., Infrastructure :easing and -inancial ,ervices 4o. :td., 1ational ,ecurities %epository :td. etc. The investments in associated companies and institutions has been financed out of the %evelopment "eserve -und. 's on Aune )/, #//1, the -und amounted to "s.1,.). crores. The 'ct provides that in the discharge of its functions under the 'ct, '+I, shall be guided by such directions in matters of policy involving public interest as I%(I may give to it in writing and if any =uestion arises whether the direction relates to a matter of policy involving public interest, I%(I0s decision is final. (ni)ue *t'engt + ,ea-ness o" !.I* '+I, is the largest player in the mutual fund industry with total investible funds of domestic schemes 2at $arket Falue3 as at )/th Aune, #//1 of "s..<,/.? crores constituting about .?P of the total investible funds of the industry. 8, <* with a total unit capital as at )/th Aune #//1 of "s.1#,?H< crores had a substantial share of these investible funds. It has certain uni=ue strengths notable amongst them being O@

1##

 Its large size with conse=uential economies of scaleL Its nation@wide well entrenched distribution network and conse=uently its wide reach and capacity to mobilise large resourcesL Its brand image arising out of a public perception that the safety of funds is assured by its pseudo &overnment character, which may not be entirely un!ustified. The fact that it does not have an '$4 to whom management fees would have to be paid which results in higher returns available to unitholders. It als, 'as + &tain %&,n,un+ d 4 aEn ss s/ (eing the largest player in the mutual fund industry, it also has large investments in individual companies. Its ability to turnaround its portfolio =uickly is therefore somewhat limited. The fact that it combines within itself the roles of an '$4 and the Trustee results in the absence of a degree of accountability which an '$4 normally owes to the Trustee and the control which the latter enforces upon the former. There is a lack of transparency, particularly with regard to 8,@<* where the sale and repurchase price are not linked to the 1'F and the 1'F is not disclosed to the unitholder. The fact that '+I, is perceived as having a pseudo &overnment character is as much its weakness as it is its strength, particularly in respect of 8,@<*. While it enchances its ability to sell the units, it also gives a false sense of comfort which may not be true or even desirable. $oreover, in a highly competitive market, public perception of '+I, as a pseudo @ &overnment institution may affect its ability to attract and retain the best professional talent or to ade=uately motivate it.

1#)

1#*

Su!! sti,n

1#.

Su!! sti,n
AXIS C&isis - ( +,mm ndati,ns 1. Initial contributors to '+I, should infuse permanent funds of atleast "s..// crores. #. The ,8 portfolio should be transferred at book value to a ,pecial 8nit ,cheme 2,8, EE3 to be subscribed for by &7I by the issue of dated &7I securities. ). 8,@<* should make a strategic sale of its significant e=uity holdings by negotiation to the highest bidder to ensure fetching the best value for the unit holder. *. a. The investment sub@limit of "s.1/,/// for ta6 benefit on 5=uity :inked ,avings ,chemes should be removed and benefit should be e6tended to 8,@<* and all schemes investing more than ./P in e=uity. b. Income distributed by 8,@<* and schemes investing more than ./P in e=uity should be e6empt from ta6. .. 1ew schemes for investing in growth stocks in IT, harma and -$4& sectors should be launched, to be subscribed for by banks. <. The size of the '+I, (oard should be increased to 1., with additional five members being co@opted by the (oard. ?. a. Trustees should assume higher degree of responsibility and e6ercise greater authority. b. The remuneration of Trustees should be increased and their attendance record be published in the 'nnual "eport. H. There should be a separate 'sset $anagement 4ompany for 8,@<* with an independent (oard of %irectors.

1#<

E. a. 4hinese walls should be created by appointing separate and independent fund managers for each scheme. b. Inter@scheme transfers must be based on independent decisions and re=uirements of concerned fund managers and at market determined prices. 1/. a. There should be an independent fund manager for 8,@<* with full responsibility and accountability. b. The fund manager should be helped by a strong research team and the research capability should be strengthened. 11. a. InvestmentKdis@investment decisions should be based on research analysts0 recommendations who should have the authority and responsibility of making the recommendations. b. The fund manager should have the final authority and responsibility in decision making based on his perception of the market and research inputs 1#. The focus on small investors should be strengthened and the lilt towards corporate investors reduced. 1). a. 8,@<* should be 1'F driven within three years. b. If at the end of the three year period, the re@purchase price and the 1'F are not in line, the Trust will be left with no alternative but to seek &7I support once again the provide the difference between the 1'F and the repurchase price. 7nly a clear commitment from the &7I to stand by 8,@<* till it finally assumes the character of a 1'F driven scheme will instill the re=uired confidence in the 8,@ <* investors.

1#?

1*. The spread between sale and repurchase prices should be gradually increased to deter short term investors. 1.. a. The dividend distribution policy needs to follow a more conservative approach to build up sufficient reserves during periods of good performances. b. 's a rule, dividends need to be curtailed when there is inade=uate income. 1<. The rate of return offered to investors needs to be reviewed on a periodic basis. The yield offered on 8,@<* is e6cessively high as compared to other comparable instruments. 1?. The composition of the portfolio needs to be changed to provide for more weightage to debt consistent with the ob!ectives of the ,cheme. 1H. The operations of 8,@<* should be brought under ,5(I purview at the earliest. 1E. 'n independent professional firm should be commissioned for a detailed review of asset management processes including back office, inter scheme transfer and investor servicing. $utual funds have their drawbacks and may not be for everyoneO

N, Gua&ant s/ 1o investment is risk free. If the entire stock market declines

in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. ;owever, anyone who invests through a mutual fund runs the risk of losing money.

F s and +,mmissi,ns/ 'll funds charge administrative fees to cover their

day@to@day e6penses. ,ome funds also charge sales commissions or >loads> to compensate brokers, financial consultants, or financial planners. 5ven if you don0t use a broker or other financial adviser, you will pay a sales commission if you buy shares in a :oad -und.

Tax s/ %uring a typical year, most actively managed mutual funds sell

anywhere from #/ to ?/ percent of the securities in their portfolios. If your fund

1#H

makes a profit on its sales, you will pay ta6es on the income you receive, even if you reinvest the money you made.

Mana! m nt &isE/ When you invest in a mutual fund, you depend on the

fund0s manager to make the right decisions regarding the fund0s portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you e6pected. 7f course, if you invest in Inde6 -unds, you forego management risk, because these funds do not employ managers '+I, should list five ways in which one can buy the fund units.

Ca- I in- st d in t' &i!'t .unds)

B< G t in t,u+' 4it' t' Ass t Mana! m nt C,m%an* The first step is to track the '$4 @@ as fund houses are known @@ online. 7nce you get onto their Web site, you will get their office addresses, phone numbers and a contact e@mail address. Qou will even be able to transact online with some of them. mutual fund Web sites allow you to invest online. ;owever, you must check if you have an account with the banks they have partnered with. -or e6ample, rudential I4I4I $utual -und allows you to buy funds online if you have a banking account with any of the following banksO 4enturion (ank, ;%-4 (ank, I4I4I (ank, I%(I (ank and '+I, (ank. Qou can buy units of ,(I $utual -und0s schemes only if you have an account with the ,tate (ank of India or ;%-4 (ank. 8nder the heading Investors 3one, you will find another one called AR4 Search. This refers to the '$-I "egistration 1umber. 4lick on it and you will arrive at a search page. Qou can locate an agent in your vicinity by !ust putting in your I1 code or name of your city. %o you have an online trading accountI Then you could check if they also sell mutual funds online.

1#E

If you do not have an online trading account and are considering opening one, you could look for a player that offers both. ,ome like I4I4I %irect sell funds online. (ut you must have a trading account with them. 7thers, like India (ulls and $otilal 7swal, do not have this facility online but if you call and leave your contact details, they will send an agent over.

1)/

C,n+lusi,n

CONCLUSION CONCLUSION (EGA(DING STUDK/

(y %ecember #/1*, Indian mutual fund industry reached "s 1,./,.)? crore. It is estimated that by #/1/ $arch@end, the total assets of all scheduled commercial banks should be "s */,E/,/// crore.

1)1

The annual composite rate of growth is e6pected 1).*P during the rest of the decade. In the last . years we have seen annual growth rate of EP. 'ccording to the current growth rate, by year #/1/, mutual fund assets will be double. :et us discuss with the following tableO A!!& !at d %,sits ,. S+' dul d C,m :anEs in India ((s<C&,& " $onthKQear $ar@EH $ar@// $ar@/1 $ar@/# </.*1 / H.1.E ) 1. EHE1* 1 1* 11)11H H 1) $ar@/) 1#H/H. ) 1# $ar@ /* @ ,ep@/* 1.<?#. 1 1H *@%ec

%eposits 4hange in P over last yr Source - RBI

1<##.?E

Mutual Fund AUMJs G&,4t' $onthKQear $ar@ EH $ar@ // $ar@ /1 $ar@ /# $ar@ /) $ar@/* ,ep@/* *@%ec 1)?<# < *. 1.11* 1 E

$- '8$0s 4hange in P

<HEH* E)?1? H)1)1 E*/1? ?.)/<

1*E)//

over last yr Source 5 A+6I

#<

1)

1#

#.

S,m .a+ts .,& t' !&,4t' ,. mutual .unds in India

1//P growth in the last < years. 1umber of foreign '$40s are in the =ue to enter the Indian markets like -idelity Investments, 8, based, with over 8,G1trillion assets under management worldwide.

7ur saving rate is over #)P, highest in the world. 7nly channelizing these savings in mutual funds sector is re=uired.

We have appro6imately #E mutual funds which is much less than 8, having more than H//. There is a big scope for e6pansion.

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0(0 and 040 class cities are growing rapidly. Today most of the mutual funds are concentrating on the 0'0 class cities. ,oon they will find scope in the growing cities.

$utual fund can penetrate rurals like the Indian insurance industry with simple and limited products.

,5(I allowing the $-0s to launch commodity mutual funds. 5mphasis on better corporate governance. Trying to curb the late trading practices. Introduction of -inancial lanners who can provide need based advice.

T' ad-anta! s ,. in- stin! in a Mutual Fund a&

Di- &si.i+ati,n/ The best mutual funds design their portfolios so individual

investments will react differently to the same economic conditions. -or e6ample, economic conditions like a rise in interest rates may cause certain securities in a diversified portfolio to decrease in value. 7ther securities in the portfolio will respond to the same economic conditions by increasing in value. When a portfolio is balanced in this way, the value of the overall portfolio should gradually increase over time, even if some securities lose value.

1&,. ssi,nal Mana! m nt/$ost mutual funds pay topflight professionals to

manage their investments. These managers decide what securities the fund will buy and sell.

( !ulat,&* ,- &si!'t/ $utual funds are sub!ect to many government

regulations that protect investors from fraud.

Li0uidit*/ It0s easy to get your money out of a mutual fund. Write a check,

make a call, and you0ve got the cash.

C,n- ni n+ / Qou can usually buy mutual fund shares by mail, phone, or

over the Internet.

L,4 +,st/ $utual fund e6penses are often no more than 1.. percent of your

investment. 56penses for Inde6 -unds are less than that, because inde6 funds are not actively managed. Instead, they automatically buy stock in companies that are listed on a specific inde6

Transparency

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-le6ibility 4hoice of schemes Ta6 benefits Well regulated

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:OOKS
;I:I 97T:5", $'"95TI1& $'1'&5$51T, Folume @< th, '445,, I1 1/T; A8:Q #/1/ $715Q, ('19I1& '1% -I1'145 Z "4 ,;'"$', (,4 '445,, I1 1.T; A815 #/1/ 8(:I4'TI71,

FOU(NALS
I4-'I 81IF5",ITQ "5,, A78"1':,

WE: SITES

www.a6isbank.com www.mutualfundsindia.com www.google.com

www.gemoney.in

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