Sebi to weigh ban on payment of upfront commissions in mutual fund schemes

Sebi is expected to take a close look at a suggestion made by CEOs of leading fund houses to ban payment of upfront commission to distributors of mutual fund schemes. 

Battling redemptions, some MFs are luring distributors with high commission - a practice that breeds unfair competition and goes against the principle of the "no-entry load regime" that kicked off from April 2009.

The subject cropped up at a meeting between Sebi and heads of as many as 15 fund houses. Faced with a dismal market, MFs have also suggested that know-yourcustomer (KYC) norms be simplified and the period of exit load extended beyond a year to attract long-term investors.

"Sebi is keen to promote mutual funds as a 'savings' product as against an 'investment'. It will form a team to take up with the government to mandate retirement funds to invest in mutual funds.

This could be similar to 401K, the US retirement savings plan for employees," said a person present at the meeting. Such a move will push the growth of the mutual fund industry in a big way, said a Sebi source.

On the issue of upfront commission, an industry source said big fund houses, which introduced the practice, are now opposing it as they lose out to new funds. According to industry sources, fund houses are paying anywhere between 0.95% and 3% as upfront commission to distributors from their own pockets.

Between October and March, fund houses pay higher upfront commission to distributors to sell their tax-saver funds. During the two-hour meeting, the fund CEOs proposed that qualified foreign investors (QFIs) would be encouraged to put in money if KYC norms are streamlined. They also asked for introduction of share-class structure and valuation models of gold funds.

"Sebi wanted our views on key issues facing the industry. The regulator, it seems, is not happy about falling asset bases and investment outflows. We think Sebi will take quick decisions on KYC for QFIs, transaction charges and extension of exit load structure," said a CEO who attended the meeting.

According to sources, the regulator may take a decision not to make PAN (permanent account number) mandatory for QFIs who want to invest in Indian mutual funds. The regulator will look into rules laid down by overseas regulators for enabling individual foreign investors, particularly from countries with a strong regulatory framework, to put money in Indian MFs.

Offshore distributors, selling Indian MFs to QFI, may be entrusted with the responsibility of completing the KYC procedure. Industry representatives strongly backed the agenda on a possible extension of the exit load period from one year to two or three years.

This, they think, will arrest sudden outflows and distributor-induced fund portfolio churning. In order to make the marketing structure more flexible, the decision to charge a transaction fee should be left to the discretion of a distributor. At present, distributors recover a charge of Rs 150 from all investors, irrespective of the size of investment.

"This is not a good practice... If someone is investing Rs 1 lakh, the distributor should have the freedom not to levy a charge," said the head of another fund. The regulator may soon exempt independent financial advisors from disclosing their fees on the websites of fund houses, he felt.

Among other things, the regulator said it would also look into the valuation model of gold fund-of-funds which have gold prices as the benchmark but valued at closing net asset value (NAV). This, according to fund managers, is resulting in widen variance between performance of gold fund-of-funds and their NAVs.

The regulator, however, was also not comfortable with the idea of introducing differential share class in mutual funds. "Differential share class discriminates between investors and it cannot be implemented," the regulator told the MF executives.

source: ET

Government revamps small savings schemes

Investments in small savings instruments will now fetch investors more, with the Union government on Friday deciding to rationalize schemes in these and to align the rate of interest with government maturities. The rate of interest on the Public Provident Fund (PPF) is proposed to be increased to 8.6 per cent from the present eight per cent and the annual ceiling on investment under the scheme to be increased from Rs 70,000 to Rs 1 lakh. The decision take effect with effect from December 1. 

In line with deregulation of the rate of interest on banks’ savings deposits, the interest rate on post office savings accounts is top be be raised from the present 3.5 per cent to four per cent. The rates on time deposits, recurring deposits and National Savings Certificates (NSC) will also go up, with a new 10-year NSC offering as high as 8.7 per cent per annum. Kisan Vikas Patras are to be discontinued. 

“The rate of interest on small savings schemes will be aligned with G-sec rates of similar maturity, with a spread of 25 basis points (bps), with two exceptions. The spread on 10-year NSC will be 50 bps and on Senior Citizens Savings Scheme, 100 bps. The interest rates for every financial year will be notified before April 1,” the finance ministry said on Friday. 

The decisions were taken on the recommendation of a committee set up in July 2010 for a comprehensive review of the National Small Savings Fund (NSSF). The panel, headed by former Reserve Bank of India deputy governor Shyamala Gopinath, gave its report this June. 

The maturity period for Monthly Income Scheme (MIS) and NSC will be reduced from six years to five years. Interest on loans obtained from the PPF will be increased to two per cent per annum from the existing one per cent. Liquidity of the Post Office Time Deposit, with maturities of one year to five years, will be improved by allowing premature withdrawal at a rate of one per cent less than time deposits of comparable maturity. Payment of five per cent bonus on maturity of MIS will be discontinued. 

Payment of one per cent commission on PPF schemes and 0.5 per cent on the Senior Citizens Savings Scheme will be discontinued. Agency commission under all other schemes will be reduced from the existing one per cent to 0.5 per cent. 

The minimum share of states in net small savings collections in a year, for investment in state government securities, will be reduced from 80 per cent to 50 per cent. The remaining amount will be invested in central government securities or lent to other willing states or in securities issued by infrastructure companies/agencies wholly owned by the Centre. 

Yearly repayment of NSSF loans made by the Centre and the states are to be reinvested in central and state government securities in a 50:50 ratio. The period of repayment of NSSF loans by the Centre and states will be reduced to 10 years, with no moratorium. 

For the current financial year, the prevailing interest rate of 9.5 per cent will continue. From April 1, 2012, a revised interest rate will be notified. 

source: Business Standard

HAPPY DIWALI - 2011

Everything You Wanted To Know About Your EPF

Our salary slips always show some contribution towards a Provident Fund (PF) account. We also see our employer contributing to the same account. However, most often than not, we are not aware how much is contributed by us and by the employer every month towards the Provident Fund Account.

Let us understand in detail about this long term savings instrument.

Types of PF

Firstly there are 2 types of Provident Funds:

1. Statutory Provident Fund
   
   A statutory provident fund is for the government and semi- government employees (ex: railway officer or any other government body/institution)
   
2. Recognized Provident Fund
   
   A Recognized provident fund is the fund which is recognized under Employee Provident Fund and Miscellaneous Provisions (EPF & MP) Act 1952. The recognized provident fund is further classified as 1) Government managed fund and 2) Private trusts managed by the organizations.

There are 3 critical components to Recognized Provident Fund

1. Employee Provident Fund (EPF)
   
   In this fund the employee and the employer contribute a defined amount every month with the objective of long term savings/savings for retirement. Here, you contribute 12% of the specified salary (either Rs. 6,500 or your actual Basic if it is higher - whichever you choose) and your employer contributes 3.67% of the specified salary (either Rs. 6,500 or the actual Basic, whichever is higher, if it so chooses)
   
2. Employee Pension Scheme (EPS)
   
   In this fund the employer and the central government contribute a defined amount every month with the sole objective of providing regular pension to the employee post retirement. You as an employee do not contribute to your own Pension Scheme, this is contributed by your employer and by the Central Government. Your employer contributes 8.33% of Rs. 6,500 Basic salary to the Employee Pension Scheme, and the Central Government contributes 1.16% of the same. The EPS provides you with regular annuity after your retirement.
   
   
3. Employee Deposit Linked Insurance (EDLI)
   
This scheme was introduced in 1976 and it provides life insurance cover to the members of Employee Provident Fund. The insurance amount is linked to the balance in the employee's PF account with a maximum cover of Rs. 60000/- at any time. Only the employer contributes towards this scheme which is 0.5% of Rs.6500/-

As per the Employee Provident Fund and Miscellaneous Provisions (EPF & MP) Act 1952, an establishment having 20 or more on-roll employees need to make contributions towards the Provident Fund. If a corporate hires majority of its employees on a contractual basis, and has less than 20 employees occupying permanent positions on the rolls of the company, then it would not contribute to the Provident Fund.

The contribution needs to be at least the lower of the following for both the employer and the employee:

1. 12% of Specified salary (Basic)
   
   OR
   
2. 12% of Rs. 6,500/- (i.e. Rs. 780)

Contribution Matrix:

Employee Contribution - Total 12% of specified Salary ---> 12% goes towards EPF & 0% towards EPS** Employer Contribution - Total 12% of specified Salary ---> 3.67% goes towards EPF & 8.33% towards EPS**
Central Government - Total 1.16% of specified salary ---> 0% goes towards EPF & 1.16% towards EPS**

Total Contribution per month -15.67% towards EPF & 9.49% towards EPS**

Let's take an example to understand the matrix:

Scenario 1

Mr. Shah, our favourite fictional case study character, draws a Basic salary of Rs. 25000/- per month and the employer's contribution towards PF is similar to Mr. Shah's contribution. Their contribution is not on specified salary but on the statutory limit of Rs. 6500/-

Mr. Shah's Contribution - Total 12% of 6,500 out of which Rs. 780 towards EPF and Rs. 0 towards EPS Employer Contribution - Total 12% of 6,500 out of which Rs. 239 towards EPF and Rs. 541 towards EPS Central Government - Total 1.16% of 6,500 out of which Rs. 0 towards EPF and Rs. 75.40 towards EPS

Total Contribution per month - Rs. 1,019 towards EPF and Rs. 616.40 towards EPS

Please Note:
Out of the 12% contribution from the employer, 8.33% of the contribution, subject to a maximum of Rs. 541 per month, is contributed to the Employee Pension Scheme.

So in the case above where Mr. Shah's Basic Salary is Rs. 25,000, and his employer also contributes on 12% of the actual Basic i.e. 12% of Rs. 25,000, totally, only 8.33% of Rs. 25,000 subject to a maximum of Rs. 541 gets contributed to the EPS, and the rest is contributed to Mr. Shah's PF account.

Based on this, the following contributions are made by his employer:

Employer's contribution to Mr. Shah's EPS: 8.33% of Rs. 25,000 = Rs. 2082.50, subject to max of Rs. 541
So, employer's contribution to Mr. Shah's EPS: Rs. 541
Employer's contribution to Mr. Shah's PF: 12% of Basic less EPS contribution = Rs. 2,459

Scenario 2

Mr. Shah's Contribution - Total 12% of 25,000 out of which Rs. 3,000 towards EPF and Rs. 0 towards EPS Employer Contribution - Total 12% of 25,000 out of which Rs. 2,459 towards EPF and Rs. 541* towards EPS
Central Government - Total 1.16% of 6500 out of which Rs. 0 towards EPF and Rs. 75.40* towards EPS

Total Contribution per month - Rs. 5,459 towards EPF and Rs. 616.40 towards EPS

*(Note: Contribution by Employer and Central Government towards EPS (Employee Pension Scheme) is always on Rs. 6500/- (i.e. in case of Employers contribution the balance is contributed towards EPF: Rs. 3,000-541= 2,459)

Hence, as seen in the above two scenarios, you and your employer would be either contributing Rs.780 and Rs.239 respectively towards your PF account or 12% and 3.67% of your specified salary (Basic) towards your PF account.

Additionally, you can choose to increase your own PF contribution from Rs. 780 to 12% of your Basic, but if you do so, your employer need not do the same, your employer can continue to contribute Rs. 239 toward your PF account, based on the basic salary of Rs. 6,500.

Contributing towards Provident Fund always proves to be fruitful because of the following reasons:

1. Employee's contribution towards PF is exempt from tax u/s 80C of Income Tax Act, 1961, with a maximum limit of Rs.1 Lakh.
   
2. Interest accumulated is tax free.
   
3. Safest instrument as return is guaranteed by the government.
   
4. The entire corpus is tax free during maturity.

(Note: Employer's contribution is tax free during maturity only if the account is active and maintained for a minimum of 5 years)

There are some points to be noted to make the most of your EPF, which are as follows:

1. Always make sure you have nominated someone for your PF account. You can nominate one or more nominees for the account. They should be your family members. Only if a person doesn't have a family, can he nominate any other person.
   
2. Even if you shift your job, always maintain one PF account. This will be beneficial over the long run due to compounding of interest in the same account and secondly becomes easier to track.
   
3. Provident Fund account gives 8.5% tax free return (except in 2010-11 where EPFO declared interest at 9.5%) which comes to 12.14% pre tax return. This is much higher than the Bank FD rates and more secured. Additionally, EPF is tax deductible from your salary under Section 80C so you do not pay any tax on this part of your income. So you have a dual tax benefit on your EPF.
   
4. You also have the option of contributing to the Voluntary Provident Fund (VPF). As an employee, you have the option of contributing an additional 88% of your Basic to the VPF. This brings y our total contribution of EPF + VPF to 100% of your Basic + DA.
   This will earn you the same tax free rate of interest of 8.50% p.a., however this amount is not tax deductible over and above the limit of Rs. 1 lakh under Section 80C.
   Additionally, your employer will not contribute to your VPF, this contribution is done solely by you.

What are the Forms I need to make changes in my EPF account?

While the EPF is a safe and strong investment avenue for the salaried class, you might want to make changes such as transferring your PF from one employer to another if you change your job, or withdrawing your PF, or availing advances / withdrawals and so on. If you want to make any such movements in your PF, you will need to fill the relevant form and submit it to the EPFO.

A list of useful forms is given below:

1. To shift your PF from one employer to another:
   You will need Form 13.
   
2. To avail an advance or to withdraw part or all of your PF contribution for certain specified reasons: You will need Form 31.
   
   If you are withdrawing your PF for purchase, construction or remodeling of a house or plot, you will also need to submit a declaration stating the exact reason and furnishing relevant proofs. There is a format for the declaration available on the EPF India website.
   
3. To apply for financing a life insurance policy out of your PF account:
   You will need Form 14
   
4. To withdraw your PF on retirement / leaving the job / termination:
   You will need Form 19
   
5. If you are a nominee and need to claim the PF account of a deceased family member:
   You will need Form 20.

Conclusion

As you can see, there's a lot more to the EPF than meets the eye. So do go through your salary slip and decide whether you would like to increase your EPF contribution and avail the tax benefit.

How will the GDP growh outlook pan out?

IMF's (International Monetary Fund) GDP forecasts for 2011 and 2012 do not really paint a rosy picture. As today's chart of the day shows, although China and India lead the pack, growth rates would still not match what they were in the last couple of years. This is not surprising given that both economies are battling inflation as a result of which their central banks have been tightening interest rates. Despite this, both these countries are way ahead of the rest of the pack in terms of growth. 

Source: The Economist

SEBI releases Concept Paper on Regulation of Investment Advisors

CONCEPT PAPER ON REGULATION OF INVESTMENT ADVISORS

1. Background 

1.1 Section 11 (2)(b) of SEBI Act empowers SEBI to register and regulate working of Investment Advisors and such other intermediaries who may be associated with securities market in any other manner.

1.2 As decided by SEBI Board in its meeting dated March 22, 2007, SEBI had posted a consultative paper on the “Regulation of Investment Advisors” on its website inviting public comments. Based on public comments received on the consultative paper as also the USAID (Fire Project), a memorandum was placed before the SEBI Board proposing a regulatory approach for Investment Advisors. It was proposed that the Regulations shall be implemented through an SRO. As Investment Advisors offer products across asset classes, it was felt that the respective regulators may take a view and formulate similar norms and code of conduct. Accordingly a reference was made to the HLCC on Financial and Capital Markets.

1.3 HLCCFM in its meeting held on December 22, 2008 set up the D. Swarup Committee to re‐examine the issue. The committee submitted its report to government in December 2009 which was discussed in the HLCCFM meeting in March 2010. Subsequently, regulatory issues relating to Wealth Management and / Private Banking undertaken by banks were discussed by the FSDC Sub‐Committee in its meeting on March 4, 2011.

1.4 In this background, SEBI has developed a framework for regulation of investment advisors through the SRO route.

2. Tackling Conflict of Interest in Distribution of Financial Products 

2.1 It is axiomatic that any industry, in order to achieve scale and high productivity, must be free of internal contradictions and conflicts of interest. Financial sector is no exception. The financial product distribution space is particularly fraught with these conflicts between the manufacturers of financial products like banks, mutual funds, and insurance companies, etc. and the distributors which sell these products who call themselves by various names like agents, financial advisors, financial planners, etc.

2.2       It is necessary to resolve or at least mitigate these conflicts, especially in the case of financial products because of their two peculiar characteristics. Firstly, the products are intangible and conceptually more difficult to understand. Secondly, the pay‐offs are in a distant future and can be camouflaged by several factors external to the product. It is in this context that the distributors occupy a key role; all the more so considering the low levels of financial literacy and awareness in India.

2.3 Two major conflicts of interest in the financial product distribution space are the following:

a. Dual role played by distributors as an agent of investors as well as of the manufacturers. This is due to the fact that with respect to many financial products, agents receive their payments from two sources: commissions from the manufacturers (either directly or through deductions from the investment amount of investors), and advisory fees or other charges received from the investors. This immediately raises the question: whose interests do they represent: the manufacturers’ or the investors’? This question has also been raised in the Devendra Swaroop Committee report on ‘Minimum Common Standards for Financial Advisors and Financial Education’. This prevalence of divided loyalties may not be in the best interest of all the stakeholders concerned. It often results in a situation where the distributors are loyal to only themselves. They would happily churn investors’ portfolio and also squeeze more commission from the manufacturer.

b. A situation might arise where distributors are likely to be partial to, and would sell more products of the manufacturer who is the best paymaster; and ultimately, other manufacturers would scramble to do the same, thus leading to a race to the bottom. Thus, there is an inherent conflict in the activities of an agent/distributor distributing similar products of various manufacturers.

2.4 There could be many possible solutions to these issues ‐ the most obvious and the easiest being enhanced disclosures. However, in a country like India where levels of literacy are low and financial literacy even lower, disclosures have a limited effect.

2.5 The Financial Services Authority, UK, had outlined plans to ban commission payments for product providers and enforce financial advisors to agree on fee payments with clients upfront. It defined two categories of service: independent and restricted, on the basis of which advisors would charge the fee. Examples of restricted advice may be where advisors offer advice only about the products of a particular manufacturer; or about the products from a defined list of manufacturers. Independent advice would include unrestricted advice based on a comprehensive and fair analysis of the relevant  market. However, there is a kind of restricted advice called ‘basic advice’. With Basic Advice, the consumer is asked some pre‐scripted questions about their income, savings and other circumstances to identify the consumer’s financial priorities and suitability for a stakeholder product, but a full assessment of their needs is not conducted nor is advice offered on whether a non‐stakeholder product may be more suitable. ‘Basic advice’ is excluded from the new rules i.e. in case of basic advice, commissions can be paid and the new advisor charging rules are not applicable to the same. Also, non‐ advised or execution only sales would be remunerated only by commission and would not fall within the ambit of the advisor charging rules. Thus, in the FSA model, the first conflict of interest as per para 2.3(a) seems to have been addressed by ensuring that the distributor/advisor owes allegiance to only one paymaster at a time‐either the manufacturer or the investor.

2.6 SEBI, with effect from August 01, 2009, had banned entry loads in mutual fund investments and had mandated that the upfront commission should be paid directly by the investors to the distributors based on factors like assessment of the service of the distributor. However, the distributor continued to earn trail commissions from the Asset Management Company at the same time. Thus, the first conflict of interest was only partially mitigated in this model.

2.7 In this paper, we are attempting to deal with only the first type of conflict of interest. The possible model for tackling this conflict of interests may be the following:

a. The person who interfaces with the customer should declare upfront whether he is a financial advisor or an agent of the manufacturer.

b. If he is an advisor, he would be subject to the Investment Advisors Regulations; and would require a much higher level of qualifications. He would act as an advisor to the investor on all financial products. He would receive all payments from the investor and there would be no limits set on these payments. On the other hand, there will be agents who will be associated with the manufacturer and would receive their remuneration from them. However, they will be prevented from styling themselves as financial advisors and will have to call themselves as agents only.

c. This will resolve the first conflict of interest as in para 2.3 (a).

3. Structure of Proposed Regulations

3.1 The proposed regulatory framework intends to regulate the activity of providing investment advisory services in various forms by a wide range of entities including  independent financial advisors, banks, distributors, fund managers etc. The investment advice may be provided for investments in various financial products including but not limited to securities, insurance products, pension funds, etc. While the activity of giving investment advice will be regulated under the proposed framework through an SRO, issues relating to financial products other than securities shall come under the jurisdiction of the respective sectoral regulators such as action for mis‐selling, violation of code of conduct, conflict of interest etc. The SRO set up for the regulation of Investment Advisors shall follow the rules/regulations laid down by respective regulators for products falling in their jurisdiction, including but not limited to suitability and appropriateness of the products.

3.2 The SRO formed to regulate investment advisors will be registered under the SEBI (Self Regulatory Organization) Regulations, 2004. SRO will have sufficient resources to perform its functions. Its duties would include registering and setting minimum professional standards, including certification of investment advisors, laying down rules and regulations and enforcing those; informing and educating the investing public; setting up and administering a disputes resolution forum for investors and registered entities etc. Persons desirous of registration as Investment Advisors shall obtain registration with the SRO established for the purpose. The SRO will be entitled to charge a fee for granting registration and an annual fee.

3.3 Complaints / disputes arising out of investment advisory services will be taken up by the SRO with the respective regulatory authority, while the complaints regarding the financial products and their manufacturers will be handled by the respective regulators. 

3.4 Investment Advisors tend to call themselves by varied names viz. wealth managers, private bankers etc. This causes much confusion as to their role and responsibility. Hence the regulations will provide that no person can carry on the activity of offering investment advice unless he is registered as an Investment Advisor under the regulations. On the other hand any person who has obtained the certificate of registration as an Investment Advisor must necessarily use the word “investment advisor” in his name.

4. Definitions

4.1 Investment Advisor

Investment advisor for the purpose of the regulations shall be any person or entity that provides investment advice directly or indirectly for a consideration, which may be received directly from the investor or who holds himself out as an investment advisor.

4.2 Investment Advice

Investment advice shall be an advice written, oral or through any other means of communication given regarding investment of funds in financial products or products that are traded and settled like financial products purportedly for the benefit of the investor. It shall include:

(a)   Financial advice; or

(b)   Financial planning service or

(c) Actions which would influence an investment decision and are incidental to making an investment/investment decision.

5. Coverage

5.1 Individuals

The following set of individuals would need to get registered under the regulations to be able to provide Investment Advisory Services:‐

a. Independent Investment Advisor– Independent Investment Advisors are professionals who offer independent advice on financial matters to their clients and recommend suitable financial products or products that are traded and settled like financial products.

b. Representatives of investment advisors or intermediaries who on behalf of the investment advisor or intermediary provide investment advice to investors: Representative would mean a person, in the direct employment of, or acting for, an investment advisor, who performs on behalf of the investment advisor any investment advisory service, whether or not he is remunerated, and whether his remuneration, if any, is by way of salary, wages, commission or otherwise, and includes any officer of an investment advisor who performs for the investment advisor any investment advisory service whether or not he is remunerated, and whether his remuneration, if any, is by way of salary, wages, commission or otherwise; 

5.2 Non‐individuals

The following set of non‐individuals (corporate entities) would need to get registered under the regulations to be able to provide Investment Advisory Service:

a. Banks providing investment advisory/ wealth management services: In India Banks are allowed to perform only Investment Advisory Services. Those banks which provide similar services would be required to get registration under these regulations.

b. Any entity, other than an individual person ‐ representing investment advisor, who on behalf of the investment advisor provides investment advice to investors : Representative would mean a person, acting for, an investment advisor, who performs on behalf of the investment advisor any investment advisory service, whether or not it is remunerated, and whether its remuneration, if any, is by way of, commission or otherwise, and includes any officer of such an entity who performs for the investment advisor any investment advisory service whether or not he is remunerated, and whether his remuneration, if any, is by way of salary, wages, commission or otherwise;

6. Persons Exempt from the regulations

6.1 A person shall be deemed not to be engaged in the business of providing investment advice, if the advice is solely incidental to some other business or profession and the advice is given only to clients of the person in the course of such other business or profession and the advice does not specify particular securities and is limited to general comments made in good faith in regard to trends in the securities market, the economic situation of the country.

6.2 The following shall be exempt from registration under these regulations:

a. An advocate and solicitor or law firm, whose offer of financial advice is solely incidental to his legal practice.

b. Chartered accountants who are registered under the Institute of Chartered Accountants of India providing of any investment advice is solely incidental to the accounting practice.

c. Any person who publishes magazine/newspaper, where —

I. the newspaper is distributed generally to the public in India;

II. the advice given, or analysis or report issued, is promulgated only through that newspaper;

III. that person receives no commission or other consideration, apart from any fee received from subscription to or purchase of the newspaper, for giving the advice, or for issuing or promulgating the analysis or report; and

IV. the advice is given, or the analysis or report is issued or promulgated, solely as incidental to the conduct of that person’s business as a newspaper proprietor.

d. Any person who owns, operates or provides an information service through an electronic, or a broadcasting or telecommunications medium, where —

I. the service is generally available to the public in India;

II. the advice given, or analysis or report issued is promulgated only through that service;

III. that person receives no commission or other consideration, apart from any fee received from subscription to the service, for giving the advice, or for issuing or promulgating the analysis or report; and

IV. the advice is given, or the analysis or report is issued or promulgated, solely as incidental to that person’s ownership, operation or provision of that service.

e. Any stock broker or sub‐broker as registered under SEBI( Stock Broker and Sub‐ Broker) Regulations, 1992, who provides any investment advice as per Regulation 7  read with Schedule II of SEBI (Stock Broker and Sub‐broker) Regulation, 1992 and not charging any consideration for such advice.

f. Any person offering exclusively insurance broking services under regulation of Insurance Development and Regulatory Authority.

7.  Registration Requirements

7.1 The Individuals who wish to get registered under these regulations would need to satisfy the following criteria:

a. Individuals should acquire a Professional Qualification from a recognized institute for e.g. Chartered Accountancy form ICAI, MBA in Finance or similar qualification from a recognized university or should have at least 10 years of relevant experience; and

b. Certification from NISM or such other organization approved by SEBI for this purpose

c. The individuals should conform to the Fit and Proper Criteria s laid down in Schedule II of SEBI (Intermediaries) Regulations, 2008.

7.2  Entities who wish to get registered under these regulations would need to satisfy the following criteria:

a. Capital Adequacy Requirement: Entities would need to maintain a minimum net worth which would be separate from the net worth required for other activities.

b. Key personnel: Entities should have at least 2 key personnel having the relevant experience exclusively for such activity. Such key personnel should also acquire the certification from NISM or such other organization as approved by SEBI for this purpose and have minimum qualification as prescribed.

c. The entity should conform to the Fit and Proper Criteria laid down in Schedule II of SEBI (Intermediaries) Regulations, 2008.

d. The applicant must have adequate infrastructure to enable it to discharge its functions as an Investment Advisor.

8. Obligations of an Investment Advisor

8.1 Fiduciary Responsibility to Investors

All information received and provided by the investment advisor would be in fiduciary capacity. The investment advisor will be responsible to maintain confidentiality of the   investment advice provided to the client and information provided by the client. Advice should be given by the advisor in the best interest of the investor.

8.2 Suitability and Risk Profiling

The Investment Advisors or their representatives would be required to do adequate risk profiling of the client before any investment service is provided to them. Based upon the risk profiling performed by the investment advisor or their representative suitable investment advice should be provided. The records of such risk profiling and investment advice should be maintained by the Investment Advisor.

8.3 Advertising and Marketing Material

Investment Advisors should not use any advertisement that contains any untrue statement of material fact or that is otherwise misleading. They should not use or refer to testimonials (which include any statement of a client’s experience or endorsement).

Refer to past, specific recommendations made by the advisor that were profitable, unless the advertisement sets out a list of all recommendations made by the advisor within the preceding period of not less than one year and complies with other specified conditions.

8.4 Conflict of Interest

No financial incentives! consideration would be received from any person other than investors seeking advice. In case of advice regarding investment in entities related to the investment advisor, adequate disclosures shall be made to investor regarding the relationship.

8.5 Maintaining Records

Records in support of every investment recommendation !transaction made which indicates the data, facts and opinion leading to that investment decision would be maintained by the Investment Advisor. Records should be retained for at least 5 years. Systematic record of all advises provided would be kept including audio recording of any oral advice given.

8.6  Fees and Charges

The Investment Advisor would clearly indicate to its clients the fees and charges that are required to be paid by them. An investment advisor shall disclose to a prospective clients all material information about itself, its businesses, its disciplinary history, the terms and conditions on which it offers advisory services, its affiliations with other intermediaries and such other information as is necessary him to take an informed decision whether to avail of its services.

9. Execution Services

Investment advisors shall not accept funds / securities from investors, except the fee for investment advice. If Non‐individual investment advisors (corporate entities) offer assistance in execution services such as broking, custody services, DP services, accounting etc., they must make appropriate disclosures, clarify that the investor is under no obligation to use their services and maintain arms length relationship through creation of Chinese walls. The choice of opting for execution services offered by investment advisor should be left to the investors. Fees and charges paid to service providers should be paid directly to them and not through investment advisors.

10.  Outsourcing

Other than sourcing of research reports, no other part of investment advisory activity can be outsourced.

11. Liability

The investment advisors shall not be liable for civil or criminal liability in respect of advice given unless the advice is negligent or mala‐fide in nature. Any dispute between the investment advisor and his client would be resolved through grievance redressal mechanism or arbitration created by SEBI

12. Entities registered as Portfolio Managers

Portfolio Managers who provide only investment advice would need to be registered only as investment advisors after their present registration expires. Portfolio Manager Regulations would be amended in view of the proposed AIF Regulations as well as the Investment Advisor Regulations.

13. Public Comments

Public Comments are invited on the Concept Paper on Regulation of Investment Advisors. All comments may be forwarded by e‐mail to Shri Manish Tekriwal, Manager, Investment Management Department, Division of Funds ‐ 1 at manisht@sebi.gov.in  latest by 1730 hours on October 31, 2011.

Easier PAN norms for FIIs, foreign nationals

In a move which could improve the fund flow and provide some stability to the choppy Indian bourses, the finance ministry has relaxed norms for foreign nationals and foreign institutional investors to obtain Permanent Account Numbers (PAN) that could also double up as KYC (know your customer) compliance for any investment they make in Indian stocks. 

Till now, FIIs or foreign nationals had to obtain a PAN and separately meet KYC requirements prescribed by the market regulator before investing in stocks. The tax obligation on any transaction is twice the due amount if they fail to mention PAN. 

In the revised rules that come into effect from October 1, a foreign national will have to only produce either h/his citizenship number or taxpayer identification number to obtain a PAN. The government is making amendments in Rule 114 and Form 49A of the Income Tax Rules and has proposed to introduce a new Form 49AA. While Form 49A will be used for Indian citizens, the other is for foreign nationals and FIIs. 

Earlier rules stipulated that citizenship or taxpayer identification number would not be accepted as proof of identity in case of foreign nationals seeking PAN card. The applicant is required to take prescribed documents to an officer of Indian Embassy or High Commission where he is a resident to get them attested. 

The revised guidelines ensure that a foreign national or an FII need not make rounds of Indian Embassies or High Commissions anymore. They can get copies of their documents attested by recognized authorities in their respective countries. Several countries and trade and industry organizations had represented the finance ministry seeking changes in the rules, in particular documents to be accepted as proof of identity and address and their attestation. 

The department of economic affairs and the central board of direct taxes (CBDT) also worked on harmonizing the requirements of PAN and meeting KYC obligation. "Since most of the basic information for both are common, it was decided to harmonize them into one so that compliance burden for a foreign investor is substantially reduced," said a senior finance ministry official. The directorate of Income Tax has devised a single integrated form that incorporates the requirements of both PAN and KYC.

SEBI: Circular for Mutual Funds

Securities and Exchange Board of India

CIRCULAR

Cir/ IMD/ DF/13/ 2011

August 22, 2011

All Registered Mutual Funds/ Approved Asset Management Companies (AMCs)

Sir/Madam,

Sub: Circular for Mutual Funds

A. Transaction charges

1. Please refer to SEBI circular no. SEBI/IMD/CIR No. 4/168230/09 dated June 30, 2009 regarding empowering investors through transparency in payment of commission and load structure.

2. It has been represented to SEBI that distributors incur expenditure on traveling and incidentals for reaching investors and procuring business for Mutual Funds. Distributors are also required to set up appropriate infrastructure for servicing investors as well as incur certain expenses while marketing the units of Mutual Funds.

3. In order to enable people with small saving potential and to increase reach of Mutual Fund products in urban areas and smaller towns, it has been decided that a transaction charge per subscription of `10,000/- and above be allowed to be paid to the distributors of the Mutual Fund products from the date of this circular. However, there shall be no transaction charges on direct investments. The transaction charge shall be subject to the following:

i. For existing investors in a Mutual Fund, the distributor may be paid ` 100/- as transaction charge per subscription of ` 10,000/- and above.

ii. As an incentive to attract new investors, the distributor may be paid ` 150/- as transaction charge for a first time investor in Mutual Funds.

iii. The terms and conditions relating to transaction charge shall be part of the application form in bold print.

iv. The transaction charge, if any, shall be deducted by the AMC from the subscription amount and paid to the distributor; and the balance shall be invested.

v. The statement of account shall clearly state that the net investment as gross subscription less transaction charge and give the number of units allotted against the net investment.

vi. Distributors shall be able to choose to opt out of charging the transaction charge. However, the ‘opt-out’ shall be at distributor level and not investor level i.e. a distributor shall not charge one investor and choose not to charge another investor.

vii. The AMCs shall be responsible for any malpractice/mis-selling by the distributor while charging transaction costs.

viii. There shall be no transaction charge on subscription below ` 10,000/-

ix. In case of SIPs, the transaction charge shall be applicable only if the total commitment through SIPs amounts to ` 10,000/- and above. In such cases the transaction charge shall be recovered in 3-4 installments.

x. There shall be no transaction charge on transactions other than purchases/ subscriptions relating to new inflows.

4. Mutual Funds shall institute systems to detect if a distributor is splitting investments in order to enhance the amount of transaction charges and take stringent action including recommendations to AMFI to take appropriate action.

5. Mutual Funds/AMCs shall carry out an exercise of de-duplication of folios across all Mutual Funds within a period of 6 months from the date of this circular.

6. It is also clarified that as per SEBI circular no. SEBI/IMD/CIR No. 4/ 168230/09, dated June 30, 2009, upfront commission to distributors shall continue to be paid by the investor directly to the distributor by a separate cheque based on his assessment of various factors including the service rendered by the distributor.

B. Distributors of Mutual Fund products

1. It has been felt that in the interest of investors there is a need to regulate the distributors through AMCs by putting in place a due diligence process to be conducted by AMCs as follows:

i.The due diligence process shall be initially applicable for distributors satisfying one or more of the following criteria:

a. Multiple point presence (More than 20 locations)

b. AUM raised over ` 100 Crore across industry in the non institutional category but including high networth individuals (HNIs)

c. Commission received of over ` 1 Crore p.a. across industry

d. Commission received of over ` 50 Lakh from a single Mutual Fund

ii.At the time of empanelling distributors and during the period i.e. review process, Mutual Funds/AMCs shall undertake a due diligence process to satisfy ‘fit and proper’ criteria that incorporate, amongst others, the following factors:

a. Business model, experience and proficiency in the business.

b. Record of regulatory / statutory levies, fines and penalties, legal suits, customer compensations made; causes for these and resultant corrective actions taken.

c. Review of associates and subsidiaries on above factors.

d. Organizational controls to ensure that the following processes are delinked from sales and relationship management processes and personnel:

i.) Customer risk / investment objective evaluation.

ii.) MF scheme evaluation and defining its appropriateness to various customer risk categories.

iii.In this respect, customer relationship and transactions shall be categorized as:

a. Advisory – where a distributor represents to offer advice while distributing the product, it will be subject to the principle of ‘appropriateness’ of products to that customer category. Appropriateness is defined as selling only that product categorization that is identified as best suited for investors within a defined upper ceiling of risk appetite. No exception shall be made.

b. Execution Only – in case of transactions that are not booked as ‘advisory’, it shall still require:

i.) The distributor has information to believe that the transaction is not appropriate for the customer, a written communication be made to the investor regarding the unsuitability of the product. The communication shall have to be duly acknowledged and accepted by investor.

ii.) A customer confirmation to the effect that the transaction is ‘execution only’ notwithstanding the advice of in-appropriateness from that distributor be obtained prior to the execution of the transaction.

iii.) That on all such ‘execution only’ transactions, the customer is not required to pay the distributor anything other than the standard flat transaction charge, as mentioned in part ‘A’ above.

c. There shall be no third categorization of customer relationship / transaction.

d. While selling Mutual Fund products of the distributors’ group/affiliate/associates, the distributor shall make disclosure to the customer regarding the conflict of interest arising from the distributor selling of such products.

iv.Compliance and risk management functions of the distributor shall include review of defined management processes for:

a. The criteria to be used in review of products and the periodicity of such review.

b. The factors to be included in determining the risk appetite of the customer and the investment categorization and periodicity of such review.

c. Review of transactions, exceptions identification, escalation and resolution process by internal audit.

d. Recruitment, training, certification and performance review of all personnel engaged in this business.

e. Customer on boarding and relationship management process, servicing standards, enquiry / grievance handling mechanism.

f. Internal / external audit processes, their comments / observations as it relates to MF distribution business.

g. Findings of ongoing review from sample survey of investors

2. Mutual Funds/AMCs may implement additional measures as deemed appropriate to help achieve greater investor protection.

C. Transparency of information

1. SEBI vide circular no. SEBI/IMD/CIR No. 4/ 168230/09, dated June 5, 2000, has stipulated that only compounded annualized yield shall be advertised if the scheme has been in existence for more than 1 year.

2. It has been decided, henceforth, that when the scheme has been in existence for more than three years:

i.Point-to-point returns on a standard investment of ` 10,000/- shall also be shown in addition to CAGR for a scheme in order to provide ease of understanding to retail investors.

ii.Performance advertisement shall be provided since inception and for as many twelve month periods as possible for the last 3 years, such periods being counted from the last day of the calendar quarter preceding the date of advertisement, along with benchmark index performance for the same periods.

3. Where scheme has been in existence for more than one year but less than three years, performance advertisement of scheme(s) shall be provided for as many as twelve month periods as possible, such periods being counted from the last day of the calendar quarter preceding the date of advertisement, alongwith benchmark index performance for the same periods.

4. Where the scheme has been in existence for less than one year, past performance shall not be provided.

5. For the sake of standardization, a similar return in INR and by way of CAGR must be shown for the following apart from the scheme benchmarks:

Scheme Type	Benchmark
Equity scheme	Sensex or Nifty
long term debt scheme	10 year dated GoI security
short-term debt fund	1 year T-Bill

These disclosures shall form a part of the Statement of Additional Information and all advertisements of Mutual Funds.

6. Any disclosure regarding quarterly/half yearly/yearly performance shall pertain to respective calendar quarterly/half yearly/yearly only.

7. When the performance of a particular Mutual Fund scheme is advertised, the advertisement shall also include the performance data of all the other schemes managed by the fund manager of that particular scheme.

In case the number of schemes managed by a fund manager is more than six, then the AMC may disclose the total number of schemes managed by that fund manager along with the performance data of top 3 and bottom 3 schemes (in addition to the performance data of the scheme for which the advertisement is being made) managed by that fund manager in all performance related advertisement. However, in such cases AMCs shall ensure that true and fair view of the performance of the fund manager is communicated by providing additional disclosures, if required.

Assets Under Management (AUM) disclosure

8. Wherever the Mutual Funds discloses the AUM figures for the fund, disclosure on bifurcation of the AUM into debt/equity/ balanced etc, and percentage of AUM by geography (i.e. top 5 cities, next 10 cities, next 20 cities, next 75 cities and others). The Mutual Funds shall disclose the aforesaid data on their respective websites & to AMFI and AMFI shall disclose industry wide figures on its website.

Commission disclosure

9. Mutual Funds / AMCs shall disclose on their respective websites the total commission and expenses paid to distributors who satisfy one or more of the following conditions with respect to non-institutional (retail and HNI ) investors

i.Multiple point of presence (More than 20 locations)

ii.AUM raised over ` 100 crore across industry in the non institutional category but including high networth individuals (HNIs).

iii.Commission received of over ` 1 crore p.a. across industry

iv.Commission received of over ` 50 lakh from a single Mutual Fund/AMC.

10. Mutual Funds / AMCs shall also submit the above data to AMFI. AMFI shall disclose the consolidated data in this regard on its website.

D. The aforesaid circulars stand modified to the said extent.

E. This circular is issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992, read with the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

Yours faithfully,

Asha Shetty

Deputy General Manager

Tel no. 022-26449258

Email-ashas@sebi.gov.in