28 February, 2014

INVESTOR AWARENESS WITH SUSTAINABILITY THROUGH

RESEARCH EMPOWERMENT

Financial Sector Reforms Suggestions – Addressing the Aam Aadmi

Empowering investors through research – undertaken by CA professionals Proper utilization of Investor Protection Fund as follows:

SEBI : Organise effective awareness / training programs with the help of Study Groups / Circles across the country

Exchanges : Online Training Programs with voice over in local languages

Mutual Funds : Booklets and investor awareness programs

Background for Investor Protection – Need For Urgent Action

Retail investors have lost faith in the capital market and its regulatory system as evidenced by the investor population that has shrunk from two crore in 1992 when the SEBI Act was enacted to half the number after two decades. In the corresponding period, the deployment of financial household savings into the securities market has dropped from over 10% to around 2% while household savings have galloped from Rs100,000 crore to Rs15 lakh crore. This fall is all the more glaring in the face of economic growth numbers.

Mutual Funds a mechanism to raise money from retail investors have seen a nearly 25% of folio closures to touch 3 crore number of folios in the last five years, hence there is clearly an urgency to address this issue now than ever before

Root Cause - Incentives and Commissions ?

Incentive driven distribution model on India and not Investor Goals Driven Investment Products (MFs and Insurance) typically sold based on highest

commission offered by Manufacturer (45% earlier to 20% currently and 6% to 3% currently equity and 2.5% Debt)

No Disclosure of commission received to end investor No Regulation of Distributor on the Products offered (Absence of

Responsibility on the part of Recommendation Maker) Kickbacks in the form of Foreign Travel, Costly Gifts and other Excursions

Financial Products – Is Mis-selling at the Heart of the Problem ?

Inadequate Disclosures on payoffs in both scenarios ie only upside explained whereas downside scenario left for investor to figure out

No Suitability Assessment Framework ie adequacy of the product to meet requirement of Customer

Cash based incentives offered to lure investments in certain products especially insurance (ULIPs as an investment product rather than risk mitigation tool)

Poor KYC norms for around 10 years which lead to massive transfer of illegal wealth into regulated investment products whose sudden withdrawal in last 2 years based on stringent regulation has affected the fortunes of genuine investors eg Sahara and MF / Insurance KYC norms

Cash based deposits has allowed Banks to channelize this money into all insurance type of investment without undertaking need based analysis

No punishment and redressal mechanism has accentuated the problem of mis-selling to such a serious level that RBI has now recommended Investment Advisors Act to deal with this problem

How important is Tax Planning as a part of Investment Planning?

Absence of Investment Planning at the cost of Tax Planning has led to investors moving out of the market as unsuitable products have been selected and this has led to a lot of investor negative sentiment

Majority of Life Insurance sales (At least 80%) have been driven only by tax free nature of Income on maturity rather than need for risk cover

Double indexation benefit has been the reason for accretion to MF AUM in the last 3 years rather than products offering goals based investment planning

Equity Future volumes are 14 times the cash volumes currently driven by low charges and tax provisions rather than genuine needs for hedging

Arbitrage Trades with low taxation in the Equity Market has increased volatility manifold and has killed real investor interest for buying Equities from Wealth Creation perspective

Investor Protection Fund Managed by Exchanges – An Overview

BSE is estimated to have around Rs 510 cr while NSE has around Rs 200 cr (end FY2011) of funds meant to be used for investor protection

This fund is primarily meant for use to compensate investors for losses for no fault of theirs during defaults by brokers

Corpus has swelled significantly in recent times (turnover has increased while defaults amounts has reduced)

Details of the funds and its utilization for various activities not in public domain as it a separate Trust ; technically utilization has to follow SEBI guidelines on funds with restrictions on end use

Money spent in the past for organizing Awards Function for Mutual Funds at a five star hotel with attendants mostly comprising eminent industry stalwarts rather than real investors

The concern is there a better way of utilizing money given that investor population is dwindling steadily and there is no provision to transfer the money to government coffers like Consolidated Fund of India

Investor Education & Protection Fund (IEPF) set up under Sec 370 of the Companies Act is required d to transfer funds to the Consolidated Fund of India and can only draw as much of the money as it hopes to spend in a given year on investor activities.

Critical area – Sustainable Investor Protection Mechanism

Are Exchanges and or Regulators utilizing corpus of investor protection money for Investor Awareness, Education and Protection on a continuous and sustainable basis effectively ?

One suggestion is to use the money to offer tax concessions to investors in secondary market to revive the interest in capital market segment

Another Suggestion is to provide this money to Investor Protection Associations and Industry Bodies that can organize events and seminars mobilizing members and public at large

It is important to hire the experts who have the research capability, financial acumen and the relevant experience to offer solutions that will power the financial sector for the next decades to bring glory back to Indian Markets

CA Community within Study Group/Study Circles, NGOs and Financial Practioners are capable of handling this successfully given their past track record of managing financial subjects and making representations to various bodies in the country

Suggestions for IPEF Utilization – Reach and Medium

Organising Investor Education Program by targeting non-financial players eg Corporates, Schools, Colleges, Housewife and Small and Medium Establishments

Involving local media for large events and social media for small events to popularise the event to ensure good participation

Delivery mechanism to focus on local languages with plenty of animations, videos, graphics and story telling to ensure understanding of the subject

Involve speakers that have financial service experience and have training experience to ensure that they can explain the matter convincingly

Organise at a national scale across top 200 towns and cities with active support and involvement of regulators to ensure widespread information dissemination

Recommendations

Suggest different modules catering to investor education which is a the heart of investor protection ; there will be separate modules on fundamentals of investing for each asset class like equities, debt and other instruments with specific focus on rights and protection for the investors

Key Modules and Areas of coverage will be as follows:

(i) Basics of Investing and Fundamentals of Money Management

(ii) Financial Markets and Institutions

(iii)Financial Analytics for better investment decisions

(iv) Behavioral Science avoiding Emotions for making Rational choices

(v) Risk Profiling and Asset Allocation : Suitability based Investment Planning

Implementation - Roadmap

Learner based approach comprising 2 hours to 2 days depending on nature of audience and depth of coverage required

Focus on learning through case studies and practical examples Train the Trainer Concept – Uniformity in Training Expand the reach – Online media and web based training Offer Online Solutions – Pre-recorded videos and presentations Reach the hinterland – Training be undertaken through local

representatives of Banks (Banking Correspondents), Insurance Companies, Financial Service Providers, Broker Forums & Associations, Micro Finance Companies, Reputed NGOs, Industry Bodies and CA/CS in Financial Services Industry

Role of Corporates in Sustainability – Social Responsibility, Investor Awareness and Research ?

Additional Points to Discuss and Debate

1. Multi-level Marketing Schemes and Collective Investment Schemes – Focus to be made there to protect small and poor investors with low income base and high return expectations

2. Focus on Amendment in IPEF Regulations that allows CA Institute to conduct such programmes like setting up of institutional arrangements or infrastructure for taking up programmes, projects and action plans keeping in view the objectives and expenditure relating thereto, including research and training activities

3. International experience and highlights http://www.legalserviceindia.com/article/l272-How-SEBI-Should-Deal-With-Disgorged-Money.html

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Thank You

Group Leader CA Kinner Mehta and Mentor CA M. Alimchandani