Three rules that changed your money life in 201212 min read . Updated: 30 Dec 2012, 10:47 PM IST
Power to the customer was the motto of the Indian financial sector regulators in 2012
Power to the customer and inclusiveness seemed to be the motto of the Indian financial sector regulators in 2012. From IPO allotment becoming fairer to the capital market regulator seeking to increase the penetration of mutual funds in small cities, though at a cost, to the Reserve Bank of India accepting the Aadhaar card as a KYC document and waiving prepayment penalty on floating rate home loans to bring new and old customers on a par, the financial industry moved to bring the masses under its umbrella. Transparency was another trend that the year saw with the insurance regulator proposing customer-friendly product structures and regulations. The pension sector looked like the weakest regulated with changes that don’t follow a roadmap. The real estate sector was also a dampener with pressure on developers and high borrowing cost translating into delayed projects and subdued sales.
The government introduced the idea of Rajiv Gandhi Equity Savings Scheme (RGESS), 2012, to encourage retail participation in the capital market. While the initial idea was to get investors interested in direct equity, eventually a certain category of mutual funds was also included. Under the scheme, new investors with annual income up to ₹ 10 lakh can invest up to ₹ 50,000 to be eligible for a tax break. The capital markets regulator, Securities and Exchange Board of India (Sebi), has asked stock exchanges and assets management companies to list the eligible stocks, exchange-traded funds and schemes on their website.
Non-allotment of shares in popular public issues is a common crib of retail investors. To address the issue, Sebi decided to modify the allotment system in such a way that a large number of retail applicants, subject to availability of shares, will get the minimum bid lot. For example, in an issue that is oversubscribed, the system will first allot the minimum bid lot to all retail investors. However, the new system will not be of use in case the issue is not oversubscribed and in cases where the issue is highly oversubscribed and shares on offer are not sufficient to fulfil even the minimum lot criteria.
Share sale made simple for promotoers
Promoters of listed companies have been allowed to sell their shares through a separate window on the permitted stock exchanges on a pre-decided day. One of the objectives of this move is to give promoters another option to comply with the minimum public shareholding rule in a company. The window cuts the time the process of selling shares took earlier and, to an extent, addresses the issue of volatility in stock prices in the secondary market, where the shares are up for sale. The window is being extensively used by government-run companies as part of the disinvestment policy.
Says Prithvi Haldea, chairman and managing director, Prime Database,
RGESS: “Exposing small first-time investors to direct stocks for tax benefit is not a good idea."
IPO allotment: “For small investors, applying for an IPO will now be worth the effort.
Promoters’ share sale: “Earlier, the promoters’ offer competed with the company’s own stock price in the secondary market and was reduced to an arbitrage opportunity."
Mutual funds (MFs) can now charge higher expenses if they go in the hinterland. According to Sebi, if an MF gets at least 30% gross new inflows in the scheme or at least 15% of its assets from “beyond top 15 cities", whichever is higher, the fund house will be allowed to charge an additional 30 basis points to the total expense ratio. MFs will be allowed to charge another 20 basis points as exit load charges since exit load collections from investors will now be directly credited to schemes. Most fund houses have already hiked charges.
Effective 30 November 2012, the new know-your-customer (KYC) norms came into effect. If you had done your KYC by 2011, you will now need to do an in-person verification (IPV). Simply put, your distributor or fund house—whoever does your KYC—will need to physically verify your identity and that you are alive. If you do not do your IPV, you won’t be allowed to invest in any fund house afresh. In other words, until you get your IPV done, you will not be allowed to invest in fund houses other than those in which you are already invested in.
The year 2012 started with the big-bang acquisition announcement of L&T Finance Ltd acquiring Fidelity International’s Indian MF business. Schroders Singapore Holdings Pvt. Ltd, a wholly-owned subsidiary of Schroders Plc, a UK-based assets management company (AMC), acquired a 25% stake in Axis Asset Management Co. Ltd. US-based Invesco also picked a 49% stake in Religare Asset Management Co Ltd. While some AMCs did a rethink on their India strategy, some foreign companies still find the Indian MF industry attractive. Most new foreign firms, however, seem to prefer tie-ups with strong local firms.
Says, Deepak Chatterjee, MD & CEO, SBI Funds Management Pvt. Ltd,
High costs: “Additional expenses can help mitigate loss of exit load collections as well as acquisition cost."
Another KYC: “Frequent changes in KYC compliance work as a deterrent to business growth. A new customer will find it cumbersome when compared with opening a bank account."
More mergers: “Investors’ apathy towards MFs and lack of appetite led few AMCs to rethink plans."
—Kayezad E. Adajania
The Bill, which was passed by Parliament on 19 December, has brought the focus on bank licences, which will pave the way for more banks in India, the first time after 2003. The newest banks as of now are Kotak Mahindra Bank Ltd and Yes Bank Ltd. The Reserve Bank of India (RBI) is expected to come up with the banking licence guidelines in January 2013. New banks would bring in more competition, a positive for consumers. Last year, when RBI deregulated the interest rate on savings account, Kotak Mahindra and Yes Bank, took the initiative to increase deposit rates.
No prepayment fee on floating rate home loan
Banks cannot charge a penalty on prepayment of home loans that are on floating interest rates. This move was to reduce the discrimination of rates offered to existing and new borrowers. It also encourages healthy competition among banks resulting in finer pricing of floating rate home loans. Earlier, banks used to charge 2-4% of the loan outstanding as early repayment charges, which forced customers to stick with existing lenders. However, prepayment penalty continues on fixed rate home loans. Even teaser loan customers, who pay a fixed rate only for a particular number of years, are not free of this penalty.
Aadhaar as KYC
With all banks now accepting Aadhaar cards as a proof of identity as well as address for opening bank savings accounts, the confusion on the card being used as a know-your-client proof is finally over. However, the card or letter can be used as an address proof only if the address on the Aadhaar letter is the same as the actual residential address that is given for communication and other purposes. So, you won’t need documents such as your Permanent Account Number, driving licence or passport if you have your Aadhaar card in place. This is seen a step in the direction of financial inclusion.
Says, R.K. Bansal, Executive director, IDBI Bank Ltd,
Banking Bill: “The banking Bill will bring in foreign institutional investor inflows. Indirectly, it will have a positive impact on retail customers too."
Prepayment penalty waiver: “The waiver has given customers the freedom to switch and has resulted in tough competition and lower home loan rates."
Aadhaar as KYC: “Aadhaar card will help the cause of financial inclusion."
In keeping with recent reforms, 2012 saw deliberations on product design of insurance policies, especially traditional insurance-cum-investment plans that are opaque in terms of costs structure. In its draft guidelines, the Insurance Regulatory and Development Authority (Irda) has proposed that traditional plans with unbundled cost structure will have to conform to costs caps the way unit-linked insurance plans (Ulips) do. The finance bill 2012 increased the sum assured to 10 times the annual premiums (the earlier limit was five times) for the policies to enjoy tax benefits on contributions under section 80C and on maturity under section 10(10D) of the Income-tax Act. In order to fast-track product clearance, the industry is also working on standard products that do not have in-built riders or explicit guarantees or innovative features.
Bank as insurance brokers
After the finance minister suggested that banks wanting to sell policies of multiple insurers should consider becoming insurance brokers, the draft on bancassurance formulated in November 2011 was modified to include the suggestion. According to the latest draft, banks have three options: to continue tying up with one insurer across the country; have limited tie-ups across states; or to become an insurance broker.
Draft rules on health
The draft guidelines on health insurance policies, issued in May, propose that all health policies should be renewable for lifetime. The draft also states that once the pricing is approved, the premium shouldn’t be changed for at least a year and after that not without proper justification. The guidelines also ask insurers to provide a premium table (showing stages of loading) so that the policyholder gets an idea about the likely increase in premium at the time of buying the policy. The draft also proposes an outer limit of 30 days to settle health insurance claims.
Says Deepak Yohannan, chief executive officer, MyInsuranceClub.com,
Product reforms: The draft on product design is customer friendly, but the immediate challenge is revamping products next year.
Banks as insurance brokers: “The bancassurance will open up space for new insurers but one distribution channel can’t handle too many products."
Draft rules on health: “The health guidelines cater to most of the policyholders’ concerns."
Freedom for fund managers
The Pension Fund Regulatory and Development Authority, PFRDA, has extended the role of pension fund managers of the National Pension System to marketing NPS. Also, the fund management charge was freed from a fixed 0.0009% to a maximum of 0.25%. PFRDA has also done away with the system of bidding to be a fund manager. Now any eligible company can become a fund manager. While PFRDA has taken steps to increase the penetration of NPS, fund managers have found it difficult to sustain their businesses. IDFC Pension Fund Management Co. Ltd was the first fund manager to exit NPS after three years.
NPS mangers to have own index funds
According to PFRDA’s investment guidelines, fund managers need to invest in index funds that replicate the portfolio of either the BSE Sensex index or the NSE Nifty 50 index. Index funds invest in securities in the same weightage as the index. But due to paucity of funds, fund managers found it difficult to replicate the index directly and were allowed to invest in index funds of mutual fund companies. For you, it meant an added annual expense of up to 1.5% over the fund management charge of 0.0009%. From next year, all fund managers—existing and new—will have to manage their own index funds.
Corporate central government scheme
Given the increasing popularity of NPS among corporates, who are investing in NPS for their employees, PFRDA launched a new scheme called corporate central government scheme this year. This was largely to bring parity in costs between the government pension fund and the pension fund. So the new scheme will also have a fund management cost of 0.25% instead of 0.0102% that government pension funds charge. Although these schemes have the same architecture and design, they differ in investment pattern. In case of private NPS the maximum exposure in equities is capped at 50%, but for government NPS, this cap is 15%.
Says Dhirendra Swarup, former PFRDA chairman and member-convener, Financial Sector Legislative Reforms Commission,
Freedom for fund managers: “Changes in design alter the basic aim of NPS to provide a low-cost simple product."
NPS managers to have own index funds: “Having own index funds won’t reduce costs as firms will have to employ expensive fund managers to track indices."
Corporate central govt scheme: “Corporate scheme won’t increase NPS footprint; returns and preferential tax treatment will."
High costs delay projects
It was a difficult year for developers as inflation kept input costs high. That coupled with a high borrowing rate and leverage meant that profits were under pressure. The high borrowing rate and prices kept genuine buyers away. This in turn meant that developers did not get as much revenue. Since borrowing also came at a high price, slower revenue did not help working capital requirements and construction took longer to complete. As a result, buyers have had to wait for a longer period for the possession of their homes. In some cities like Mumbai, regulatory changes like the new development control regulation also had a part to play. In other cities, too, many launches also dampened absorption rate and hence, completion of partially unsold projects is taking longer than expected.
Prices remain high
Capital value growth across cities was not uniform but overall prices went up. According to Jones Lang LaSalle India, average residential capital values in 2012 appreciated 1-3% year-on-year. With buyers waiting for prices to correct, demand didn’t get translated into actual sales. Nevertheless, in metros like Mumbai and National Capital Region, there has been healthy absorption. In some tier II cities like Lucknow, prices went up more than that in the metros, but in others like Jaipur that wasn’t the case. By and large, experts suggest that if prices hold up in large cities, small cities too will see stable prices, barring impact of local factors.
Under-construction properties cheaper
In general under-construction properties were sold at a premium because they give the advantage to the buyer of staggering payments. However, things have turned around now and projects under construction are being sold at prices less than those of completed or ready-to-move properties. This is clearly because the visibility of project completion is lower. Buyers are not sure whether they will get the possession at the indicated time or whether they will have to wait and for how long.
Says Anuj Puri, chairman and country head, Jones Lang LaSalle,
High costs delay projects: “It (delayed possession) has primarily affected developers who launched later as permission took time. For buyers primary criterion remains property pricing."
Prices remain high: “Residential real estate worked well only in certain cities."
Under-construction properties cheaper: “Choosing a property under construction is mainly a matter of risk appetite."
—Lisa Pallavi Barbora