Times of India, Chennai

30/12/10

Gurgaon: Shiv Raj Puri, 32, the man who cleaned out nearly Rs 250 crore from the Gurgaon branch of Citibank, is not someone you’d associate with fraud or greed. He was soft spoken and the car he drove belonged to his father, Raghu Raj Puri.

According to his neighbours at the upscale Hamilton Court, Puri was a modest man, who pretty much kept to himself. Though Puri was married, he often stayed with his parents. Says M M Bhalla, former president of Hamilton Court Residents Welfare Association, “Shiv Raj’s parents have been staying here for the past several years. We know them as friendly residents. I’ve met Shiv Raj only once. He was modest and came across as a god-fearing guy.”

God-fearing perhaps, but not quite law abiding. And smart. Says an investor, who was charmed out of his pocket to the tune of Rs 20 crore, “This tall, suave banker met me several times, and I was impressed by his soft talk.”

What Puri was talking about was miracles, the essence of which was greed. Puri said he would give 18% return on the money he received. To support his promises, he flashed a forged document, purportedly by Sebi, that empowered the DLF-II branch where he worked to float special schemes. His wealthy clients saw in Puri a short cut to even more riches. According to the police, over 20 high net worth investors allowed themselves to be lured into his trap.

A major problem with greed is that it prevents people from using their intelligence fully. And Puri soft-talked and hard-tapped his way into that vice with a vengeance. In the last few years, Puri opened 78 accounts in his name and in the names of his grand parents, Premnath Puri and Sheela Premnath Puri, and in the name of his mother, Deeksha Puri. All the three are coaccused along with Puri.

The accounts are with different financial institutions, including banks and brokerage houses spread across Gurgaon, Delhi and Kolkata. Religare, Bonanza and India Infoline figure in the list. The banks include SBI, HDFC, Standard Chartered, PNB, Axis and ABN-Amro.

According to police commissioner S S Deswal, notices have been issued to the banks to seize all the accounts. “We have formed five special teams to investigate the case,” Deswal said.

Hero Group staff among clients?    
Corporate which have invested in Citibank’s Gurgaon branch through manager Shiv Raj Puri include the Hero Group, sources said. A police officer supervising the multi-crore rupee fraud said most of the corporates which invested the amount with Puri belonged to the Hero Group. Naveen Munjal of Hero Exports alone had given around 50 crore to Puri for further investment, the officer said. Neither Munjal nor the group spokesperson could be contacted. AGENCIES

Business Standard 16/11/10

Turnover charges, regulator fee and demat charges to come under the service tax net.

Stock brokers will now have to pay more service tax. The Central Board of Excise & Customs (CBEC) has clarified that turnover charges, exchange transaction charges, dematerialisation charges and regulator fees recovered by brokers from clients will be added to the brokerage amount while calculating the tax. The stamp duty and securities transaction tax would be kept out of the taxable amount, it said.

Most brokers collect service tax only on brokerage charges and not on many statutory levies like the Securities and Exchange Board of India (Sebi) fees or stock exchange transaction charges, considering that these are levies required to be paid to remain in business. Earlier this year, in Gujarat, the service tax department told brokers to pay service tax on the charges mentioned above. The CBEC circular is a clarification and, hence, silent on the effective date. Service tax departments can demand arrears for the past five years.

Shailesh Sheth, a service tax expert, said: “Inclusion of statutory charges for calculation of service tax is debatable and, in any case, should not be with retrospective effect.” He cited several tribunal judgements that transaction charges, handling charges, terminal charges, etc, could not be included in the taxable value for determining service tax.

New demand notices
After the circular, all state service tax departments are expected to issue demand notices to stock brokers. Last year, the National Stock Exchange and the Bombay Stock Exchange collected Rs 1,000 crore transaction charges from brokers, which means an additional Rs 100 crore service tax from this account alone. If added to other charges on which brokers are not collecting service tax, the figure could be much higher. Only a handful of large brokerage houses collect service tax on all other charges. If the department asks for the additional tax, brokers will have to pay, irrespective of whether the tax was collected from the clients or not.

Since the issue became controversial after differences of opinion within the department in the western zone, the matter was referred to CBEC for clarification. In September, CBEC issued an internal circular, which was made public a few days ago, saying only the stamp duty and securities transaction tax were the liability of the buyer/seller of securities and the broker pays these while acting purely as an agent (collecting such charges from clients on behalf of the revenue department). So, these are not included in the service tax amount.

The board has now ruled that the gross amount received as consideration for provision of service should be considered. It shall include expenditure or costs incurred by the service provider in the course of providing the service, even if the various costs are separately indicated in the invoice or bill issued by the service provider to his client.

Our Comment: The stance taken by Excise Dept. will not just affect the Brokers but in turn will hit the Customers also as the brokerage charged might move up due to the extra burden put on the brokers. VRIDHI

Mint 3/9/10 Anirudh Laskar & N. Sundaresha Subramanian

anirudh.l@livemint.com

Reduction in charges to benefit policyholders, but will bring down agent commissions from 15-17% to 7-9%

Nearly three-fourths of the 1.6 million agents working for private life insurers are set to go out of business, as insurers are taking steps to cut costs in the wake of a dramatic reduction in charges of unit-linked insurance policies, or Ulips, by the insurance regulator. The new norms, which may push 1.2 million agents out of work, took effect from 1 September.

Ulips, a hybrid product that combines insurance and equity investment, account for at least 80% of new business premiums for life insurers.

The size of the agency channel, which sells policies of 23 life insurers, has grown from 900,000 to about three million in a decade. Until recently, agents were aggressively pushing sales of Ulips, earning commissions of up to 40%.

Life Insurance Corp. of India, or LIC, the state-run insurance behemoth, alone manages at least 1.3 million agents. There are about 310 million policies in force, including traditional life insurance policies.

The insurance regulator has capped various charges including surrender charges. Till 31 August, companies were able to levy up to 100% as surrender charges from a customer if a policy was discontinued.

The regulator has also ordered insurers to offer a minimum guaranteed return of 4.5% on the fund value in linked pension plans. Earlier, there was no such norm and the value of the funds invested entirely depended on the yield of the instruments where the premium was allocated.

The new norms will benefit policyholders but will bring down average agent commissions in Ulips from 15-17% to 7-9%.

Though the new rules will benefit policyholders, reduce first-year agent commissions and help curb rampant mis-selling, insurance firms will be required to underwrite more losses, infuse more capital and cut costs to sustain Ulip sales.

“With the change in distribution norms, 75% of the agents will earn less than Rs10,000 a month. They will hardly bring any meaningful business to us. They are most likely to either quit on their own or we will ask them to leave,” said the chief executive of a large private sector life insurer who did not want to be identified. Currently, such agents earn nearly Rs20,000 a month.

S.B. Mathur, secretary general, Life Insurance Council, the representative body of Indian life insurers, went one step ahead: “About 75% of the agents are not productive. They just sell one or two policies and go away. What is the use of having them?”

LIC may not need to resort to cost-cutting measures due to its highly profitable business, but private sector insurers are planning drastic cost-cutting measures to sustain their businesses in the new regime. Cutting the agency channel is only one of several cost-cutting measures. The firms also plan to cross-sell products through branches of associate companies instead of opening new branches, cut commission of agents retained, and redesign new products with variable premium.

The companies are also focusing on alternative distribution channels such as subancassurance, where the expenses are lower. According to industry estimates, the cost of sales through bank branches or bancassurance can be as low as 20% of the value of the policies sold.

Though a bulk of the sales for some private players comes from bancassurance, overall, nearly 80% of policy sales in the life industry comes from agency channels.

LIC recorded a surplus of Rs23,500 crore in fiscal 2009-10 but most private life insurers continue to be in the red.

According to a recent study of consultancy firm McKinsey, existing distribution channels are almost entirely focused on Ulips. Nearly 85% of new business premium comes from sales of Ulips but the cost of sales through agency channels is very high—between 50% and 100%.

The study said the cost should be brought down to 25-30%. It also revealed that nearly 60% of the agents work part-time.

To save costs, private players are also focusing on training facilities to improve agents’ productivity. Some bank-owned life insurers are planning to sell insurance policies through the branches of their mutual fund subsidiaries.

LIC is setting up a separate wing for training agents. “Once this happens, agents can be trained on focused marketing strategies, where they will work on a select seven-eight products at a given time rather than going to the customer with 50 different products,” said Nilesh Sathe, executive director-marketing, at LIC.

N.C. Upase, a member of the chairman’s club of agents, LIC, said private sector agents are the worst affected. “Earlier, they used to be earning 25-40% commission. Now they won’t get more than 7-8%. This means their monthly income would come down by 60-70%.”

The chairman’s club of LIC is an exclusive group of agents who sell policies worth more than Rs1 crore in a year and have at least 550 life insurance policies in force for three consecutive years.

Upase said LIC agents may not face much trouble since they were earning much less, about 7.5%. “There are no major changes in LIC policies, except that the allocation charges are now distributed over five years. Agents would continue to get same commission,” he added.

Consultants are convinced agency sizes have to be trimmed. “The insurance industry cannot continue with the current costs. It needs to build a focused agency force. Companies must bring down the number by 30-50% at least, depending on their individual cost structures,” said Joydeep Sengupta, managing partner, McKinsey and Co. Singapore Ltd. Though the life insurance industry has grown to its current levels on the back of agency channels, this distribution channel is the most expensive of all other channels.

“Due to higher-than-expected expenses the companies have failed to attain a breakeven so far. The persistency ratio too is as low as 10% in some cases. This has to be improved,” J. Hari Narayan, chairman, Insurance Regulatory and Development Authority, or Irda, said at a conference in Mumbai on Wednesday.

The regulator has so far cleared 51 of 68 new Ulips filed by insurers. There were 230 Ulips in the market till August.

India’s life insurance industry has grown some eightfold in the past decade, collecting a total premium income of Rs2.61 trillion in 2009-10, or which nearly Rs1.1 trillion came from Ulips. At least 310 million life policies are in force now.

27/7/10 ET

Benchmark indices have more than doubled in the past 15 months, and many individual stocks have risen much more. But if leading retail broking firms are to be believed, this has not really translated into huge gains for them by way of increased broking commission.

The dismal performance of the shares of listed broking firms already testifies to this. And now the buzz on Dalal Street is that many mid-sized broking firms have begun sending out feelers, expressing interest in joint ventures, strategic stake sales, and in some cases, ven an outright sale of their retail broking operations.

“The revenue pool is not growing with falling yields (lower broking commission),” said Rashesh Shah, chairman and managing director, Edelweiss Capital, adding, “Also with rising employee and other costs, increased compliance and capital needs, many mid-sized firms will look for consolidation.”

And it is not just the second-tier firms that are looking to cash out, or shore up their capital reserves. Citi Venture Capital International, the majority shareholder in Sharekhan — among the top 10 broking firms in the country — is said to be in talks for either a stake dilution, or an outright sale. CVCI declined to comment on the matter.

Talk in stock market circles is that privately-held Prabhudas Lilladher —one of the oldest broking firms in the country — and listed firm Networth Stock Broking are among the other firms looking for strategic investors.

Prabhudas Lilladher denied that it was looking for strategic investors, or planning to raise capital in the near term. Mumbai-based Networth Stock Broking denied that it was looking to exit its retail operations. “We have no plans to sell our retail business, but would be looking to raise capital from time to time, and preferably from a strategic investor who has a long-term view on the business,” Girish Dev, executive director, Networth Stock Broking, told ET. The company had reported a net profit of `3 crore for financial year 2007-08, but lost `14 crore in 2008-09 and nearly `12 crore in 2009-10.

Fierce competition among retail broking has resulted in a steady decline in broking commission in the past couple of decades. From a peak value of 2% in the early 90s, broking charges today range anywhere between 0.05% and 0.30%, depending on the volumes generated by the client.

When the market was on an uptrend between mid-2003 till the start of 2008, the increase in traded turnover more than made up for lower commissions. Somewhere in 2007, many broking firms went on an expansion-spree — hiring staff and adding branches — convinced that the good times would last forever. In hindsight, that turned out to be a costly mistake, and most firms are still paying for it.

Nirmal Jain, chairman and managing director of IIFL (formerly India Infoline), feels that current market conditions are ideal for consolidation within the retail broking space. “Valuations are neither too high like they were in 2007-08, and nor are they too low,” Mr Jain said, adding, “So, it makes sense both from a buyer as well as a seller’s perspectives. We could see quite a few deals happening in the next 6-12 months.”

Mr Jain’s firm is keen on an acquisition, if it’s satisfied with the scale of operation and valuation. But not everybody is as optimistic of too many deals happening in the near future. “There may be many players up for sale; but how many of them offer a value proposition,” asks Divyesh Shah, chief executive officer, Indiabulls Securities, one of the top five retail broking firms.

While there are no concrete numbers to prove it, most broking firms admit their active client base has shrunk in the past two-and-a-half years. A good number of retail investors, who lost heavily during the market crash of January 2008, never returned, and the ones, who returned, scaled down their bets. Average daily cash market volume in 2007-08 was `14,148 crore.

This fell to `11,325 crore the following year, when the market corrected, and rose to `16,959 in 2009-10. However, delivery-based trades (in value terms) fell to `14.08 trillion from `14.92 trillion during this period. The commission earned by broking firms on delivery-based trades is five times or more than what they get from non-delivery trades (transactions that are squared off the same day).

Also, the activity shifting from futures contracts to options contracts post the market correction hurts broking firms’ bottomline. That is because commissions on futures transactions are significantly higher than those charged on options trades. In 2007-08, the total value of trades in the futures segment was `113.69 trillion. This fell to `91.29 trillion in 2009-10. On the other hand, the notional value of transactions in options contracts rose to `181.69 trillion in 2009-10 from `134.49 trillion in 2007-08. These trends are unlikely to change anytime soon, say market experts.

All most all the top brokers are unanimous that it is going to be an uphill task for second-tier broking firms in the coming days. But that may not necessarily mean too many deals happening. Mr Shah feels that at best, there could be a couple of deals over the next 12 months, and he does not mind being involved in one as the buyer.

“We are currently focused on Anagram integration. But we are always open to inorganic growth opportunities, as we certainly see benefits of scale and scope being achieved through consolidation,” he says. And not all the top broking firms are keen on growth through acquisition. “We have a strong branch network of our own, and are not looking for any acquisitions at the moment,” says Motilal Oswal, chairman and managing director, Motilal Oswal Securities.

11/1/10 ToI

Big Fish Gain
1. Earlier, if a client invested in an MF through an agent (IFA), the latter would receive a percentage of the entry load (approx. 2.5% of entry load) and an annual commission known as trail

2. The agent, who brought in the client, would continue to get the trail even if the investor changed the agent

Mumbai: If the abolition of entry load was not enough to hit smaller mutual fund agents (also called independent financial advisers or IFAs) hard, a Sebi directive of December 30 has thrown open the market for large distributors to cannibalise the existing clients of smaller MF distributors for trail commissions. It has also okayed the use of hard cash in the MF industry – something that Sebi has been trying to replace with compulsory use of cheques in all MF-related payments. Additionally, expense for fund houses could also rise, top industry players said.

   The email sent by Sebi to Association of Mutual Funds in India (AMFI) 10 days ago said that all fund houses should follow an AMFI circular of September 2007 that had initially laid down the rule for change of MF agents for an investor and payment of trail commission.

   In industry parlance, a ‘trail’ is an annual payment received by an agent for bagging a client for the fund scheme. This payment varies from one fund house to another and ranges between 30 and 50 basis points (100 basis points = 1%) of the market value of the investment.

   Till August this year, when an client invested in an MF scheme through an IFA, the latter got a large share of the entry load (about 2-2.25% of the total investment) that the fund house charged the investor. In addition, the agent also got an annual trail commission from the fund house till the time the client stayed invested. The trail was calculated on the current market value of his investment and not on the initial amount invested.

   For example, if a client invested Rs 1 lakh in an MF scheme, the fund house paid about Rs 2,000 to the agent as upfront commission. Thereafter, the agent got about 30-50 bps each year on the market value of that Rs 1 lakh investment. Even if the investor changed his agent, the trail was always paid to the original agent and not to the new one, similar to the practice followed in the insurance industry.

   In August 2009, Sebi abolished the entry load but allowed the trail payment to IFAs to continue. The ban on the entry load hit the small IFAs hard, especially those whose livelihood depended on selling mutual funds.

   The AMFI circular of 2007 had initially allowed payment of trail commission to the new IFA in case of a change of agent. However, due to differences among fund houses, it was put on hold. Sebi’s email last week has now directed all fund houses to pay trail to the new IFA in case of a change of IFA for old investments.

   Top officials fear that small IFAs who are still getting trail from investments they had brought into fund houses earlier, might lose out to big and organised MF distributors. And this could also bring in the practice of ‘pass back’ into the industry and also increase costs for fund houses.An email sent to Sebi for its comments on the issue remained unanswered for over a week.

   Most fund houses are against this change although there are a few who are supporting the move. “By sheer money power, big agents can snatch away trail income of a large number of smaller IFAs,” said head of sales at a large fund house.

   For example, if an investor has an investment of Rs 10 lakh in an MF scheme, the IFA, who had brought this investor into the scheme, gets about Rs 3,000 this year as trail.

   Now under changed circumstances, a big distributor might approach the investor and offer him a cut from his Rs 3,000 trail in case he agreed to change his agent. The incentive, or cut from the trail (also called pass back), is in cash and, in most cases, unaccounted for.

   “It could also lead to polarisation of large distributors in the industry, which, in turn, could lead to increase in cost of assets,” said head of another local fund house. “In such a situation, large distributors could even force fund houses to shell out a higher trail,” the official said.