Monday, January 19, 2009

SEBI bans indicative yields on debt funds

India's market regulator on Monday banned funds from suggesting indicative yields on debt plans and cut the maximum maturity of papers liquid funds could invest, a move that could dent popularity of these schemes.
The Securities and Exchange Board of India (SEBI) said mutual funds must not disclose indicative yields and portfolios of debt funds, a practice widely followed in the industry to sell fixed maturity plans.
"This practice should be prohibited as the indicative portfolio and indicative yield may be misleading to the investors," the regulator said in a statement.
In an another statement, the regulator also lowered the maturities of papers that liquid or money market funds could invest into from the current requirement of one year.
It said liquid funds can invest in securities with maximum maturity of 182 days with effect from Feb 1 and 91 days with effect from May 1.
There are currently more than 350 fixed maturity and liquid funds managing about 1.6 trillion rupees, according to data from the Association of Mutual Funds in India.

Unitech's debt obligation reduced to Rs 600 crore up to March '09

India's second largest listed real estate developer Unitech on Monday claimed that its debt obligation up to March '09 has reduced from Rs 2,500 crore to Rs 600 crore on account of repayment and roll over of loans. Of the Rs 600 crore loan, which the company is now expected to pay back by March, 60% is due to banks and rest to mutual funds. The company claimed it paid back close to Rs 950 crore and the rest was rescheduled to a later date.
Unitech had a total debt of Rs 8,300 crore on its balance sheet as of September, of which Rs 2,500 was supposed to be repaid by March 2009. Unitech MD Sanjay Chandra said over Rs 1,000 crore loan has been restructured so far, but didn't give the exact figure.
Some of the loans that have been rescheduled include those which were due after March. Without clarifying how much Unitech still owed its lenders following the repayment and restructuring of loans Mr Chandra said, "We don't have substantial repayment obligation now. Nothing that worries us."
Unitech had raised Rs 900 crore at 19% interest rate from 8-9 mutual fund houses, including Reliance and Kotak, in November 2008. This was due for repayment on Monday. The company said it paid back a 'substantial' amount on Saturday, while the rest was rolled over.
"We are trying to replace our short-term mutual fund debt by long-term bank loans," said Mr Chandra, adding that he expected to replace Rs 2,500-crore short-term loans by long-term loans in the next two months. He said he has been able to raise fresh debt, mainly to retire old ones, but refused to give the amount of fresh debt raised.
Unitech in a hurriedly concluded EGM on Monday also obtained approval of shareholders to raise Rs 5,000 crore through fresh issue of equity or convertible instruments. "The way restructuring is happening and the pace at which it is happening, we don't need fresh capital. But if there is a window of opportunity, we will go for it," said Mr Chandra. He declined to comment on the shares promoters have pledged with other financial institutions.
On the issue of share buy-back of AIM-listed Unitech Corporate Park(UCP), Mr Chandra said a decision will be taken by the UCP board next week in Dubai. UCP holds real estate projects being executed by Unitech in India. Unitech's wholly owned subsidiary Nectrus Ltd will buy back shares using management fee it gets from UCP once the board gives a green signal.

The amendment to LIC Act


On December 23, 2008, the government introduced in Parliament a Bill for amending the Insurance Act, to raise the capital of the Life Insurance Corporation from Rs. 5 crore to Rs. 100 crore. On the face of it, the intention behind the proposed amendment may appear to be good. Unfortunately, it is not so.

Needless exercise
It is a recognised fact that a life insurance company does not require any capital. There were, and still are, many life insurance companies known as Mutuals. Standard Life of the U.K. (which operated in India even before 1900 and is now again in India in partnership with Housing Development Finance Company) was a mutual company till June 30, 2006. In India itself, Bombay Mutual, before nationalisation of insurance, was a well known example. The mutual companies have no capital — only working capital, during initial years. Policyholders are the owners of these companies and the entire profit, after tax, goes to them.
The Rs. 5 crore provided by the government at the time of formation of LIC was more in the nature of working capital than real capital. Today, the Controlled Fund of LIC exceeds Rs. 7 lakh crore, with a solvency margin reserve of more than Rs. 30,000 crore. This reserve, built up by transfers from surplus (profit) after tax, is akin to general reserve and, therefore, for all purposes, equivalent to capital, but with one difference. Ninetyfive per cent of this capital belongs to policyholders.
With policyholders thus providing almost 95 per cent of the capital, LIC is virtually a mutual company. In this context, an addition of Rs. 95 crore to capital is a drop in the ocean and serves no purpose, except perhaps to facilitate passing of a part of the business to the private sector, Indian and foreign.
Can a minority shareholder unilaterally alter the capital structure of a company? This question has to be first answered before the bill, in its present form, is taken up for discussion in Parliament.
As per the LIC Act, the Central government is not eligible for more than five per cent of the valuation of surplus emerging each year. This was in line with the standard set up by Oriental Assurance Company before nationalisation. In the case of private insurers, as per the Insurance Act, the shareholders are eligible for 100 per cent of the surplus emerging from without profit policies and 10 per cent of the surplus emerging from with profit policies. The unit linked policies come under the without profit category. With these policies constituting more than 95 per cent of the portfolio of private insurers, almost 98 per cent of surplus goes to shareholders in the case of private insurance companies. Policyholders to suffer
If the proposed amendment to the LIC Act goes through, the shareholders’ share of profits of LIC will immediately jump from five per cent to 10 per cent and then gradually increase, during the next ten years, to more than 40 per cent. That is, within the next ten years, even assuming only a modest growth rate, the shareholders of LIC would get more than Rs. 15,000 crore a year, or Rs. 1,250 crore a month, as compared to the present level of Rs. 1,000 crore a year. This, at the cost of policyholders.
These figures would explain the objective behind the proposed amendment.
Such a move to siphon off the profits of LIC will result in enrichment of private pockets, drastically reduce the levels of bonus to policyholders, render the corporation uncompetitive and eventually weaken it beyond recognition. Simultaneously, the demand to withdraw government guarantee to LIC has been resurrected. The government can be allowed to withdraw the guarantee but, on one condition. Convert the LIC into a mutual company and make the policyholders, who have contributed 95 per cent of the capital, the owners.
The amendment to the Insurance Act made in 1999 has conferred on us a distinction. After this amendment, India is perhaps the only country not to allow formation of mutual insurance companies. But, this position can be easily rectified through a minor amendment to the Act. In this context, it is worth mentioning the view held by the International Association of Insurance Supervisors (IAIS). According to this body (not binding on member states), an insurance company can be either a joint stock or a mutual company.
For giving up its control of LIC, the government may be compensated through payment of a fixed sum, say Rs. 1,000 crore a year, for the next 20 years. One may feel that the quantum of compensation is high. But, the price of freedom always is.
If such a scheme is implemented, it would result in immediate increase in the levels of bonus to policyholders, making LIC a much stronger organisation.
In 1993, a national survey was got conducted by the Malhotra Committee, spanning cities, towns and villages. The survey showed that LIC’s emblem was readily recognised by more than 99 per cent of the persons covered by the survey. The LIC is not just a national institution. It is a symbol of national integration and its emblem is treated as a symbol of security. It is the duty of every right thinking Indian to stand up against any attempt to dilute this status.

R. RAMAKRISHNAN
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