Sucheta Dalal :Motivated Negativity?
Sucheta Dalal

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Motivated Negativity?  

Jan 29, 2008



 

SEBI’s no entry load on direct investment enthuses few - went a Times of India headline in the first week on January. It referred to Securities and Exchange Board of India’s (SEBI) touted New Year gift to investors directing mutual funds not to charge the 2.5% entry load to those applying directly to schemes instead of going through a distributor.

Less than a week after the announcement, the headline seems to write off one of the most investor-friendly decisions in recent times. What was the basis of its finding? Apparently, the view of an unnamed “mutual fund expert” that “most people don’t understand the concept of mutual fund” and “only a small percentage of the investing population actually takes the mutual fund route.” Hence the conclusion that you need an agent to tell you which fund to invest in, and no agent will offer correct advice without a commission.

The report, however, contains several contradictions. It says that many financial advisors are encouraging investors to take advantage of SEBI’s rule and that these advisors are “quick to point out” that “agents don’t have a sterling record” and “have been pushing products that earn them the maximum commission.”

So why does the headline discredit a hard-fought move, even before the ink had dried on SEBI’s regulations? How does the reporter surmise investors’ indifference before fund houses are even geared to accept direct applications from individual investors? Are the powerful mutual fund distributors who lobbied hard to dissuade SEBI from scrapping entry loads on direct investment instigating such writing? They are bound to lose easy money if investors prefer to invest directly.

MoneyLIFE has long criticised the self-defeating, high entry loads charged by mutual funds to pamper powerful distributors. There was also a fairly well-reported controversy over how distributors -- mainly banks and security firms -- dubiously encourage investors to churn their money and move from existing schemes to new ones, only to earn higher commissions. Thanks to their tight nexus, mutual funds helped distributors to fool investors by projecting new schemes as initial public offerings (IPOs) on the lines of equity issues. Eventually, SEBI barred funds from using this nomenclature and they are now called new fund offerings (NFOs). Another outrage still remains -- the rule that requires investors to get a no-objection-certificate from the distributor if they want to switch to another agent.

 

MoneyLIFE has long criticised the self-defeating, high entry loads charged by mutual funds to pamper powerful distributors. There was also a fairly well-reported controversy over how distributors -- mainly banks and security firms -- dubiously encourage investors to churn their money and move from existing schemes to new ones, only to earn higher commissions. Thanks to their tight nexus, mutual funds helped distributors to fool investors by projecting new schemes as initial public offerings (IPOs) on the lines of equity issues. Eventually, SEBI barred funds from using this nomenclature and they are now called new fund offerings (NFOs). Another outrage still remains -- the rule that requires investors to get a no-objection-certificate from the distributor if they want to switch to another agent.

 

Soaring High

 

The shares of Gateway Distriparks Limited are on an upward trajectory and it is talked about everyday, either in the traditional media or on blogs or brokers’ websites. On 28th December, the Times News Network talked about a conflict between the Indian and Singapore-based promoters of the company leading to the Indian promoter hiking his stake to acquire management control. The stock exchanges wrote to the company to verify the report. Especially since the story speculated that the Indian promoter may later sell his stake to either the Ambani group or the Tatas.

Calling the reports speculative, the company pointed out that it had “only one Indian promoter, Mr Prem Kishan Gupta, who holds around 18% in the equity of Gateway Distriparks Limited in his personal name and in the name of his company, Prism International Private Limited.” Rather than putting an end to the issue, the answer only raises more questions. After all, it says nothing about the alleged conflict with Singapore-based promoters, Gopinath Pillai, Karan Singh Thakral and their investment entities, who together form the 39% promoter holding, as well as the Tamasek-affiliate, which holds another 7%. It also does not say why Gupta is hiking his stake. Clearly, stock exchanges need to ask some follow-on questions if their intention is to protect investors, especially since the company reportedly plans a Rs900 crore expansion and intends to raise private equity for its subsidiary Gateway Rail Freight (GRFPL) -- which operates container trains in the country.

 

Hasty Denials

 

The capital market seems to have entered the bubble phase where the soaring Sensex is sometimes out-of-sync (as on 8 January 2008) with falling small- and mid-cap stock prices. At times like these, several media reports are based on information flowing from large brokerage houses that tend to have an inside line on corporate developments. Often, the reports are just a day or two ahead of official corporate decisions. However, when stock exchanges send out their news verification queries, companies have no option but to issue carefully-worded denials. The question is: are these denials more damaging than a wrong report? Can they prompt an investor to sell stocks prematurely and at a lower profit than would have otherwise been possible? Consider the following examples.

MTNL: On 3 January 2008, Mahanagar Telephone Nigam Ltd (MTNL) responded to reports that it may get a pan-India mobile licence and would probably develop its land in Mumbai. The telecom company carefully told the bourses that it had “not provided any such information” to the media. It clearly didn’t want to go into details because most key decisions pertaining to public sector companies are taken in government offices rather than the boardroom. The Department of Telecom would decide whether or not MTNL would get a pan-India licence and, as for land development, it said, “as soon as any specific major development reaches the takeoff stage, relevant information shall be provided at the appropriate time.” How then does the verification process help investors?

UCO Bank: Over the past few days, there has been a flurry of reports about the possible merger between UCO Bank and United Bank of India (UBI).  Two specific ones talked about its capital restructuring and follow-on public issue plans and quoted the Bank’s chairman SK Goel; both were datelined Kolkata. Yet, when the stock exchanges wrote to the Bank to verify the reports, here is how it reacted: “We vehemently deny the contents of the referred news item. Our Bank’s proposal involving restructuring of capital has been submitted to the Central Government for its ‘in-principle approval’ which we are awaiting.”

Let’s look at what the reports said. On 30th December, PTI reported that UCO Bank planned to enter the insurance business and was scouting for partners. It quoted Mr Goel saying, “We expect to get the Cabinet nod in the first week of January” for its capital restructuring plans. PTI said that, once this was obtained, MTNL “would hit the market with a follow-on public offer” to raise Rs450 crore-Rs500 crore by 31 March 2008. This would reduce government holding from 76% to 54%.

Earlier, on 21st December, The Economic Times had published a Kolkata datelined report saying, “Daddy wants the best for his li’l child.” It said, when UCO Bank had suggested a possible merger with UBI, the finance ministry suggested it cast its net wider and look for a better suitor. The report quoted the chairman, but was careful about the exact words that went under quotation marks. It mentioned details about UCO Bank’s financials and future plans including the possibility of a follow-on public issue that would reduce government holding to around 54%.

So why is UCO Bank denying the ‘contents’ of the report with such ‘vehemence’? They seem entirely sourced from the Bank and if there was any specific mistake or conjecture, it could have been specifically denied. It seems to us that the Bank is more worried about its regulator and the finance ministry than the news reports. Meanwhile, the Bank’s shares certainly reacted to the ‘contents’ by soaring upwards.

 

Listing ICICI Securities

 

Reports about the listing of ICICI Securities, a 100% subsidiary of ICICI Bank, are in the same genre. The Bank responded to stock exchange queries saying that its board had not considered the issue. Clearly this was only a matter of time, and hence a pointless query and potentially misleading clarification

 


-- Sucheta Dalal



 



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