Confusing signals?

Core sector ECB norms may be eased

Prabhakar Sinha

Government is likely to allow external commercial borrowings (ECBs) of more than $20 million for rupee purchase of infrastructure plants, machineries and equipment. However, such borrowings would require prior approval of the Reserve Bank of India.

In its recent amendments in ECB policies on August 7, the finance ministry had banned ECB of more than $20 million for rupee expenditure. Even ECB of up to $20 million for rupee expenditure would need prior approval of RBI.




The amendments in the ECB policy have caused a lot of problems to the domestic manufacturers of plants and machineries. A senior banker said companies like Bharat Heavy Electricals Limited, Bharat Electronics Ltd and L&T among others, are facing tough times to compete with global players because of the new ECB policy. As on an average an infrastructure equipment order is more than $20 million, in the present scenario, a company will prefer to purchase the equipment from abroad, where interest rates are lower, than buying from the domestic market.

The banker said the cost of ECB is around 1.5 percentage points to 2 percentage points lower than the rupee borrowings in the domestic market. Normally, the purchase
of plants and machineries are done on borrowed money.
If a company buys equipment from foreign companies, it can borrow from the international market at lower interest rates. But, if it sources the equipment from domestic suppliers, ECB financing (over $20 million) is not possible. The company will have to borrow in domestic market at higher interest rates.

Therefore, purchase of equipment, plants and machinery from the domestic market has become costlier. This has put the domestic suppliers at a disadvantageous position. According to a source, these companies represented to the government to address the issues in the amended ECB policy.

At present, India has emerged as one of the biggest markets for infrastructure equipment, plants and machineries in the world. But, the recent amendments in the ECB
policy would enable the foreign suppliers to win the orders in the domestic market.

Government had changed the policy because of huge surge in ECB in 2006-07. RBI had originally estimated a total of $ 15 billion ECB during the period. But, because of huge inflow, the central bank revised the amount to $ 22 billion. But the financial year ended with ECB inflow of over $ 24 billion.

The trend continued in the first four months of the current financial year. As ECB was allowed under the automatic route in most of the cases up to $ 500 million, the
central bank could not do much to contain the inflow.




This led to appreciation in the rupee, which affected the competitiveness of the domestic companies. This forced the government to amend the policy to contain the ECB inflow. But the source said, government realised that present amendment has created an uneven market for the domestic suppliers. Therefore, it is working to tweak the policy, allowing ECB in infrastructure sector even more than $ 20 million after RBI approval.

Rupee appreciation will hit software earnings, but will make imports cheaper, which includes assets, goods, and raw materials like crude
oil. It will hurt export earnings for Indian companies but will also hurt FII investors in the Stock Market.

The government and the RBI have to guide the Indian Economy through this confusing maze.

Real estate headed south?

Businessworld

RAJESH GAJRA WITH GURBIR SINGH

The recent swings in the equity markets rattled Purvankara Projects’ plans to go public and have shaken investor confidence in the realty market. The Bangalore-based realty firm had wanted to raise Rs 1,130 crore when its stock was valued in the Rs 500-525 band. But as the stockmarket fell last week, Purvankara was forced to revise its offer price band to Rs 400-450, which allowed it to raise just Rs 898 crore.

But retail investors gave the issue a wide berth, leaving institutional buyers to subscribe to the company’s initial public offering (IPO). The same happened with the recent DLF IPO and this raises a question: Are we seeing a revision in the appetite for real estate stocks?

Yes. Real estate is a cyclical industry, and like all cyclical industries it is very sensitive to changes in interest rates; any increases in rates make prospective home owners postpone buying decisions. Given the Reserve Bank of India (RBI) is still seen to be committed to raising interest rates, this is depressing market sentiment as 70-80 per cent of the real estate market is residential.

Since realty markets in Bangalore and in north and central India have seen a 10-15 per cent correction, there is a growing perception that there is a glut in the supply of space and this is pulling real estate stocks southward.




The Purvankara IPO has also raised questions about the way realty companies are valuing themselves. Since demand forecasting in the real estate business varies widely, every real estate company needs to have a large land bank.

A realty company’s stock price and valuation is based on its land bank the same way other companies base theirs on their net asset value (NAV).

What’s troubling is that several realty companies do not appear to actually hold titles to the land they claim is part of their land bank. Purvankara’s lower stock price seems like a more accurate reflection of its real NAV, and as long as there is no clarity on land bank valuations, realty stocks will suffer.

And just last year the global outlook on Indian real estate was extremely upbeat:

Indian Real Estate

Even here rising interest rates were a concern, but the entry of global real estate funds was supposed to ride over such difficulties. What will happen if there are real estate jitters in the US following the sub-prime lending fiasco?

Company details

The companies listed in the previous posts are said to have had IPOs (initial public offerings) that bombed. That is, the stock price has been steadily declining ever since those companies made their debut in the markets. So let's see what details come up regarding each of these companies:

Oriental Trimex

Their website: http://www.orientaltrimex.com/

This company name is sometimes inadvertently given as "Oriental Trimax":

Oriental Trimax Pvt. Ltd. Marble Gypsum Board, Rough Marble, Slabs & Blocks Granite And Marble. 26/25, OLD RAJENDRA NAGAR,BAZAR STREET, NEW DELHI-110060

Oriental Trimax, engaged in the marble business, plans to tap the capital market through its initial public offer to finance its expansion, which includes setting up new marble processing units in Kolkata and Bangalore and expansion of its existing unit in Greater Noida. The company, also involved in trading of decorative stones including granite, has filed the Draft Red Herring Prospectus with market regulator SEBI, Oriental Trimax said in a release.

while in other news reports it is "Oriental Timex":

News reports mention that Oriental Timex has acquired mining rights for decorative stones at village Potteru in Malkangiri district. Following is a quote from one of the reports. The company acquired the said rights through a prospecting license dated Apr. 13, 2007, executed between the company and deputy director of mines, Koraput Circle Koraput, government of Orissa. The decorative stone quarry is spread over an area of 10.279 hectares / 25.40 acres. The deposits in this quarry are of black colour granite stone. The company said is in the process of complying with the terms and conditions of the prospecting lease.

In either case the company has used the IPO proceeds for capacity expansion and investments in new mines. The returns from the those investments will become apparent in a few years time. The same is more or less true for these other companies.

Abhishek Mills

(http://www.abhishekmills.com/ has plans of getting into the retail business)

Abhishek Mills ltd (AML), an RM Mohite group company based in Kolhapur , operates primarily in two business segments – cotton yarn manufacturing and construction. The company started its spinning operations in 1999 with a manufacturing facility of 13,104 spindles for 100% combed cotton yarn at Kolhapur . Currently, it has a capacity of 33,120 spindles producing 100% combed cotton yarn.

Post expansion, total capacity will increase to 45,120 spindles. It is also adding yarn dyeing capacity of 1,620 tonnes per annum, weaving capacity of 108 looms and
processing capacity of 21.60 million meters per annum. AML exports to European countries like Germany, Italy, Switzerland and others including Vietnam, Bahrain, Hong Kong, Russia, Korea and Mauritius. The company ventured into the construction business in 2000 and undertook the job work for Morbe dam (earthern) project on
Dhavri River.

House of Pearl Fashion (http://www.houseofpearl.com/)

The Group's principal activity is to manufacture, marketing and distribution and sourcing of garments. It provides total supply chain solutions to its customers which includes value retailers as well as higher-end fashion brand retailers in the United States of America and Europe. It is a design driven company with International designers working across the globe, keeping their fingers at the pulse of latest fashion trends, and providing design support to our offices world wide and has world class manufacturing facilities across India, Bangladesh, Indonesia. It also has sourcing operations which are in Hong Kong, China, Bangladesh, India and Indonesia with strategic partnership with more than 150 vendor factories across Asia.

The Gurgaon-based multinational apparel company, House of Pearl Fashion Ltd , is set to double its manufacturing capacity to a total of 40 million pieces in the next three years and is set to acquire a retail chain in the USA in a
couple of months, its Chairman, Mr Deepak Seth has said. The IPO will mop up around Rs 400 crore to finance a slew of its plans. Of this, Rs 110 crore would be meant for forward integration and Rs 150 crore for backward integration and acquisitions. The company already supplies to 60 major retailers across the world and is targeting to acquire chains having around 600 stores.

Decolight Ceramics(http://www.decocovering.com)

Decolight Ceramics has taken up an aggressive drive in the Andhra Pradesh market, Visakhapatnam in particular, to enhance its sale of vitrified tiles, according to Mr. T.V.V Ashok Kumar, General Manager. At a press meet here on Wednesday, he said the company, had set up a manufacturing unit in Gujarat with a capacity of producing 10,000 square metres per day and 20,000 boxes of wall tiles per day in different sizes and hues. He said Decolight had set up depots in Hyderabad, Vijayawada, Vizag and Nellore to supply its products to all parts of the State. Deco group's turnover during 2005-2006 amounted to Rs 200 crore, he added.

Old Ghuntu Road, B/h. Deco Gold Glazed Tiles Ltd.,
Morbi - 363642,
Gujarat,
India.

Broadcast Initiatives

Broadcast Initiatives Limited has informed the Exchange that : "The utilization of IPO Proceeds as at March 31, 2007 is as follows :
(a) CapitalAdvances for the Project Rs. 1634 Lacs
(b) spent towards IPO expenses Rs 475 Lacs
(c) Repayment of Term Loan Rs 2500 Lacs
(d) towards General Corporate Expenses Rs 1964 Lacs.
(e) The amount kept in fixed deposits with banks Rs 3500 Lacs and balance of Rs 187 Lacs has been kept in IPO current account.

Most of the regional markets have at an average 6-7 regional language channels and the Company's foray into the Bhojpuri market will give that market its first regional language channel. The Company already has two channels, one news and current affairs channel Janmat and a Marathi General Entertainments Channel Mi Marathi, in the Subsidiary of the Company Sri Adhikari Brothers Media Ltd (SABML). After the maiden IPO of the Company, Company is investing hugely in the latest equipment and technology for the news channel Janmat and this new revamped avatar will be visible in the month of July.

Transwarranty Finance (http://www.transwarranty.com/about.html)

Transwarranty Finance Limited (TWFL) was established as a full service Financial Services and Investment Banking Company in the year 1994 by Mr. Kumar Nair. Mr. Kumar Nair, a Chartered Accountant by profession was part of the core team in Kotak
Mahindra Finance Limited since inception. The spectacular growth enjoyed by Kotak Mahindra Finance Limited gave tremendous opportunity to Mr. Kumar Nair to be in
a wide range of functions and he gained extensive experience in Financial Services and Investment Banking.

Since the activities are diverse and governed by different regulatory authorities, the businesses are structured under Transwarranty Finance Limited a full service
Investment Bank as the flagship company and its subsidiary companies with 51% shareholding.

Transwarranty Finance Limited is a Reserve Bank of India registered Non Banking Financial Services Company (NBFC) with active business in Investment Banking,
Project Finance, Trade Finance, Corporate Finance and Retail Finance BPO.

Transwarranty Forex & Derivatives Company, a division of Transwarranty Finance Limited is a FEDAI registered foreign exchange broking firm and provides inter-bank
foreign exchange broking services.

Transwarranty Capital Pvt Ltd is a SEBI registered stock broking company with membership in the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE)
in both the Capital Market and Futures & Options segments. The company is also a SEBI registered Merchant Bank.

Transwarranty Forex & Commodities Pvt Ltd a member of the Multi Commodity Exchange (MCX) provides commodities broking services. The company proposes to
acquire membership in NCDEX in the near future.

International operations shall be launched from Dubai activating the membership awarded to us in the Dubai Gold and Commodities Exchange (DGCX). This shall be
followed with offices in London & Singapore to provide a window for the emerging companies in India to tap international capital and to assist foreign funds and
companies as a facilitator to invest in India.

In India, geographical expansion is being pursued with opening of 6 regional offices in Delhi, Kolkatta, Ahmedabad, Chennai, Bangalore and Hyderabad and a nationwide
distribution network of branch / franchise offices.

Our business objective is to be the preferred provider of financing services, investment banking and wealth management including broking services to corporate, retail and institutional clients across various cities and towns in India and in three international cities of Dubai, Singapore and London.

42 - B, Mittal Towers B Wing, Nariman Point
Mumbai - 400021,
Maharashtra,
India.

Transwarranty Finance Ltd has informed that the members at the 13th Annual General Meeting (AGM) of the Company held on August 01, 2007, inter alia, have accorded the following:

1. Received, considered and adopted the Balance Sheet as at March 31, 2007 and the profit and loss account for the year on that date and the report of the Directors and the Auditors thereon.

2. Declared a dividend of 10% (Re 1/- per share) to all the shareholders of the Company.

3. Mr. Raghu R Palat was reappointed as Director of the Company whose period of office shall be liable to determination by retirement of directors by rotation.

4. M/s. Haridas Associates, Chartered Accountants, Mumbai was appointed as Statutory Auditors of the Company from the conclusion of this Annual General Meeting
until the conclusion of next Annual General Meeting.

5. Mr. N R Achan was appointed as Director of the Company whose period of office shall be liable to determination by retirement of directors by rotation.

6. To pay commission to the Non-Executive Directors.

AMD Metplast (http://www.amdmetplast.com/)

AMD Group is a group of companies engaged primarily in the manufacturing of packaging articles being used in soft drinks, Beverages, water, beer, liquor and pharmaceutical industries We are the only company in India with a complete one stop shop solution for the entire carbonated soft drink market. With humble beginning in 1958 as a trading company, the group is now India ’s top Beverage packaging company supplying finished products to MNC’s like Coca Cola, Pepsi, South African Breweries (SAB), United Breweries(UB) Dabur, HLL, etc. as well as numerous large indigenous beverage Pharma and health care companies.

This may sound a little bizarre: a company plans to ramp up capacity to enjoy a tax break and not because it needs the extra production. Delhi-based AMD Metplast India manufactures crown caps, closures and PET preforms (from which PET bottles are made).
The company already has a 4,260-tonne capacity PET preform manufacturing facility in Ghaziabad in Uttar Pradesh that runs much below the 100 per cent capacity for
three to four months a year.

AMD Metplast now plans to set up a new plant to manufacture 2,700 tonnes of PET bottles at Neemrana in Rajasthan at an investment of Rs 22.58 crore.

The company is investing in a new plant in Neemrana since it was required to to invest Rs 30 crore by December 2005 in the crown cap manufacturing plant to claim
exemption from payment of Central Sales Tax that amounted to Rs 15.63 crore as on March 31, 2006.

AMD Metplast had acquired a 10 acre plot at the Rajasthan State Industrial and Investment Corporation (RIICO) estate in Neemrana and set up a crown caps
manufacturing plant at an investment of Rs 17 crore. According to a letter issued by the Rajasthan Board of Infrastructure Development and Investment Promotion, the
company could avail of the exemption provided it invested up to Rs 30 crore in the project.

The company is seeking to raise Rs 75 crore with a public issue that will be floated on February 15. While Rs 22.58 crore from the issue proceeds will be set aside for the PET project at Neemrana, a sum of Rs 20 crore will be earmarked for long term capital requirements. Another Rs 12 crore will be used to repay loans it had taken from United Bank of India, State Bank of India and State Bank of Indore.

AMD Metplast has loan liabilities of Rs 47.65 crore on its books as on March 31, 2006.

Following the public issue AMD Metplast’s equity capital base will increase more than two-fold to Rs 19.2 crore from Rs 9 crore at present.

Asahi Songwon (http://www.asahisongwon.com/)

Asahi Songwon is in the business of manufacturing chemicals, pigments, and dyes. In the year 1996-97 Songwon Colors of South Korea decided to enter into a joint venture with Asahi Dyechem with financial investment and technological collaboration
and the company’s name was changed to Asahi Songwon Colors Ltd.
30 Ambica Society
Usmanpura
Ahmedabad - 380013,
Gujarat,
India.

Vijayeswari Textile ltd (VTL)

VTL is entering the capital market on February 8, 2007 with a public issue of equity shares of Rs ten each for cash at a price to be decided through the 100 per cent book building process.

The price band has been fixed between Rs 115 and Rs 130 per share.

The issue closes on February 13,2007 and is proposed to be listed on the Bombay Stock Exchange (BSE) in addition to its current listing of the equity share on the
Madras Stock Exchange (MSE).

Company CMD Mr K Rajagopal told reporters here today,'' The company is tapping the market to augment additional capital for financing the modernisation of spinning
and expansion of the capacities in all the divisions.The company is also proposing to take over a sewing facility with a capacity of 24,00,000 pieces per annum and is
further setting up an additional capacity of 26,00,000 pieces per annum.The company also plans an addition of 4,950 KW WEGs.'' ''The company has strong presence in
US and UK markets.The US and UK markets contributed 76 per cent and 16 per cent of its made-ups revenue respectively during the financial year 2006.The Australian
and New Zealand markets have accounted for four per cent of its made ups revenue.

The company proposes to widen its geographical reach by enetering into new
markets and increasing its presence in France, Australia and New Zealand markets,'' he added.

Insecticides Ltd (http://www.insecticidesindia.com/)

Insecticides (India) Ltd (IIL), which is into manufacturing and distribution of plant protection chemicals and house hold pesticides, will be entering the capital market with an initial public offering of 32.10 lakh shares of Rs 10 each at a premium to be decided through a book building process.

The price band of the issue is between Rs 97 and Rs 115 per equity share and is scheduled to open on May 7 and close on May 11. Addressing a press conference on

Tuesday, Mr Pradeep Aggarwal, Chief Financial Officer, IIL, said, "The proceeds of the IPO will be used to set up a formulations plant at Samba (Jammu & Kashmir)
and set up a manufacturing technical plant and research and development (R&D) facility at Chopanki (Rajasthan)."

Technocraft Industries

Technocraft Industries (India) Ltd is on an expansion spree. From August 2004 onwards the company's production capacity is expected to go up from the current 4,000 tonnes per month to around 7,000 tonnes per month. "We are also diversifying more into value added pipe products like scaffolding components and accessories," says Shetal Mehta, Export Manager, Technocraft Industries (India) Ltd.

Technocraft supplies its pipes to gas and water industries as also to scaffolding industries. The company manufactures Electric Resistant Welding (ERW) pipes as per
various international standards like BS, IS, DIN and ASTM. "Our quality is very well accepted in the international market. We have our warehouses in several countries
to cater to customer requirement," Shetal Mehta says. An ISO:9002 company, the head office of the Technocraft Group is in Mumbai, with overseas offices in the UK,
Poland and Hungary.

Regarding problems, Shetal Mehta says, "For the last one year, raw material price has gone up alarmingly, which resulted in low export growth for the last few months.
However, in the recent Budget, the reduction in customs duty on steel is a positive factor for us." At the same time, highlighting the prospects of the piping industry, Shetal Mehta avers, "In the last one or two decades, many pipe industries have come up. There is good demand for tubes in India, as our country is now growing at a good
pace."

Technocraft, a multi-product and multinational group, was established in 1972 by a group of technologists with the aim of manufacturing high precision and sophisticated products, mainly for discerning worldwide markets. Technocraft enjoys a significant position in five main business industries, namely drum closures, pipes and tubes, engineering services, scaffolding systems and accessories and cotton yarn. Several products in computer software and information technology have been added recently.

Technocraft is now a government recognised trading house due to its highly encouraging export performance.
Technocraft Industries (India) Ltd, A-25, MIDC Road No.3, Opp. ESIS Hospital, Andheri (E), Mumbai-400093.

Technocraft Industries (India) Ltd. has embarked on major expansion, entailing an estimated capital outlay of Rs.125 crores. In its drum closure division, the Company is upgrading its plant by incorporating next generation technology developed by the company to significantly reduce manufacturing costs. The total investment envisaged is Rs.19.58 crores. In the tubes division, the Company plans to increase the production of scaffoldings as well as a range of new products like props, cup locks, tube locks, tubes for the Automobile industry and ring scaffoldings. This will involve an outlay of Rs.21.07 crores.

In its textile division, Technocraft is setting up a Cotton yarn mill with a 27,640 (2640 already installed) spindle Capacity to produce finer counts which will add to its already existing capacity of 33,264 spindles, at an outlay of Rs.66.89 Crores of which Rs.13.37 crores would be funded through the proposed IPO and the balance of Rs. 53.52 Crores has already been tied up through a rupee term loan from Bank of India, under TUF Scheme.

Akruti Nirman Ltd ( IPO oversubscribed by 53 times)

(http://www.akrutiestate.com/)Akruti Nirman Ltd. is a real estate development company involved in the development of contemporary housing, commercial, retail and institutional premises. The company focuses on delivering high quality real estate solutions where design, engineering, and execution dovetail into a landmark development.

Akruti Trade Centre, 6th Floor Road No. 7 Marol, MIDC, Andheri (E) Mumbai - 400 059.

Real estate company Akruti Nirman Ltd has reported a net profit of Rs.46.42 crore for the first quarter ended June 30, 2007. Net sales for the quarter were Rs 63.78 crore. The IPO of the company, aggregating Rs 361.80 crore, closedon January 19 this year. The company said that this being the first year of listing, figures for the corresponding quarter were not compiled and hence unavailable for comparison.

C&C Constructions Ltd (IPo oversubscribed 20 times)

(http://www.candcinfrastructure.com/)The Company is engaged in diverse range of construction related activities on a nationwide and global basis:
Highways.
Airports.
Laying of Optic Fibre Cables.
Maintenance of Telecom Network.
Electric Transmission Network.
Microwave Tower.
Manufacturing and Erection of Telecom Antennas.

Incorporated in July 1996 by a group of professionals for infrastructure development, C&C has a vision to broaden its activity base to diversify into other infrastructure disciplines and achieve a healthy growth rate. It provides services like Airfield pavements-rigid and flexible, State and National Highways, City and rural Roads, Bridges and Culverts, OFC Backbone Projects etc.

C & C Constructions Ltd has informed that the Company in JV with B Seenaiah & Co. (Projects) Ltd (BSCPL), has signed a concession agreement with NHAI for
KuraliKiratpur Road Project. This marks the entry of the Company into the BOT segment, which provides the Company contracting revenue as well as revenue from
operations.

The Company has been granted a concession for the development, design, construction, maintenance and operation of 44 km stretch of the highway from Kurali Kiratpur
on NH-21 connecting Chandigarh to the tourist and apple belt of Kullu Valley and beyond and other districts of Himachal. This road has a historic significance as it
connects the religious siteAnandpur Sahib. It also provides access to two industrial areas of Himachal Pradesh Nalagarh & Baddi. The project is valued at an estimated
cost of Rs 400 crores with a grant from the government of Rs 44 crores. The concession period is 20 years including construction period of two and half years.

The Company and BSCPL are infrastructure project development Companies, that provide engineering, procurement and construction services for infrastructure projects.
The Company has also significant expertise in EPC contracts, and has also recently forayed into urban infrastructure projects. As part of its international operations, the Company and their JV partner BSCPL has been present in Afghanistan since 2003 and have executed a number of infrastructure projects for the reconstruction of
Afghanistan.

Major clients of the Company include NHAI, AAI, Infrastructure Boards and PWD's of various State Governments, Govt. of Afghanistan, The Louis Berger Group Inc,
RITES Ltd and UNOPS etc.

C & C Constructions Limited shall publish Audited Financial Results within a period of 3 month for the year ended on June 30, 2007 i.e. on or before September 30, 2007.

IPOs that bombed

TOI

Out of 56 companies that entered the capital market in 2007, shares of around 25 companies are currently trading below their offer prices.

What is interesting is that the most of these IPOs were oversubscribed and had debuted with good premium to their offer prices. However, they could not hold on to the gains for long.

Shares of recently floated IPOs like Oriental Trimax, Abhishek Mills, House of Pearl Fashion, Decolight Ceramics, Broadcast Initiatives, Transwarranty Finance, AMD
Metplast, Asahi Songwon, Vijayeswari Textile, Insecticides Ltd and Technocraft Industries have fallen from 30 to 62% from their offer prices.



Even shares of IPOs like Akruti Nirman Ltd (oversubscribed by 53 times) and C&C Constructions Ltd (20 times) are also being traded much below than their offer
prices. Based on Wednesdays closing shares of C&C Constructions are being traded 24% discount to its offer price of Rs 291, while shares of Akruti Nirman are being
traded 6.48% discount to its offer price of Rs 540.




IPOs are normally priced within the range based upon the sentiment prevailing at the time of issue. As a result, with the condition change in the secondary markets, the
prices of the stock concern can go at discount or at the premium to the issue price.

IPOs that are fully priced can go at a discount even as slightest deterioration of the sentiments but IPOs that are offered at massive discount to its valuation can continue to remain above their issue price even after massive selling in the markets, VK Sharma, research-head, Anagram Securities said.

Mutual Funds--hidden costs

Businessworld

VISHAL KRISHNA & ABHISHEK CHOWDHURY

Two years ago, Shreedhar Raju, 27, decided that he had to make quick money. So, he invested a part of his hard-earned wages in a new open-ended mutual fund, where he could withdraw his investment at any given point of time. He was, then, unaware that he had paid 5-6 per cent as distribution expenses, charged by the distributor or the financial intermediary, who sells the fund on behalf of the mutual fund company. But over a cup of tea, it occurred to him that he had ignored a simple, but crucial rule. He realised that he had incurred expenses up to 7.25 per cent over a year on the total investment made, which included 2.25 per cent as management expenses along with distribution expenses of 5 per cent.

India’s distribution expenses for mutual funds, for which data is not available, “is very high”, say analysts. They attribute this to the large number of schemes in the Indian market. Well over 1,115 in number, these schemes are mostly managed by the top 10 fund houses in India, according to OptiMix, an investment solutions firm. “There should be an increase in the household savings market, which should participate in the mutual fund industry,” says Mugunthan Silva, chief investment officer (CIO) of OptiMix in Mumbai. “At the moment, only 3 per cent of the household market participates in mutual funds.” The Indian household savings participating in mutual funds is about $8 billion (Rs 32,000 crore).

When the Indian mutual fund industry is compared with that of Australia’s massive $1-trillion market, management expenses are higher by up to 7-8 per cent. But the latter’s returns are higher too because of the sheer size of the market, say fund managers. Also, the number of schemes in the market are less than 500 and there are around 70-80 fund houses. In India, there are 32 fund houses managing over 1,000 schemes. Here, the returns are less and because most of these schemes are new funds, the expenses incurred by an individual are higher. “In a mature market, the distribution costs are lower,” says Mugunthan. “In India, this would happen only when the funds under management grow substantially.”

Analysts from CRISIL explain why distribution expenses are high in India. Although management fees charged are on a par with those in most European nations (See ‘Who’s The Costliest Of All’), the number of new funds released in India makes distribution expenses high.

“The investor will be better off without the 5-6 per cent distribution charge, which a number of open-ended new fund offers (NFOs) are charging,” says Krishnan Sitaraman, CRISIL head of fund services and fixed income. “The distribution charges in the US would be less than 5 per cent. At the same time, if one invests in an existing scheme in India, rather than an NFO, the deductions are much lower.” Krishnan says these 32 fund houses are together tapping only about 4 per cent of the incremental household savings market on an annual basis. There are many versions amidst the fund management fraternity saying that India is the cheapest market in the world. But when it comes to the distribution expenses, it’s a completely different story. Analysts say that there are too many schemes chasing very few investors and as investors skip from one scheme to another, their expenses rise.

More close-ended schemes are increasingly being launched after the SEBI set guidelines last year for not allowing for amortisation, where initial expenses on a fund are knocked off over a number of years, in open ended schemes. “Low penetration in the household savings market, combined with more investment in long term funds will reduce distribution expenses for the individual,’’ says Krishnan. According to CRISIL, only top five asset management companies (AMCs) in India accounted for about 52 per cent of the mutual fund market and the Indian mutual fund industry forms only 0.37 per cent of the globally managed funds in the mutual fund industry, which is $23 trillion. The reason for this was largely the lack of geographical penetration in the industry with a substantial portion of the assets under management (AUM) coming from the larger cities.

But the reason why fund houses charge high distribution fees is that the average Indian investor hangs on to a mutual fund as a tax saving benefit for a short period. Therefore, by investing in many new open-ended schemes, expenses were generally higher and stood between 6-7.25 per cent of the investment. “Most of these investments are in open ended equity funds and Indian investors are in mutual funds for not more than a year or so,” says Mugunthan. “Such individuals, investing in many funds, do not realise that their expenses would have gone up.” This mentality of short term investment has been one of the causes for the birth of new fund offers and schemes.

Analysts believe that investors should lock in their funds for at least 3-5 years to get better returns. They believe that the asset base of mutual funds in India would increase over the next five years to Rs 10 lakh crore with 50 per cent investment in equity. They are placing huge emphasis on educating individuals in tier-II cities so that mutual fund investment is considered more as a long term investment.




Similarly, index funds and exchange traded funds (ETFs) have not found favour in the Indian market. ETFs are cheaper with 0.6-1 per cent as annualised total expenses and are relatively new in the Indian market. Also, the SEBI has recently capped the maximum expenses that can be charged by an index fund at 1.5 per cent of total assets. Till date, the figure was fixed at an upper limit of 2.5 per cent, in line with any other equity fund. Compare this with the US, and one will find that these expenses are cheaper. The average expense ratio for US index funds is 0.70 per cent and ETFs is 0.34 per cent. In India, the expenses for index funds stand at 1.10 per cent. “Led by Vanguard, index funds in the US have more than $1.7 trillion of AUM, while in India just Rs 375 crores are in index funds,” says Ajay Bagga, CEO of Lotus India Asset Management Company. “Similarly, ETFs are taking off globally, with assets worth nearly $500 billion (Rs 20 lakh crore) in ETFs now.” In India, ETFs total to Rs 6,090 crore, the largest chunk of which comes from banking ETFs, which manage Rs 5,845 crores in assets (See ‘India’s White Elephant’).

However, industry sources mention that the entry and exit loads were the cheapest in India when compared to open-ended international funds, where entry loads could go up to 5 per cent. “Indian stockmarkets have given a return of nearly 18 per cent on a compounded average basis for the past 15 years,” says Sandip Sabharwal, CIO, JM Financial Asset Management. “The current load structures should not be an impediment for investors.” He also points out that only investors who stayed longer in mutual funds have had healthy returns and, further, he compares this to India’s bull run since 2003. However, most fund houses declined to comment on the high cost of distribution expenses and the need to reduce the number of schemes that are present in the Indian mutual fund market today.

“Although a lot of structured products or schemes can be designed to suit the need of individuals,” says Sabharwal, “there is a need to allow household savings into the mutual fund market. Only then can one compare the Indian market to other developing markets.” Fund managers feel that introducing new products would not work in a market like India. Instead, they want the understanding of basic products to catch up first.