A reform that requires reform

Mon, 12 Nov Pre-Open

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At the end of September 2009, the number of retail (defined as individuals investing below Rs 0.5 m) folios in equity oriented mutual funds stood at 40.55 m. Over the next two years, i.e. at the end of September 2010 and 2011, this figure dropped to 38.6 m and 38.1 m respectively. In March 2011, the figure stood at about 37.1 m. At the end of September 2012, the number of retail folios dropped to just about 35 m.

During the same three year period, the number of retail folios for debt oriented funds increased from about 2.9 m folios to about 5 m folios at the end of September 2012.

As you would have guessed, equity as an asset class has been losing its favour by retail investors over time. Some key reasons would include investors shying away from markets post the 2008-09 market declines, the high interest yielding instruments in the markets and the range bound market behaviour over the past year.

To increase retail participation, to tap newer markets and deter investors from investing in assets such as gold and real estate, stock market regulator Securities and Exchange Board of India (SEBI) announced a few reforms for the mutual fund industry over a month ago.

Amongst the many reforms announced, SEBI's board approved allowing cash investments of up to Rs 20,000 without PAN requirement. This would help enhance the reach of mutual fund products among small investors such as farmers, small traders/businessmen and workers, who may not be tax payers and may not have PAN or bank accounts.

But it seems that this proposal has not gone down well with mutual fund houses.

As reported by the Economic Times, this plan has gone 'awry' with fund houses on account of various reasons. The key reason being that fund houses are not expecting this idea to be very viable, as huge inflows are not anticipated through this route. Secondly, the accounting complexities and the very high costs towards cash handling and management facilities make the whole scenario messy as well as difficult t manage.

Apart from the operations related issues, we must not forget the high possibilities of frauds, money laundering and tax related issues that could crop up. Issues related to misappropriations and embezzlements between the agents and investors also remain. And as pointed out by Firstpost, dealing with investors without proper documents would allow the rich (and high net worth individuals) to take this route to convert their black tainted money to white.

While the broader idea of bringing in investors to participate indirectly in the India growth story, such issues will definitely need to be cleared. SEBI would need to rethink about these aspects.