FT beyondbrics: Goldman goes it alone in Sinopec deal
11 February, 2013FT beyondbrics. Sukuk market: mixed signals
13 February, 2013Financial Times Beyondbrics, February 12 2013. To see at the FT click here:
A glut of new investment products appeared in India over the weekend, designed to bring first-time retail investors into the country’s stock markets with a generous tax break. Good news, surely? Well, characteristically for India’s asset management industry, the truth is more complicated than it needs to be.
At a weekend presentation in Mumbai’s Taj Vivanta hotel, finance minister P Chidambaram launched the Rajiv Gandhi Equity Savings Scheme. (He had announced this scheme in the previous government budget in September, but only on Saturday did it get underway.) The idea is that investors with an annual income of less than Rs10 lakh (Rs1m, or $18,567), who have never previously invested in equities, will receive a 50 per cent tax exemption on any investment up to Rs50,000.
The idea is sound – to attract small investors to the long-term investment opportunities of the stock market – but the scheme has been met with an underwhelming response domestically, perhaps because it is too complicated, or too late, or because commentators surmised there were better tax-effective options out there anyway. An onerous and confusing lock-in period of three years (fixed for the first, baffling for the next two, during which a sale is possible but only if other shares are bought with the proceeds) has not helped.
Central to the sluggish reaction is a question of timing. In India, the tax year ends on March 31, only a few weeks away. Most investment products launched over the last week have been closed-end with a fixed offer term, such as IDBI’s from February 9 to March 9, UTI’s to March 8, and DSP BlackRock’s to March 8, so there is just about time for investors to get in. But many employees in India actually provide all their tax information before the end of the tax year – typically, about now – so their employers can work out their tax liability for them.
The response is fitting for a fund management industry that has far less heft than one would expect in a country with a vast and fast-growing middle class. According to Cerulli Associates, assets under management in India’s mutual fund industry fell 1 per cent in the 2012 financial year to Rs5.87tn ($108bn), while retail equity assets dropped 6.63 per cent year on year to Rs1.23tn. Compare this to Rmb2.43tnon ($389.6bn) in mutual funds in China at the end of the third quarter, according to Z-Ben, a figure that will certainly have risen since on the back of local market rebounds.
“If you think about the fact that there has been a mutual fund business in India since the 1960s, yet it is around a third the size of the much younger Chinese market, ‘punching below its weight’ is an understatement,” says Shiv Taneja, managing director of Cerulli Associates. “What compounds that is that a lot of the assets – as much as half – are not really mutual funds but money market funds that corporate treasuries use to mitigate tax.”
Taneja blames three trends for this: unrealistic local expectations of mutual fund returns, a tendency to treat them as trading instruments, and a lack of focus on asset management as a way to create vehicles for long-term savings. “There is a lot of work to be done at multiple levels. It’s like when you got a grade C at school: great potential, but needs to work a lot harder.”
Nevertheless, Chidambaram has said he plans to amend the scheme in the next budget, so there is still time to take feedback on board for later incarnations.
