Prudential Financial Inc's Pramerica Investment Management is buying Deutsche Asset Management's Indian unit for an undisclosed sum, betting on a revival of India's mutual fund industry. Asset managers in India have struggled for years with high redemptions after the financial crisis, hurting profitability. While Deutsche Bank's sale of its Indian Asset Management business marks the latest foreign asset manager to exit the country, a recent surge in the stock market suggests fund inflows are coming back. Net inflows into equity mutual funds reached $2 billion in June, the second-highest monthly additions since January 2008. The Deutsche deal will help Pramerica Asset Managers Pvt Ltd, which runs its fund management business in a joint venture with local partner Dewan Housing Finance Corporation add assets under management of 207.20 billion rupees ($3.25 billion), nearly 10 times its current book of 21 billion rupees. Deutsche, which set up its asset management business in India in 2003, said it was divesting the asset management unit to focus on its core business. Deutsche's exit is the latest among a series of foreign firms to quit India's highly-competitive fund industry. Last year, Kotak Mahindra Bank bought PineBridge Mutual Fund's Indian schemes, while Morgan Stanley sold its asset management unit to HDFC in 2014. Other high-profile exits include Japan's Daiwa Asset Management and Fidelity Worldwide. (Reuters)
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Malaysian anti-corruption officials investigating state investor 1MDB for alleged graft visited the local office of Goldman Sachs last month seeking documents relating to the state firm, two people familiar with the visit said. The scandal engulfing indebted 1MDB has triggered a political crisis for Prime Minister Najib Razak, who oversees the fund, and has contributed to the ringgit's fall to a 17-year low against the U.S. dollar. One of the sources familiar with the matter told Reuters Malaysian Anti-Corruption Commission (MACC) officials visited Goldman Sach’s office in Kuala Lumpur on July 8, the same day the anti-graft authority visited the offices of 1MDB. "1MDB is the subject of investigations, not Goldman Sachs," this source said. Goldman Sachs is working with the MACC on its request, this source said without providing more details. Goldman Sachs declined to comment. The U.S. investment bank helped 1MDB raise U.S. dollar debt to finance acquisitions of power plants. Goldman Sachs' role in the bond issue was criticised in Malaysian media and political circles after it emerged that 1MDB paid hundreds of millions of dollars to the bank for helping it raise $6.5 billions in three bond deals in 2012 and 2013. The bank earned roughly $590 million in fees, commissions and expenses from underwriting the bonds, a person familiar with the situation said. Banks would usually charge around 1 percent to place a bond. Goldman's profit on the 1MDB bonds came from the private nature of the deals, and the risk the bank took in buying some of these bonds and then selling them to clients, debt bankers familiar with the bonds said. In a report in early July, the Wall Street Journal claimed investigators looking into 1MDB had discovered nearly $700 million was transferred to Najib's bank accounts, citing documents from the investigation. Reuters has not verified the Wall Street Journal report. Najib, who also acts as finance minister in Malaysia and chairs 1MDB's advisory board, has denied taking any money for personal gain. Last week Malaysia's anti-corruption commission said the funds deposited in Najib's accounts were from a donation, not from 1MDB, without elaborating on who the donor was. (Reuters)
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Salaried employees for the first time stand a chance to exploit the potential of equity asset class and reap its benefits, says Sunil Dhawan At last, the long awaited decision to make an employee’s savings work harder and generate high real returns has actually transpired. The Employee Provident Fund Organisation (EPFO) that manages about Rs 8.5 crore of the contributions (savings) of nearly 5 crore employee across the country has started investing EPF Corpus into equities. In an attempt to test equity-waters, EPFO has taken two decisions – One, not to invest directly into stocks but only though exchange traded funds (ETF) and secondly, to invest only 5 percent of its incremental corpus in this financial year. With an incremental corpus of about Rs 1 lakh crore, it’s expected that nearly Rs 5,000 Crore would be invested in ETFs this year. Not a substantial sum by market numbers, but a start certainly has been made. Starting 6th August, EPFO has started investing in two ETFs of SBI Mutual Fund namely, SBI ETF Nifty and SBI Sensex ETF in 75:25 ratio. Why ETFs: Exchange traded funds (ETF) are similar to what a mutual fund is in terms of composition and portfolio. The units of ETF are however traded on exchanges and can be bought or sold anytime during trading hour. They typically mirror an index and hence returns are largely in line to that of the market. The cost too is lower in ETF as they are passively managed. The role of the fund manager is absent. Why Equities: In order to beat inflation, it is imminent to generate high real returns in order to create wealth. Several studies in the past have shown that equities have delivered high inflation-adjusted returns over long term. A small difference in returns can bring about a huge impact on the final maturity corpus. Illustratively, if an employee contributes Rs 5,000 a month (at 8 per cent) towards his EPF account for 25-years, a mere 2 percent difference in return can generate a 40 per cent difference in corpus amount while in case of a 4 per cent difference, the corpus can be 98 per cent more! National Pension System (NPS), another retirement focussed investment available even for non-salaried investors have since inception generated an average return of about 12 percent per annum, even with an equity exposure of just 15 percent of its total corpus! The last ten years return too is around 12 percent for the market. Ajay Bodke, CEO & Chief Portfolio Manager - PMS at Prabhudas Lilladher Private Limited informs, “With pension funds having long term liabilities the investment horizon matches patient investing which delivers superior returns. The benchmark BSE SENSEX that represents bluest of blue chip companies has returned around 17 to 18 per cent CAGR over the last 35 years with the markets growing 6 to 7 fold every decade in 1980s, 1990s and 2000s.” Till Now: The trade union bodies had for decades opposed any investment into equities and therefore the entire corpus found its way only into debt asset class such as the central and state government securities yielding a return in line with policy or the bank rates. The current rate for the year 2015-16 stands at 8.75 percent. The biggest drawback of investing in debt assets over a longer horizon is the low real returns i.e. returns adjusted to inflation. With inflation running close to 9 percent, the employees felt short-changed as real returns from EPF has always been low. Being a long term retirement-focussed scheme, the need for high yielding asset class was always felt. Bodke says, “It is a long overdue measure on the part of the Trustees of EPFO to invest a part of the assets in equities which have globally proven to be the highest yielding asset class over the long term.” Now On: Then came the directive from the Labour ministry, notifying the new investment guidelines and allowing EPFO to invest in equities. The new investment pattern for EPFO allows it to invest in "shares of body corporates listed on Bombay Stock Exchange (BSE) or National Stock Exchange (NSE) which have market capitalisation of not less than Rs 5,000 crore as on the date of investment". According to investment norms, EPFO can also invest in mutual funds regulated by the Securities Exchange Board of India and which have minimum 65 percent of their investment in shares of body corporates listed on BSE or NSE. Bodke feels, “In fact by keeping away from investing in equities the Trustees have denied the employees of superior retirement benefits.” The Pitfall: Investing in equities is associated with volatility too and hence a probability of losing principal amount. However, volatility tends to fall over long period of holding. The ideal way should be to route funds through SIP way rather than trying to time the market by doing a lump sum investment. On depressed market conditions, EPFO anyhow has a margin to go up to 15 percent of incremental corpus. Also, EPFO needs to install proper hedging mechanism to keep the risks under control. As of now, both of SBI MF ETF’s are prime index funds. EPFO also needs to diversify across other indices and sectors to better manage funds. When it comes to saving for retirement, one needs to make full use of equities. The end note: It’s time to take your EPF account on a serious note now. Remember, the take-home salary that you get is net of your contribution towards PF. Instead of funds lying in debt-assets, the government has opened up the equity-route for your retirement savings. Now, when an employee is busy working hard for a living, he is sure that his retirement funds too are working hard to generate a decent return.
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Brace for the worst. Indian banks will need more capital than what was thought earlier to comply with Basel-III capital norms and fuel growth. India Ratings is of the view that an additional Rs 1 lakh crore will be needed to get banks into shape given their exposure to high leverage borrowers; the share of state-run banks will be Rs 93,000 crore. In effect, the capital needed will be excess of the Rs 2.40 lakh crore estimated by the rating agency to comply with Basel-III requirements which kick in from fiscal 2019. India Inc Will Hit BanksThe study reveals that banks would need an average 24 per cent reduction in their current exposure to ensure reasonable debt servicing (1.5 times interest coverage (ICR)) by these corporates on a sustained basis. For state-run banks, which have about 90 per cent share of this exposure, this amount comes to around Rs 93,000 crore or about 1.7 per cent of their fiscal-2015’s (estimates) of risk weighted assets. “Assuming banks provide for this haircut either as a provision ramp-up or by building additional capital buffers, this exposure can add significantly to our estimate of Rs 2,40,000 crore of common equity tier-1 (CET1) needed for the Basel-III transition”, said India Ratings. The overall debt reduction or haircut required would be around 24 per cent of the bank debt analysed by the rating agency. While companies in the power, other infra and iron and steel sectors would need a haircut of 20-30 per cent, a few deeply leveraged names in the textile and sugar sectors might require a higher amount of debt reduction (30-40 per cent. If we include the seven (Rajasthan, Uttar Pradesh, Haryana, Punjab, Andhra Pradesh, Madhya Pradesh and Tamil Nadu) distressed state electricity boards (including only their distribution entities) to the analysis using our estimate of their fiscal 2015’s debt and their respective EBITs (earnings before interest and taxation) at their operating best over the last 10 years, even then they would need a minimum 30 per cent haircut. Mint Road Was Spot OnIt might be recalled that the Reserve Bank of India’s Financial Stability Report (June’2015) had observed that gross non-performing advances (GNPAs) of banks as a percentage of gross advances increased to 4.6 per cent from 4.5 per cent between September 2014 and March 2015. The restructured standard advances during the period also increased, pushing up stressed advances to 11.1 per cent (10.7 per cent). State-run banks recorded the highest level of stressed assets at 13.5 per cent of total advances at end-March 2015, compared to 4.6 per cent in the case of private banks. The net non-performing advances (NNPAs) as a percentage of the total net advances for all banks remained unchanged at 2.5 per cent at end-September 2014 and end-March 2015. But at the bank group level, NNPA ratio of state-run banks increased to 3.2 per cent (3.1 per cent); and in the case of private banks to 0.9 per cent (0.8 per cent). The FSR made particular mention of the mess in the power sector. It noted that the deteriorating financial health of distribution companies (Discoms) is an area of concern. As state governments have not been able to strengthen their financial health under their financial restructuring plans (FRP). That’s because discoms’ have been unable to comply with the requirements relating to the elimination of the gap between average cost of supply (ACS) and average revenue realised (ARR), reduction of transmission & distribution (T&D) losses, fixing tariff on a regular basis and setting up of the State Electricity Distribution Responsibility Act. Banks have restructured around Rs 53,000 crore of the seven discoms’ (Rajasthan, Uttar Pradesh, Haryana, Punjab, Andhra Pradesh, Madhya Pradesh and Tamil Nadu) exposure under FRP. The moratorium period for repayment of the principal amounting to Rs 43,000 crore ended-March 2015. “Considering the inadequate fiscal space, it is quite likely that the state governments might not be in a position to repay the overdue principal and installments in time… the probability of slippage of this exposure into NPAs is very high considering the implementation of new regulatory norms on restructuring of loans and advances effective April 1, 2015”. The last line is a reference to the fact that Mint Road has made it clear that even restructured advances will be deemed as NPAs from the current fiscal. You have not heard the worst!
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Quarterly performance shows ‘Individual non-single’ pulling down the performance with nearly half of the lot showing de-growth in core business activity, write Sunil Dhawan The life insurance companies have been able to control the downslide in the first quarter of this financial year. The combined collection for all insurers in the April-May-June, 2015 period stood at Rs 23,568.14 crore as against Rs 19,699.28 crore in the same period last year. However, it has come largely on the back of Group Insurance business which showed an increase from about Rs 9,500 crore to nearly Rs 14,250 crore. The important element of life insurance business is the “Individual non-single’ figure that captures the premium collection of regular premium policies including monthly, quarterly, and half-yearly and annual premium. The single premium figures are separated from this addition. The ‘Individual non-single’ collections shows a decline from Rs. 7010.84 crore in quarter ending June 14 to Rs 6977.12 crore for quarter ending June in 2015. This looks disturbing as the ‘Individual non-single’ in the first quarter ending 2014 had shown an increase over same period of 2013. Life Insurance Corporation (LIC), the India’s largest life insurer in terms of market share, clocked Rs 3,716.62 crore as against Rs. 4,155.47 crore last year same period. Among the private insurers, only 13 companies out of 23 also showed a growth.
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British insurer Aviva said on Thursday it was planning to raise its stake in its Indian joint venture with Dabur Invest Corp to 49 percent, following Indian rule changes on foreign direct investment. Aviva will raise its stake to the maximum level allowed for foreign companies from 26 percent, the previous maximum stake. "The increase of foreign direct investment limits...has made the Indian insurance market much more attractive," said David McMillan, chief executive of Aviva Europe and India, in a statement. McMillan added that Aviva expected to complete the deal in the next six months. Aviva is one of the first foreign life insurers to announce an increase in its stake, after the rule changes were passed in March 2015. (Reuters)
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Canadian insurer Sun Life Financial Inc is interested in raising its stake in its Birla Sun Life Insurance joint venture in India as it weighs several acquisition opportunities in Asia and North America, its top executive said on Thursday. Birla Sun Life is a joint venture with Indian conglomerate Aditya Birla Group and is one of India’s biggest insurance companies. Sun Life has been on an acquisitive streak and has announced at least three deals so far this year, including one to purchase real estate investment manager Bentall Kennedy Group for C$560 million ($426.67 million). "We continue to turn the soil over and look at a number of opportunities. We're interested in more M&A activity if it makes sense," Chief Executive Dean Connor said in an interview. "We have quite a bit of capital and balance sheet flexibility." While this year's deals have been in North America, some analysts speculate Asia might be Sun Life’s next target. Asia contributed about 13 percent to Sun Life's operating earnings in the second quarter, with net income from the region more than doubling. India's move earlier this year to increase the proportion of foreign investment allowed in insurance companies could create an opening for Sun Life to expand its presence. The insurer has interest in lifting its stake in Birla Sun Life to 49 percent, from 26 percent currently, Connor said. “That would be of interest to us if we could find a purchase price that makes sense for both parties. It really comes down to price,” he said. “We like India, we think India has strong long-term prospects.” Sun Life also owns 49 percent of Birla Sun Life Asset Management, the fourth largest mutual fund company in India, he said. Connor said the Indian insurance business is starting to turn the corner after being under pressure in recent years due to regulatory changes. He added that earnings from Asia this year are on track to beat the company's target. “The Asia piece is growing quickly. There will come a point, I think, where our Asian business could be larger than our Canadian business.” The company is seeing strong momentum in the Philippines, Malaysia, Indonesia and Hong Kong, Connor said. Sun Life shares were up 4.9 percent on Thursday after the company reported a quarterly profit late on Wednesday that topped market estimates. (Reuters)
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Seeking to root out undeclared wealth, India's market regulator has sent letters to some large wealth managers operating out of low-tax centres like Hong Kong and Singapore to try and bring them under its remit, people with knowledge of the matter said. India's government is cracking down on tax evasion as a means of boosting revenues, and in October said the state was prosecuting several individuals on suspicion of having undeclared assets outside the country. In a significant new move by Prime Minister Narendra Modi's government, the Securities and Exchange Board of India (SEBI) has recently started to reach out to international private banks, asking them to register their offshore units with the Indian watchdog if they are soliciting business in India, five people with direct knowledge of the matter told Reuters. By registering with SEBI, some private banks would have to admit that they are managing funds of wealthy Indian clients outside the country. That in turn could prompt further requests from SEBI to share information about Indian individuals. "There are banks which do below-the-radar private banking in India to hunt for offshore assets," said a banker with direct knowledge of the matter. "For them SEBI's message is clear - you should be transparent and therefore you must register with us." An estimated $344 billion has been illegally removed from the Indian economy between 2002 and 2011, data from the U.S. think-thank Global Financial Integrity show, depriving the country of an important source of tax revenues. As well as affecting wealthy individuals, SEBI's moves could make private bankers think twice about building their business in India, even though Indian private wealth is expected to show double-digit growth. Personal Wealth SoarsAttracted by a growing number of Indian millionaires, foreign banks including Barclays Plc, BNP Paribas SA and Standard Chartered Plc are offering onshore wealth management services in India under the regulatory supervision of local watchdogs. Other players, including JPMorgan Chase & Co and UBS Group AG, have, however, either stayed away or shut down local operations due to high costs and thin margins, preferring to focus on their overseas operations. JPMorgan, UBS, BNP Paribas, Barclays and Standard Chartered all declined to comment when asked about SEBI's approach to some banks. In its letters, the regulator did not mention what actions it might take against those not willing to comply, sources said, but it is a sign that India is becoming more aggressive in pursuing citizens who illegally park funds abroad. "We have been steadily putting in place effective checks and balances of funds that come and go out of India and we will continue to do that without disrupting (the) market," SEBI board member S. Raman told Reuters on Thursday, referring to concerns raised in last month's government report on black money. He declined, however, to comment on notices being sent out to wealth managers. A SEBI spokesman did not respond to request for comment. The SEBI directive has not yet been sent to all wealth management players, said the sources, who declined to be named because of the sensitivity of the matter. Some banks were told about the request in meetings that took place last month. "With regulators all across the world tightening rules for movement of individual wealth across borders, many large banks have pared their focus on offshore advisory business," said a Mumbai-based wealth manager at a European bank. "On top of that, if a country decides to put in an additional regulatory layer, not many would be willing to accept that process," he said. "I would expect most of the offshore players to simply wind up their business in India." Some boutique private banks in centres such as Singapore have been trying to tap wealthy Indians and manage their foreign assets without having operations in the country and without informing local regulators, several private banking executives said. The business opportunity to advise on and manage overseas assets of resident Indians is, however, not very big and not worth the effort of adding another regulatory layer by registering with SEBI, two private bankers said. Under Indian rules, a resident Indian can remit up to $250,000 per year outside the country. Once the money is moved abroad, authorities lose oversight of the funds. "I don't think it is abnormal that a country's regulator would try to keep some sort of an oversight over the investment products being marketed in their jurisdiction," said Indian law firm BMR & Associates LLP partner Bobby Parikh. (Reuters)
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