SHORT-TERM MEASURES IN THE OFFING TOO Sebi Plans Policy to Revive MF Industry

The securities market regulator has proposed a long-term policy to revive mutual funds, which includes tax breaks for investors, higher minimum capitalisation norms, and an obligation on fund houses to push their schemes in the hinterland.  Sebi has also made a pitch for lowering of taxes and stamp duties to make the Indian capital markets competitive compared with rivals such as Singapore, its Chairman UK Sinha said in an exclusive interview.  Policymakers in India led by the prime minister have been worried about the fortunes of India's asset management industry, hit by a sluggish stock market and the reluctance of distributors to sell mutual fund schemes to investors after Sebi banned the entry load — an amount deducted from payments by investors that is paid as commission to distributors — two years ago.  The mutual fund industry has been lobbying for reintroducing the entry load, but Sinha says the response has to be structural to boost revenues of fund houses. In an interview to ET on Wednesday, Sinha, formerly a civil servant and head of UTI Asset Management Company, said some short-term measures to boost the industry are in the offing.  These could be in the form of incentives for selling mutual fund schemes beyond the top 10 cities in the country, and disincentives to stop the phenomenon called churning or frequent switching of schemes by distributors and fund houses.  The top five cities in the country contribute over 70% of the total assets under management in the Indian mutual fund industry. "The response also has to be structural rather than only to enhance the revenue stream for AMCs. Sebi is contemplating that there should be a mutual fund policy of the government."Sebi to Discuss Specific Proposals  And that policy should envisage, for example, the tax treatment, what are the investor protection measures that we can provide, the sales practices that we can allow or can't allow. And also how to ensure that genuinely serious players come into the markets.  Right now, for example, the capital norms for entry into the segment for an AMC are in my view very small," Sinha said. The Sebi board will be guided by broad principles and will discuss specific proposals at its upcoming meeting this month. The regulator has also pitched for a tax structure on capital market transactions that encourages long-term investors, and a reduction in total costs for operating in the Indian stock markets.  In India, for every Re 1 spent on executing a trade in the stock markets, 56% is accounted for by the securities transaction tax, or STT, and stamp duty; 43% goes towards brokerage, banking and other costs; and 1% on exchange costs. The total cost is about three times of what it takes to execute a trade in Singapore, which is now attracting business from Indian entities.  "It is not correct to assume that capital-raising in India is not efficient because of products traded outside the country. The issues to be addressed are the tax structure here and our foreign exchange regulations. My case is that the cost structure is driving client or investor behaviour," Sinha said.  Sebi will also look to spread the equity cult by using the existing secondary market infrastructure to reach out to more investors across the country to facilitate greater participation in initial public offerings, or IPOs. Talks are also underway with banks to smoothen the process.  Sinha said there is a strong case for a tax on the lines of the STT on non -agricultural commodities, adding that the risks related to trading in these products were not fully addressed. UK SINHA CHAIRMAN, SEBI