Suppose you give your car to the mechanic for servicing, and after a few days and a hefty fee, it is returned to you minus the steering wheel. Outrageous, isn't it? Likewise, does it make sense to pay a sizeable fee to a portfolio management service (PMS) to handle your investments, only to end up with negative returns? Obviously not, believes market regulator Sebi, which now wants the PMS offered by brokerage houses and wealth management firms to be more transparent and investor-friendly. The PMS can be availed of on investments as low as Rs 5 lakh. This is attractive for investors as it promises a better return than most other financial instruments (the average return promised by most brokerage houses is above 12%) and there is no need for daily monitoring.
However, not many brokerage houses were able to deliver the promised returns when the markets crashed in 2008. Some investors also complained that their portfolio returns had been negative even after staying invested for up to five years. Sebi has proposed a 'high watermark principle' to compute the performance and linked incentives for fund managers of PMS schemes.
So, a fund manager will earn his fee only if the client makes incremental money, which means that he will not earn a fee if the value of the investor's portfolio goes down and then recovers. He will be eligible for a performance bonus only when he achieves a portfolio value that is higher than the 'high watermark' of the portfolio. 10 lakh. Suppose it goes up to Rs 15 lakh in the first year and down to Rs 12 lakh in the second year.
In the first year, there will be a performance-related charge, but this will not be levied in the second year. If in the third year, the portfolio's worth rises to Rs 17 lakh, the additional Rs 2 lakh earned over Rs 15 lakh would be eligible for a performance fee. "The proposal is in line with global standards of 2+20; 2% as management fee and 20% as performance incentive. This will ensure that a fund manager gives his best," says Nirakar Pradhan, CIO, Future Generali Life Insurance. Implementing these recommendations may be a shortterm pain for the industry, but they are definitely in the long-term interest of investors.
The problems:
There is no statutory reporting system, which makes scrutiny difficult.
While the brokerage house gets a fixed management fee despite low returns, the 'performance fee' in case of higher returns can be substantial.
Most brokerage houses churn portfolios frequently and can invest in dubious stocks.
Sebi's solutions:
Disclosure of fees and charges should be mandatory.
There should be a transparent mechanism for the portfolio manager's performance and profit-sharing fee. There should be a transparent dispute resolution mechanism
Unwilling to share:
While regulators have, of late, been proactive about increasing transparency, the government seems to be taking a step back on reforms. The Finance Ministry has diluted the minimum public shareholding for public-sector entities. The revised guidelines require listed public-sector units to maintain a minimum public shareholding of 10% within a period of three years, against the earlier requirement of 25%. It has also done away with the requirement of issuing at least 5% equity every year to meet the minimum public float norms.
The latest revision comes after a representation from PSUs, which were worried about the effect that a spate of FPOs would have on their valuations. For investors, this means that only about 15 PSUs may come up with FPOs, against the 35 planned earlier. Instead of the estimated Rs 1,10,000 crore divestment, which would have been required to achieve 25% shareholding for listed companies, now only Rs 25,000 crore worth of divestment will take place.
Realty ratings:
One of the biggest financial decisions for most people is buying a house. It's also one of the most nerve-wracking due to the fear of choosing the wrong project. For the average buyer, picking a project on the basis of location and price is easy, but it's very difficult to determine the reliability of a builder or have access to legal documents from government authorities.
To bridge this information gap, ratings major Crisil has launched the Real Estate Star Ratings, which will now assign a city-specific rating to a particular project on an eightpoint scale. "Most homebuyers explore their cities to identify properties for purchase. In response to this specific need, the Crisil Real Estate Star Ratings will benchmark real estate projects within each city to provide meaningful information to buyers," says Roopa Kudva, MD and CEO, Crisil.
Crisil has set five project-specific quality parameters, which it will use for the ratings. These are the track record of the builder, quality of construction, legal documentation, financial flexibility and innovation.
While one star will be considered the lowest rating, seven stars will be the highest. The last rating would be for 'non-deliverable project'. To gauge the use of such a rating, the agency had conducted a survey among real estate buyers and received about 5,000 responses. Of these, 70% said they would select a rated project over an unrated one, and over 50% of the respondents said they were willing to pay a higher price for a rated project. To begin with, Crisil has announced ratings for 21 projects in nine cities, including Bengaluru, Chennai, Hyderabad and Mumbai.- By Rakesh Rai