Monday, September 7, 2009

India's Financial DON

India's Financial DON

With India’s New pension Scheme as a non starter with common man and the Mutual Fund industry falling back to institutional investors, D Swarup panel in the name of alleged financial reforms has recommended scraping agent fees on financial products. D Swaroop needs no introduction, he is the failed Chairman of the Pension Fund Regulatory Development Authority (PFRDA) which runs the New pension Scheme. Meanwhile the other Civil Servant, C B Bhave, chairman of the Securities and Exchange Board of India (SEBI) has removed the entry fee for investors, a move that has nearly killed the retail Mutual Fund sales in India. C B Bhave already holds the dubious distinction of killing retail (for small investor) Share market activity in India.

The politician and present Union Minister of Home Affairs P Chidambaram is busy coding Tax reforms which is not his job. He now wishes to tax all insurance and investments. His last tenure as finance minister, P Chidambaram ensured the fall of otherwise healthy economy which he inherited by from competent financial ministers before his term. Chidambaram spent all his energies taxing the ripe economy. He was found issuing empty threats to Indian Industry, after the world economic problems set in, while sitting in other world capitals and negotiation non financial deals.

The idea of moving to thin capitalization may not be bad. ‘Thin capitalization’ means a situation an entity has a high proportion of debt than equity. The method of achieving thin capitalization by the Indian government is wrong. Thin capitalization actually goes against the very grain of customer empowerment, the platform C B Bhave and D Swarup are using for their advantage. P Chidambaram’s penchant to tax is not understandable if you see his dismal performance as finance minister. He imposed education cess and the money has not been spent in education. Worst example of P Chidambaram’s tax fetish was taxing the ATM withdrawal. It is alleged that P Chidambaram was eased out of Finance ministers post because of his incompetence.

If these bureaucrats keep their ego out, they might see the damage to the New Pension Scheme and Mutual Fund. Instead they are set to destroy the most successful financial advisory model, the insurance. It was the insurance agents who have built up the retail financial industry in India. The mutual funds was also pushed by the insurance agents in majority of the case. Mutual Fund industry failed to cultivate the individual agents and chased the High net Investments and Institutional investments.

Let us take the example of C B Bhave’s stock market reforms. Today a small investor is left out of the stock markets. How does a small investor buy stocks? Since he has small money the big brokers and sub brokers shun him. He is not so capable of using an internet. Even if, he dose not understand the financial ratios. Now, since the Mutual Fund came to C B Bhaves attention, the small investor will be further left out. Misselling should be dealt with necessary regulation tackling that particular problem. But C B bhave has a history of chopping the head for a tooth ache. No head no problems seems to be his motto.

A small investor can be served only by a individual financial adviser. Had NPS been rewarding, D Swaroop would have been scripting success stories than the self face saving committee recommendations he is making. A small investor cannot pay fees as he barely has money to invest and a individual advisor needs higher commission to survive. The current Insurance model was very sustainable. Even now, the cut in the commission of the Development Officers of the LIC has a telling affect.

The premise that agents should negotiate for commissions with customers is an unworkable idea for which India is not ready yet. Finance ministry (or the Home minister), the SEBI and the PFRDA have not taken any initiative to educate the customer. The entire education of customers was done by the insurance agents and is a continuous process. Let us think of a situation where SEBI, PFRDA, Income tax employees and the Home minister should be paid salaries based on the services they render and should be negotiated with their customers, viz, the mutual fund and insurance distributors. And to truly empower the customers of these entities, there should be minus salaries of these employees are found cheating or not working optimally. Should the Home minister should be paid over time for doing finance jobs or not paid for not going behind the terrorists. And should the Finance minister be paid at all?

If there are reforms required it should be in the bureaucracy, tax departments and the the reforms of the regulatory bodies themselves. These entities have allegedly become the hubs of corruption.

Now, let us ask if these above mentioned departments are truly customer centric? Is the Customer empowerment is limited to the agents? Has the customer won or lost? Is the customer being serviced at all? Is the 2% - 35% percent commissions to agents costly to the customers than the corruption and the unrewarding taxation? By forcing the investor to investing in low yield debt and taxing their returns truly an investment empowerment?

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