Sebi gives a little, but takes as well

IPO investment gets easier but higher MF costs by 20-30 basis points will hurt in bad market conditions

Primary market investors will be happier after Sebi chairman U K Sinha’s announcement but mutual fund (MF) investors might feel a bit let down.

Investors will now be assured of a minimum allotment when they invest in Initial Public Offers (IPOs). So, if you put just Rs 10,000 worth of bids in an IPO, you will still get a decent amount of shares. The minimum retail investors can put in has also been increased to Rs 10,000-15,000 from the existing Rs 5,000-7,000.

At the moment, retail investors are often unsure how many shares they’d be allotted (if any), especially in the case of big IPOs. Take the Coal India issue a few years earlier. The retail portion received bids for 446 million shares against the 200 mn offered for the category, a subscription of 2.23 times. Of this lot, many got none.
 

HIGHER COSTS
Scheme Size	Rs 500 crore
Investment	Rs 1 lakh
Expense ratio (earlier)	2.25% or Rs 2,250
Expense ratio (new)	2.45% or Rs 2,450
Service Tax on	12% of investment
expense ratio	management (1-1.5%)
Total rise in expense	Rs 350 (30 basis points)

The process of investing has also been made simpler, with a nod given to electronic IPO (e-IPO) guidelines. An e-IPO will allow online participation of investors in a public offering, without any physical paperwork. It will hasten the public offering process. No more issues of your forms getting lost in transit or making mistakes in the form and so on.

Prithvi Haldea, chairman, Prime Database, says with this move you can apply for an IPO from any broker, so more would do so. At the moment, one can apply for shares in an IPO only through syndicated brokers of the primary market issuance, a hindrance, says Haldea.

Sudip Bandyopadhyay, managing director and chief executive officer, Destimoney Securities, says: “Many retail investors stay away from an IPO, especially the big-ticket ones, as they think they’ll not get allotment. This will mean a decent amount of shares will be allotted to them.”

As for the MF guidelines, these might help the sector in terms of incentivising their distributors and expanding reach. But it will also make MFs more expensive. A little number crunching will tell you why. The expense ratio has gone up 20 basis points (bps). At present, for equity assets up to Rs 100 crore, fund houses charge 2.5 per cent; for the next Rs 300 crore, 2.25 per cent; for the next lot of Rs 300 crore, two per cent; and 1.75 per cent after that. In other words, for a scheme with Rs 500 crore, the expense ratio was 2.25 per cent. Now, it will be 2.45 per cent.

So, if you had invested Rs 1 lakh in a scheme with assets of Rs 500 crore, your expense will go up by Rs 200. The new expense: Rs 2,450.

There will be another addition, the service tax on expense ratio. MFs used to bear this cost earlier. So, besides the service tax of another Rs 150 (12 per cent of investing management fees, usually 1-1.5 per cent) will have to be paid. This means the overall cost, the rise in expense ratio and service charge, will be Rs 350 or almost 30 bps.

“Though the cost will be higher, what could help investors is the ploughing back of the exit load,” said Hemant Rustagi, CEO, WiseInvest Advisors.

Assuming a churn of 10 per cent in the same scheme, the scheme will earn Rs 50 lakh (one per cent of Rs 50 crore), and the Net Asset Value will improve to that effect. In other words, the net impact will be around 20-30 bps.

According to Amar Ranu, senior manager, Motilal Oswal Private Wealth, this increase might not have a big impact if equities perform in the long run. However, if equity markets do not perform well, the impact could be fairly high.