A DISSERTATION REPORT On ANALASIS OF

AXIS MUTUAL FUND

Submitted by: BHUPENDRA SINGH ASWAL ROLL NO. 520810891 COURSE MBA-IV CENTRE CODE NO. : 01713

SIKKIM MANIPAL UNIVERSITY OF HEALTH MEDICAL AND TECHNOLOGICAL SCIENCES

Distance Education Wing

ACKNOWLEDGEMENT
The present work is an effort to throw some light on Axis Mutual Fund. The work would not have been possible to come to the present shape without the able guidance, supervision and help to me by number of people. With deep sense of gratitude I acknowledge the encouragement and guidance received by my organizational guide Mr. Sudhir Kumar (Branch Manager) and other staff members. I convey my heartful affection to all those people who helped and supported me during the course, for completion of my Project Report.

BHUPENDRA SINGH ASWAL

DECLARATION

I hereby declare that the project work entitled AXIS Mutual Fund" is an authentic work carried out by me at SINO SECURITIES under worthy and esteemed guidance of, Managing Director Mr Piyush Gupta This work has not been submitted to any other university for Award of any MBA Programme or any other programme.

BHUPENDRA SINGH ASWAL MBA Roll No.: 520810891

TABLE OF CONTENT

I II III IV V VI VI VII

INTRODUCTION REVIEW OF LITERATURE OBJECTIVES OF THE STUDY SCOPE OF THE STUDY RESEARCH METHODOLOGY: SEBI GUIDELINE REGARDING AXIS MUTUAL FUND PERFORMANCE EVALUATION OF AXIS MUTUAL FUND CONCLUSION & SUGGESTION

INTRODUCTION
AXIS Mutual Fund, the largest private sector Mutual Fund company in India with an asset base of Rs 25,500 crores, will be the leading Fund Manager for Government of India's newly created National Investment Fund(NIF). Announcing this AXIS Asset Management Company Managing Director and Chief Executive Officer(CEO) U K Sinha told newsmen here this evening that besides the AXIS Mutual Fund, the other two leading financial institutions which were shortlisted for the massive job were State Bank of India(SBI) and the Life Insurance Corporation(LIC) of India. He said the new fund had been created by the Centre with a view to investing the entire disinvestment fund into the NIF corpus and reinvest them in health, education and other social causes through a calculated manner. Since the scheme was still in its preliminary stage, the government was yet to create a separate corpus for the fund, which was announced only last month. Referring to the corporate plan of AXIS Mutual Fund whose ownership had recently changed hands following the purchase of its 25 per cent stake each by the country's four leading banks and financial institutions like SBI, Bank of Baroda(BOB), Punjab National Bank(PNB) and the LIC last month with a total capital infusion of Rs 1236 crores, Mr Sinha said under the new management they were planning to leverage their own capabilities with a much higher target oriented growth. AXIS AMC CEO, however, categorically ruled out the possibility of any clash of interest among the new stake holders of the company in view of their similar business intereste in terms of Mutual Fund. Replying to a related query he said though each of these institutions had their own mutual fund businesses, it would not clash in any manner with that of AXIS mutual Fund since the agreement among them would prevent them from doing so. In the wake of over 33 per cent growth in the Indian Mutual Fund industry since April this year, Mr Sinha said it had enabled the AXIS Mutual Fund to increase its Asset base by over Rs 5,500 crores during this period from Rs 20,000 crores achieved till March. "

We are confident to maintain a similar growth path in the coming years too." About the huge potential and the actual position, Mr Sinha claimed that AXIS Mutual Fund had already been enjoying about 67 per cent domestic market share of the country's around one crore investors in mutural fund products. " It is only the tip of an ice berg with about five crore more people awaiting to invest in the country's burgeoing mutual fund industry with full realisation of its risk factotrs, he said. About their product portfolios, Mr Sinha said at present a total of 56 products were running successfully catering to different demands of the people. "We are now planning to introduce three more products primarily in equity market area by next week", Mr Sinha said replying to another query. After becoming a private company last month, AXIS Mutual Fund is mulling aggressive foray with new products catering to investors across all risk profiles. We are going to kick-start the initiative by announcing three new products within a week. The schemes will be open for subscription in January, said U.K. Sinha, managing director and chief executive officer, AXIS Mutual Fund. We will offer both pure equity and balanced schemes to cater to investors with various risk profiles, he added. The countrys largest fund house currently manages Rs 25,500 crore worth of assets and has an investor base of 67.7 lakh across 50 schemes. The mutual fund industry has so far been able to tap only a tiny fraction of the potential investors in the country the whole industry is serving just one crore investors, elaborated Sinha. Being the pioneer asset management company in the country, AXIS will take initiatives to increase the reach of mutual funds to more people, he added. AXIS Asset Management Company became a private company last month with the four sponsors, Life Insurance Corporation of India, State Bank of India, Punjab National Bank and Bank of Baroda paying back the government its equity worth Rs 1,236.95 crore in the company. Each sponsor now owns a 25 per cent stake in the company and

under the terms of the new agreement, the owners will not be allowed to change their shareholding pattern. We are also keen to increase our exposure in the overseas market through the offshore funds, said Sinha. AXIS Mutual Fund is also exploring investment opportunities in emerging sectors like the knowledge process outsourcing, textiles and biotech through the private equity and venture capital arm, AXIS Venture Funds, said D. S. R. Murthy, executive director, AXIS Asset Management Company. And, the move has also started paying off. IBM has struck a preferred relationship with us because of our investments in the technology products and companies, said Rajakumar, managing director and chief executive officer, AXIS Venture Funds. The computer giant is also weighing options to pick up a stake in AXIS Venture Funds. AXIS Venture Funds floated a $150-million fund in April. The fund has received encouraging responses from top investors across West Asia, Singapore and Europe. The fund has mobilised $140 million as soft commitment from the investors and we are expecting to close it with a total collection of $180 million by March next year, Rajakumar added. The Government of India has shortlisted AXIS, along with LIC and SBI, as the fund managers for the National Investment Fund a composite fund constructed with the proceeds disinvestment of public sector units. The returns generated by this fund will be used for social sector projects. IBM is eyeing a stake in AXIS Venture, a 100 percent subsidiary of AXIS Asset Management Co. According to the highly placed sources, AXIS Mutual Fund ruled out a strategic deal in the immediate future, they referred to a number of top international outfits that have shown interest in the venture fund's recent initiatives. AXIS venture firms Managing Director, K E C Rajakumar said, IBM is indeed interested in striking a "preferred relationship" with the AXIS MF subsidiary. He, however, mentioned that no stake sale is on the cards. He said, "We intended to raise $150 million, but are now hopeful of mobilizing $180 million or so. The funds so raised will be allocated to promising companies operating

in what are typically called emerging businesses, such as, biotechnology, knowledge process outsourcing and textiles. A battery of high-power public sector fund managers could take the field in the proposed New Pension System (NPS), with the Pension Fund Regulatory and Development Authority (PFRDA) taking a positive view on all the State-owned entities that have till date expressed interest in handling pension accumulations. Among the PSUs that have approached the interim PFRDA to express their intent of seeking a Pension Fund Manager (PFM) licence are SBI, LIC, and Punjab National Bank. AXIS Mutual Fund has also expressed its intent to participate as a fund manager in the NPS, though till recently it had not formally approached the regulator. Under the PFRDA Bill, the regulator would be mandated to licence "at least one" public sector fund manager under the NPS. However, the authority is of the opinion that all the PSU entities that have sought to play a role have more than adequate credentials to handle the pension contributions. "Even for PSUs there would be no limit. Why will I restrict the number of PSU fund mangers? The reach, the manpower, the financial strength of the public sector entities that have approached us is hard to match," D. Swarup, Chairman of the interim PFRDA, told Business Line. The PFRDA's open mind on the number of PSU fund mangers could go a long way in allaying the lingering concerns of the Left parties that have expressed their fears over pension accumulations being handed over to private fund managers. The choice of opting for private or public sector fund managers would be left to the individual subscribers. | The Government recently decided to incorporate an amendment to the PFRDA Bill to include a clause that "at least one of the pension fund managers shall be a Government company or a wholly-owned Government company or Government companies." The decision was conveyed to the Left parties at a meeting to iron out differences over the pension reforms.

Earlier, a Parliamentary Standing Committee had asked the Government to incorporate a specific clause that would make it mandatory to have at least one PSU fund manager in the NPS. The Committee had said that the presence of a PSU entity would be "in the interest of the subscribers." Though it had appeared that political consensus had been reached on the PFRDA Bill, it now seems that certain issues remain to be ironed out before the Bill gets Parliament's nod. Besides fears over private fund managers handling pension contributions, the Left parties have also said that there might be a need to ensure minimum guaranteed returns to subscribers to ensure income security in old age. AXIS Mutual Fund has announced a tax-free dividend of 50 per cent under its AXIS Dynamic Equity Fund, for which the record date is December 27. AXIS Mutual Fund has announced a tax-free dividend of 50 per cent (Rs 5 per unit on a face value of Rs 10) in its open-end equity Fund - AXIS Dynamic Equity Fund. This is the second dividend declared by the scheme during this calendar year. The last dividend declared by the scheme was 25 per cent in February, 2007. With this dividend pay out, the scheme has distributed a total dividend of 75 per cent (Rs 7.50 per unit on face value of Rs 10) during calendar year 2007. All unit holders registered under the dividend option of AXIS Dynamic Equity Fund as on December 27, 2007 will be eligible for this dividend. Also investors who join the dividend option of the scheme on or before the record date will be eligible for the dividend. AXIS Dynamic Equity Fund was launched in September 2006 as an open-ended equity scheme. The objective of the scheme is to generate capital appreciation by primarily investing in equity/equity related instruments. As a defensive strategy arising out of market conditions, the scheme may also invest in debt/money market instruments. | AXIS Dynamic Equity Fund is positioned as an aggressively managed equity fund primarily focussed on mid cap/ small cap companies. A number of investment

opportunities have been identified which will generate handsome returns for the unit holders going forward. The fund continues to be bullish on the Indian equity markets over a 2-3 year horizon on the back of strong GDP growth momentum and the resultant corporate earnings growth numbers. Over the last one year; AXIS Dynamic Equity Fund has yielded 48.96 per cent as against 33.28 per cent given by its benchmark PS&P CNX- Nifty, as on December 5, 2007. Earlier, only insurance companies were floating unit-linked plans. Now, mutual funds, too, have these. Is the line between units and mutual funds blurring? Before answering this question, one should ask oneself if unit-linked plans offered by insurance companies are the same as investing in similar plans of mutual funds. Most people believe unit-linked plans offered by insurance companies are superior products compared with MFs. This is because insurance companies have positioned this product as a savings product, which offers the benefit of insurance as well as market-related returns. Before we get into the nitty-gritty of the issue, let us first understand what the differences between insurance and mutual funds are. First, insurance is a transfer technique whereby the insured (investor) transfers his risk of financial loss to another party, the insurance company or insurer. The insurance company, in turn, makes good the losses arising due to an uncertain event and distributes the costs of insuring these loses among all of its policyholders. Therefore, the primary aim of insurance products is to help in risk management, in the handling of an uncertain event. Therefore, people who put money in insurance companies for the purpose of earning good returns are going against the fundamental purpose for which insurance companies came into existence i.e., risk management. MFs, on the other hand, refer to a process of pooling of investments that are invested in the capital market by professional fund managers, to generate market-related returns for investors. In light of the above, any product which is predominantly investmentoriented should be a mutual fund product, as these funds are better equipped and have the skill to manage such products. The core activity of a mutual fund is to invest money on behalf of its investors and generate market-related returns. The term insurance cover that is provided by some mutual funds is purely a value-added service to investors. It is pertinent to note that 10

mutual funds are not equipped to provide insurance cover, as it is not their core business; they buy the insurance cover for their unit-holders from an insurance company. This is unlike insurance companies, who invest the money themselves, rather than asking an asset management company to do so. In our country, insurance products had always been sold with a savings element in them. Over the past few years, ULIPs of insurance products have become popular owing to the boom in the equity market. However, the first unit-linked insurance product i.e., AXIS ULIP, was launched by a mutual fund in 1971. Although the first ULIP was launched by a mutual fund, it has not been possible for mutual funds to compete in this market, due to the absence of a level playing field. The limits on expenses, the rules and regulations, the level of transparency, all are skewed in favour of insurance companies, making it difficult for mutual funds to compete. It is immaterial who launches ULIP products, but what are required are uniform rules and regulations. In the absence of these, insurance companies will continue to poach in a territory alien to them. And, perhaps, get away, as the mutual funds may not raise a hue and cry, as their sponsors may also have an insurance company in their stable. In fact, insurance companies should concentrate more on risk management products, which is their core competence, and leave the floor open to mutual fund houses to manage investment products. There is a lot of scope for launch of such products and it is ironical that not many insurance companies are focussing on term assurance products and other risk products without any savings element, which is their core competence. On the other hand, with equity schemes of mutual funds also tax exempt almost on par with insurance productsmutual funds should launch more ULIPs, with the insurance companies providing term assurance cover. Investors will be very much benefited, as they get lower expense ratios, professional fund management, better transparency and also insurance cover provided by insurance companies. It will be a win-win situation for all the players. president, AXIS Asset IBM is eyeing a stake in AXIS Venture, a 100 per cent subsidiary of AXIS Asset Management Co. The writer is vice-

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While highly placed sources at AXIS Mutual Fund ruled out a strategic deal in the immediate future, they referred to a number of top international outfits that have shown interest in the venture fund's recent initiatives. K.E.C. Rajakumar, Managing Director, AXIS Venture, told Business Line that IBM is indeed interested in striking a "preferred relationship" with the AXIS MF subsidiary. He, however, mentioned that no stake sale is on the cards. | AXIS Venture's latest efforts at mobilising commitments are now expected to cross its targets, it is pointed out. "We intended to raise $150 million, but are now hopeful of mobilising $180 million or so," said Rajakumar. The funds so raised will be allocated to promising companies operating in what are typically called "emerging" businesses, said D.S.R. Murthy, Executive Director, AXIS MF, adding that these may include biotechnology, knowledge process outsourcing and textiles. An earlier fund, Murthy further informed has seen significant growth (CAGR) of about 46 per cent, marked by major returns in one or two cases. "These have been multibaggers," he remarked. "A Mutual Fund is an ideal investment vehicle where a number of investors come together to pool their money with common investment goal. Each Mutual Fund with different type of schemes is managed by respective Asset Management Company (AMC). An investor can invest his money in one or more schemes of Mutual Fund according to his choice and becomes the unit holder of the scheme. The invested money in a particular scheme of a Mutual Fund is then invested by fund manager in different types of suitable stock and securities, bonds and money market instruments. Each Mutual Fund is managed by qualified professional man, who use this money to create a portfolio which includes stock and shares, bonds, gilt, money-market instruments or combination of all. Thus Mutual Fund will diversify your portfolio over a variety of investment vehicles. Mutual Fund offers an investor to invest even a small amount of money. "Mutual Funds schemes are managed by respective Asset Management Companies sponsored by financial institutions, banks, private companies or international firms. The

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biggest Indian AMC is AXIS while Alliance, Franklin Templeton etc are international AMC's. "Mutual Funds offers several benefits to an investor such as potential return, liquidity, transparency, income growth, good post tax return and reasonable safety. There are number of options available for an investor offered by a mutual fund. Source: Website of "eastindiavyapaar.com" Mutual Funds - Investment Objectives and Valuation Policies What are Mutual Funds? A Mutual fund is an organization that invests in a diversified portfolio of financial securities on behalf of a pool of subscribers to its schemes. These securities can be in the form of equity, debt instruments, money market instruments etc., or a mix of these securities, depending on the scheme objectives.

Why is it such a good idea to invest in Mutual Funds? Diversification : Mutual Funds invest their corpus in diversified portfolios which reduces the risk contained in the investment. This also means that you can invest a small sum of Rs.5000/- and still be a part of a portfolio where the market value of single scrip might be much more than the total investment. Research: These mutual funds perform an extensive research of the company before making an investment decision giving you the benefit of expert advice. Liquidity: These funds are extremely liquid, some of them even have features like across-the-counter redemption. This feature is especially useful at times when the market is rising or falling. Professionally Managed: These funds are managed by professionals who have the required expertise in buying and selling stocks. As a result they make better decisions on entering and exiting a particular stock, which is very crucial for the overall performance of a portfolio. Moreover, mutual fund investment also rids the investor of

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maintaining records, eliminates hassles with the broker for payment, delivery and other arduous back office tasks. Savings on transaction costs: As purchases and sales are done in bigger quantities, the funds also get the advantages of lesser brokerage and other reduced transaction costs. Tax Advantages: In India these funds become even more attractive because of the tax advantages, like indexation benefits , long term capital gains tax , tax free dividends and much more. Investment Objective (Regulation: 43) The moneys collected under any scheme of a mutual fund shall be invested only in transferable securities in the money market or in the capital market or in privately placed debentures or securitised debts. Provided that moneys collected under any money market scheme of a mutual fund shall be invested only in money market instruments in accordance with directions issued by the Reserve Bank of India; Provided further that in case of securitised debts such fund may invest in asset backed securities and mortgaged backed securities. Investment, & Borrowing, Restriction (Regulation: 44) 1. Any investments to be made under regulation 43 shall be invested subject to the investment restriction specified in the Seventh Schedule. 1. A) The mutual fund having an aggregate of securities which are worth Rs.10 crores or more, as on the latest balance sheet date, shall subject to such instructions as may be issued from time to time by the Board settle their transactions entered on or after January 15, 1998 only through dematerialised securities. 2. The mutual fund shall not borrow except to meet temporary liquidity needs of the mutual funds for the purpose of repurchase, redemption of units or payment of interest or dividend to the unit holders.

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Provided that the mutual fund shall not borrow more than 20% of the net asset of the scheme and the duration of such a borrowing shall not exceed a period of six months. 3. 4. The mutual fund shall not advance any loans for any purpose. The mutual fund may lend securities in accordance with the Stock Lending Scheme of the Board. Option Trading (Regulation: 45) The funds of a scheme shall not in any manner be used in option trading or in short selling or carry forward transactions. Provided that mutual funds shall enter into derivatives transactions in a recognised stock exchange for the purpose of hedging and portfolio balancing, in accordance with the guidelines issued by the Board. Underwriting of Securities (Regulation: 46) Mutual funds may enter into underwriting agreement after obtaining a certificate of registration in terms of the Securities and Exchange Board of India (Underwriters) Rules and Securities and Exchange Board of India (Underwriters) Regulations, 1993 authorising it to carry on activities as underwriters. 1. Explanation: For the purpose of these regulations, the underwriting obligation will be deemed as if investments are made in such securities. 2. The capital adequacy norms for the purpose of underwriting shall be the net asset of the scheme. Provided that the underwriting obligation of a mutual fund shall not at any time exceed the total net asset value of the scheme. Method of valuation of investments (Regulation: 47) Every mutual fund shall compute and carry out valuation of its investments in its portfolio and publish the same in accordance with the valuation norms specified in Eighth Schedule.

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Computation of Net Asset Value (Regulation: 48) 1. Every mutual fund shall compute the Net Asset Value of each scheme by dividing the net assets of the scheme by the number of units outstanding on the valuation date. 2. The Net Asset Value of the scheme shall be calculated and published at least in two daily newspapers at intervals of not exceeding one week: Provided that the Net Asset Value of any scheme for special target segment or any monthly income scheme which are not mandatorily required to be listed in any stock exchange under Regulation 32, may publish the Net Asset Value at monthly or quarterly intervals as may be permitted by the Board. Pricing of Units (Regulation: 49) 1. The price at which the units may be subscribed or sold and the price at which such units may at any time be repurchased by the mutual fund shall be made available to the investors. 2. The mutual fund, in case of open ended scheme, shall at least once a week publish in a daily newspaper of all India circulation, the sale and repurchase price of units. 3. While determining the prices of the units, the mutual fund shall ensure that the repurchase price is not lower than 93% of the Net Asset Value and the sale price is not higher than 107% of the Net Asset Value. Provided that the repurchase price of the units of a close ended scheme shall not be lower than 95% of the Net Asset Value: Provided further that the difference between the repurchase price and the sale price of the unit shall not exceed 7% calculated on the sale price. 4. The price of units shall be determined with reference to the last determined Net Asset Value as mentioned in sub-regulation (3) unless,

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a. b.

the scheme announces the Net Asset Value on a daily basis; and the sale price is determined with or without a fixed premium added to the future net asset value which is declared in advance.

Mutual Funds - Scope for Growth and Development in India Mutual Fund Industry in its true spirit rooted in a free market and oriented towards competitive functioning with the dedicated goal of service to the investors can be said to have settled in India only in 1993. However the industry took its roots much earlier with the setting up of the Unit Trust In India (AXIS) in 1964 by the Government of India. During the last 36 years, AXIS has grown to be a dominant player in the industry with assets of over Rs.72,333.43 Crores as of March 31, 2000. The AXIS is governed by a special legislation, the Unit Trust of India Act, 1963. In 1987 public sector banks and insurance companies were permitted to set up mutual funds and accordingly since 1987, 6 public sector banks have set up mutual funds. Also the two Insurance companies LIC and GIC established mutual funds. Securities Exchange Board of India (SEBI) formulated the Mutual Fund (Regulation) 1993, which for the first time established a comprehensive regulatory framework for the mutual fund industry. Since then several mutual funds have been set up by the private and joint sectors. The Unit Trust of India Chairman M. Damodaran today ruled out the possibility of dumping equities in its flagship scheme US-64 as it might have an adverse effect on the market, but threatened to sell non-performing shares to competitor companies at a higher price. AXIS will not dump the shares it is holding just to achieve that objective (increasing the debt exposure in US-64), but was working out schemes to get maximum returns from both non-performing and performing assets, Damodaran told NRI investors here. One of the factors holding the market down now may be the feeling that AXIS may download shares to meet redemptions once it accepts NAV-based listing next month. But we are not going to sell to meet fund demands, he said. The AXIS chief, however, threatened to sell unattractive shares to their competitors at attractive prices.

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AXIS will offer its stake in companies yielding nothing, to their rivals if these companies themselves did not buy back the shares, he said, adding that we are concerned only with investors interests. Damodaran assured the NRI investors in the Gulf that US-64 was firmly on the road to recovery and suggested that investors stay with the fund for better returns. He told reporters that the US-64, which will be traded on the basis of its net asset value (NAV) from January 1 2002, was being restructured along with other schemes to reduce the equity exposure and increase debt exposure. Damodaran also said AXIS will not launch assured-return close-ended schemes though it may have monthly income schemes with variable returns. He said the AXIS board will consider the recommendations of the Malegam Committee on restructuring Indias largest mutual fund at the end of this month or early next month. He also clarified that AXIS has not yet approached Infosys Technologies with any proposal to convert its entire equity holding in the IT company into American Depository Receipts (ADRs) for offloading them in the international markets. Damodaran said there is no proposal to convert its 5.6 per cent holding in the it major to ADRs and market abroad to realise a higher value. PTI

Growth of Mutual Fund Business in India The Indian Mutual fund business has passed through three phases. The first phase was between 1964 and 1987, when the only player was the Unit Trust of India, which had a total asset of Rs. 6,700/- crores at the end of 1988. The second phase is between 1987 and 1993 during which period 8 funds were established (6 by banks and one each by LIC and GIC). The total assets under management had grown to Rs. 61,028/- crores at the end of 1994 and the number of schemes were 167. The third phase began with the entry of private and foreign sectors in the Mutual fund industry in 1993. Kothari Pioneer Mutual fund was the first fund to be established by the private sector in

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association with a foreign fund. The share of the private players has risen rapidly since then. Within a short period of seven years after 1993 the growth statistics of the business of Mutual Funds in India is given in the table below:

Net Assets of Mutual Funds as at 3l.03.2000 [Source: Website of SEBI] The net assets of all domestic schemes of mutual funds were Rs.1,07,946.10 crores as on March 31, 2000 as against Rs. 68,193.08 crores as on March 31, 1999 . The details are given below :

Amount (Rs Crs) AXIS Public Sector Private Sector Total 72,333.43 10,444.78 25,167.89 1,07,946.10

Percentage (%) 67.00 9.68 23.32 100.00

During the year 1999-2000, the share of AXIS in the total assets of the mutual funds industry has declined to 67% from 77.9% in 1998-99. Net assets of other public sector mutual funds have also shown a decline from 12.09% in 1998-99 to 9.68% in 19992000. However, net assets of private sector mutual funds have increased from 9.97% in 1998-99 to 23.32% in the year 1999-2000. There are 34 private Mutual Funds in the fray and they have seized about 25% of the market share in the brief period of 7 years, mobilising above Rs.25000 Crores from the public Scope for Development of Mutual Fund Business in India

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A Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. India has a burgeoning population of middle class now estimated around 300 million. A typical Indian middle class family can have liquid savings ranging from Rs.2 to Rs.10 Lacs today. Investments in Banks are liquid and safe, but with the falling rate of interest offered by Banks on Deposits, it is no longer attractive. At best a part can be saved in bank deposits, but what is the other sources of investment for the common man? Mutual Fund is the ready answer. Viewed in this sense globally India is one of the best markets for Mutual Fund Business, so also for Insurance business. This is the reason that foreign companies compete with one another in setting up insurance and mutual fund business units in India. The sheer magnitude of the population of educated white collar employees provides unlimited scope for development of Mutual Fund Business in India. The alternative to mutual fund is direct investment by the investor in equities and bonds or corporate deposits. All investments whether in shares, debentures or deposits involve risk: share value may go down depending upon the performance of the company, the industry, state of capital markets and the economy; generally, however, longer the term, lesser the risk; companies may default in payment of interest/ principal on their debentures/bonds/deposits; the rate of interest on an investment may fall short of the rate of inflation reducing the purchasing power. While risk cannot be eliminated, skillful management can minimise risk. Mutual Funds help to reduce risk through diversification and professional management. The experience and expertise of Mutual Fund managers in selecting fundamentally sound securities and timing their purchases and sales, help them to build a diversified portfolio that minimises risk and maximises returns. The Advantages of Investing in a Mutual Fund The advantages of investing in a Mutual Fund are: 1. Professional Management The investor avails of the services of experienced and skilled professionals who are backed by a dedicated investment research team which analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme. 20

2.

Diversification Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own.

3.

Convenient Administration Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient.

4.

Return Potential Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities.

5.

Low Costs Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.

6.

Liquidity In open-ended schemes, you can get your money back promptly at net asset value related prices from the Mutual Fund itself. With close-ended schemes, you can sell your units on a stock exchange at the prevailing market price or avail of the facility of direct repurchase at NAV related prices which some close-ended and interval schemes offer you periodically.

7.

Transparency You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook.

8.

Flexibility Through features such as regular investment plans, regular withdrawal plans and

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dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience. 9. Choice of Schemes Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

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10. Well Regulated All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI. In the following chapters we propose to discuss all relevant information about Mutual Funds in India, the regulatory and legal structure governing them that a common investor ought to know. The literature is mostly drawn from the website of SEB, but suitably tabulated to provide ready information. The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by AXIS in the year 1963. Though the growth was slow, but it accelerated from the year 1987 when non-AXIS players entered the industry. In the past decade, Indian mutual fund industry had seen a dramatic imporvements, both qualitywise as well as quantitywise. Before, the monopoly of the market had seen an ending phase, the Assets Under Management (AUM) was Rs. 67bn. The private sector entry to the fund family rose the AUM to Rs. 470 bn in March 1993 and till April 2007, it reached the height of 1,540 bn. Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than the deposits of SBI alone, constitute less than 11% of the total deposits held by the Indian banking industry. The main reason of its poor growth is that the mutual fund industry in India is new in the country. Large sections of Indian investors are yet to be intellectuated with the concept. Hence, it is the prime responsibility of all mutual fund companies, to market the product correctly abreast of selling. The mutual fund industry can be broadly put into four phases according to the development of the sector. Each phase is briefly described as under.

Brief History:

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First Phase - 1964-87 Unit Trust of India (AXIS) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 AXIS was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by AXIS was Unit Scheme 1964. At the end of 1988 AXIS had Rs.6,700 crores of assets under management. Second Phase - 1987-1993 (Entry of Public Sector Funds) Entry of non-AXIS mutual funds. SBI Mutual Fund was the first followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC in 1989 and GIC in 1990. The end of 1993 marked Rs.47,004 as assets under management. Third Phase - 1993-2006 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except AXIS were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2006, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds. Fourth Phase - since February 2006 This phase had bitter experience for AXIS. It was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as on January 2006). The Specified Undertaking of Unit Trust of India,

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functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the AXIS Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile AXIS which had in March 2000 more than Rs.76,000 crores of AUM and with the setting up of a AXIS Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2007, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes Concept: There are many entities involved and the diagram below illustrates the organisational set up of a mutual fund:

Organisation of a Mutal Fund

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Features: Unique Features of AXIS their Impact on its Functioning [Extract from the Report of "Corporate Positioning" Committee] In the initial stages, AXIS had been performing a hybrid role of both a financial institution and a mutual fund. However, over the last few years, its role as a financial institution has significantly diminished and it has positioned itself purely as the largest mutual fund in the country. There is also a significant trend emerging which suggests that financial institutions will gradually wither away or merge into universal banks. In this scenario, commercial banks and mutual funds will emerge as the primary institutions for the mobilisation of household savings. This reinforces the need for AXIS to evolve as a pure mutual fund. At the same time, consideration has to be given to the fact that AXIS has promoted and holds controlling interest in a number of institutions outside the pure mutual fund industry. As noted earlier, AXIS's management structure is at variance with the structure prescribed for mutual funds under SEBI regulations. These regulations provide for four separate entities, namely a Sponsor, an Independent Trustee, an Asset Management Company and the Fund. It is necessary that AXIS as the largest player in the Mutual Fund industry should, as recommended by the Vaghul Committee, lend itself to SEBI's regulatory jurisdication and conform to the form of structure prescribed in SEBI regulations. As stated earlier, out of 73 domestic schemes, 67 schemes have already been brought under SEBI regulations and apart from US-64 and SUS-99, the remaining schemes have finally suspended sales and/or are nearing termination. It only remains for the structure of AXIS also to be made SEBI compliant. While the present structure of AXIS provides for separate Asset Management Committees for US-64, equity schemes and for income/debt schemes, the degree of control exercised and direction imparted by these Committees appears to be restricted and inadequate. The key mandate of the Committees is to review performance of unit schemes of AXIS and provide guidance. The Committees discharge this role of independent review of scheme performance through the mechanism of periodic meetings. Given the limitation of a "review committee" format, the Committees have not found it possible to resolve "embedded" problems stemming from "historical" decisions. The Committees, therefore, cannot replace Asset Management Companies.

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There is therefore need for an independent Trustee and an independent AMC, as provided under SEBI regulations with wider powers of control and direction. AXIS has no identified Sponsor but the institutions, which contributed to the initial capital of Rs.5 crores and, crores in 1999, may be considered as Sponsoring Institutions. SEBI regulations impose certain responsibilities and obligations on sponsors and it would be difficult to discharge these responsibilities and obligations when there are a large number of sponsors. It is therefore necessary that the Sponsor should be a separate company. It is suggested that this company can be formed with the initial shareholders being the Sponsoring Institutions who will convert the whole or part of their present holdings in the initial capital of Rs.5 crores and the additional contribution of Rs.445.50 crores made in June 1999 into the capital of the Sponsoring Company. This conversion can be made at the NAV of the units when US-64 becomes NAV based. It is desirable that no single member of the Sponsoring Institutions ultimately holds more than 25% of the ultimate capital of the Sponsoring Company, particularly since many of them already own or have participation in AMCs managing other mutual funds. With the increase in mutual fund players in India, a need for mutual fund association in India was generated to function as a non-profit organisation. Association of Mutual Funds in India (AMFI) was incorporated on 22nd August, 1995. AMFI is an apex body of all Asset Management Companies (AMC) which has been registered with SEBI. Till date all the AMCs are that have launched mutual fund schemes are its members. It functions under the supervision and guidelines of its Board of Directors. Association of Mutual Funds India has brought down the Indian Mutual Fund Industry to a professional and healthy market with ethical lines enhancing and maintaining standards. It follows the principle of both protecting and promoting the interests of mutual funds as well as their unit holders.

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The objectives of Association of Mutual Funds in India The Association of Mutual Funds of India works with 30 registered AMCs of the country. It has certain defined objectives which juxtaposes the guidelines of its Board of Directors. The objectives are as follows:

This mutual fund association of India maintains a high professional and ethical standards in all areas of operation of the industry.

It also recommends and promotes the top class business practices and code of conduct which is followed by members and related people engaged in the activities of mutual fund and asset management. The agencies who are by any means connected or involved in the field of capital markets and financial services also involved in this code of conduct of the association.

AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fund industry.

Association of Mutual Fund of India do represent the Government of India, the Reserve Bank of India and other related bodies on matters relating to the Mutual Fund Industry.

It develops a team of well qualified and trained Agent distributors. It implements a programme of training and certification for all intermediaries and other engaged in the mutual fund industry.

AMFI undertakes all India awarness programme for investors inorder to promote proper understanding of the concept and working of mutual funds.

At last but not the least association of mutual fund of India also disseminate informations on Mutual Fund Industry and undertakes studies and research either directly or in association with other bodies.

The sponsorers of Association of Mutual Funds in India Bank Sponsored

SBI Fund Management Ltd. BOB Asset Management Co. Ltd. Canbank Investment Management Services Ltd. AXIS Asset Management Company Pvt. Ltd.

Institutions

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GIC Asset Management Co. Ltd. Jeevan Bima Sahayog Asset Management Co. Ltd.

Private Sector Indian:

BenchMark Asset Management Co. Pvt. Ltd. Cholamandalam Asset Management Co. Ltd. Credit Capital Asset Management Co. Ltd. Escorts Asset Management Ltd. JM Financial Mutual Fund Kotak Mahindra Asset Management Co. Ltd. Reliance Capital Asset Management Ltd. Sahara Asset Management Co. Pvt. Ltd Sundaram Asset Management Company Ltd. Tata Asset Management Private Ltd.

Predominantly India Joint Ventures:

Birla Sun Life Asset Management Co. Ltd. DSP Merrill Lynch Fund Managers Limited HDFC Asset Management Company Ltd.

Predominantly Foreign Joint Ventures:

ABN AMRO Asset Management (I) Ltd. Alliance Capital Asset Management (India) Pvt. Ltd. Deutsche Asset Management (India) Pvt. Ltd. Fidelity Fund Management Private Limited Franklin Templeton Asset Mgmt. (India) Pvt. Ltd. HSBC Asset Management (India) Private Ltd. ING Investment Management (India) Pvt. Ltd. Morgan Stanley Investment Management Pvt. Ltd. Principal Asset Management Co. Pvt. Ltd.

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Prudential ICICI Asset Management Co. Ltd. Standard Chartered Asset Mgmt Co. Pvt. Ltd AXIS Mutual Fund ties up with Dena Bank for distributing its MF schemes AXIS Mutual Fund (AXIS MF) and Dena Bank today announced a strategic tieup for distribution of AXIS MF schemes. Under the agreement, Dena Bank will offer the entire bouquet of AXIS MF's schemes across the bank's selected branches

September 12, 2007: AXIS Mutual Fund (AXIS MF) and Dena Bank today announced a strategic tie-up for distribution of AXIS MF schemes. Under the agreement, Dena Bank will offer the entire bouquet of AXIS MF's schemes across the bank's selected branches. Presently AXIS MF (with assets under management of over Rs.25000 crore) reaches out to its investors through its wide distribution network comprising 65 Financial Centers (UFCs), 271 Chief Representative offices, 58 Chief Agents, over 19000 AMFI certified Financial Advisors and through tie-ups with several Banks and Department of Post. With today's tie-up, AXIS MF is further enhancing its distribution capabilities. AXIS MF will now also be offering its schemes initially through 80 branches of Dena Bank including 41 FinMart branches across India . Announcing the AXIS MF's tie-up with Dena Bank, Dr R H Patil , Chairman, AXIS AMC said, "This initiative reflects AXIS MF's strategy to rapidly expand in the retail market and value-add its access network to complement the Mutual Fund's growth strategy in the Indian mutual fund sector. With this tie-up millions of customers of Dena Bank will get an opportunity to invest in various schemes of AXIS MF closer to their doorstep at the branches where they do their banking transactions." "Dena Bank has got a dominant presence in Gujarat and Maharashtra which happen to be important retail markets for AXIS MF." he added On the occasion, Shri M V Nair , Chairman and Managing Director, Dena Bank said, The signing of our Agreement today is a very happy occasion for both Dena Bank and AXIS Mutual Fund. It is a significant milestone for the Bank and it is the first tie up the

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Bank has made to offer various Mutual Fund products to its customers. The Bank will endeavour to cross sell its products also with this tie up. Shri M V Nair said, "In a rapidly changing scenario, the lender - borrower relationship which Banks traditionally had with customers is giving way to a different kind of business relationship and the Banks are now offering a variety of financial services to the customers to meet their changing aspirations. The tie up between Dena Bank and AXIS MF is a step towards converting the bank branch into a financial supermarket which caters to all the financial needs of the customer by providing banking, insurance, as well as investment services at one stop."

"There is immense potential for marketing of mutual funds and the tie up would help to tap this potential. Today's agreement brings together two strong and vibrant brands in a strategic alliance, which will combine the strengths of both organisations for mutual benefit. We are looking at the tie up as an opportunity to bring more customers into our fold and to expand our horizons." he added

About AXIS MF AXIS Mutual Fund was carved out of Unit Trust of India as a SEBI registered mutual fund by repealing the Unit Trust of India Act (1963) on 1st February 2006. AXIS Mutual Fund (AXIS MF) manages the pure Mutual Fund schemes, which are fully SEBI compliant and in line with the best global practices, while, the Specified Undertaking of the Unit Trust of India (SUUTI) manages schemes which involve the commitment of the Government of India. About Dena Bank Dena Bank, over a period of more than six and half decades, has successfully leveraged and integrated the modern technology with traditional values to provide a range of products and services that strengthen existing relationships with its customers and seek to build new ones. Founded on the principles of integrity, high standard of efficiency, a sense of service and a national outlook, the Bank has through the years nurtured and established enduring relationship with its customers with exemplary service and professional competence.

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Moving proactively with the times and in its efforts for greater customer convenience, Dena Bank has introduced many technology-based products like Multi-City Cheque facility, Any Branch Banking, Mobile Banking etc. The Bank has also opened 41 Dena FinMarts, which are exclusive one-stop shops for all retail loan products of the Bank, across the country. The signing of the Agreement with AXIS AMC will enable the Bank to market all mutual fund products of AXIS MF through its branches, in addition to its core banking activities and insurance services. The Bank has a network of over 1100 branches and satellite offices across the country and the total volume of business of the Bank is nearly Rs.32000 crore at present

Definition of Important Terms/Concepts in Mutual Fund Industry Before proceeding to consider the salient provisions of SEBI regulations governing mutual funds, it is necessary to get familiar with the basic terms and phraseology used in Mutual Fund literature. Net Asset Value ("NAV"): The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV). Mutual funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly depending on the type of scheme. Sale Price: Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load. Repurchase Price: Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price. Redemption Price: Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related.

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Sales Load: Is a charge collected by a scheme when it sells the units. Also called, 'Front-end' load. Schemes that do not charge a load are called 'No Load' schemes. Repurchase or 'Back-end' Load: Is a charge collected by a scheme when it buys back the units from the unit-holders. What are the different types of mutual fund schemes? Schemes according to Maturity Period:: A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period. Open-ended Fund/ Scheme: An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity. CRISIL's composite performance ranking (CPR) measures the performance for each of the open-ended scheme of Mutual Fund. There are four parameters considered to measure the performance of a mutual fund such as Risk-adjusted returns of the scheme's NAV, Diversification of Portfolio, Liquidity and Asset Size. Close-ended Fund/ Scheme: A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis. Schemes according to Investment Objective: A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such

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schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows: Growth / Equity Oriented Scheme: The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. Income / Debt Oriented Scheme: The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations. Balanced Fund: The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds. Money Market or Liquid Fund: These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are

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appropriate for corporate and individual investors as a means to park their surplus funds for short periods. Gilt Fund: These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes. Index Funds: Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges. What are sector specific funds/schemes? - These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert. What are Tax Saving Schemes? - These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme What is a Load or no-load Fund? - A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution

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expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund which are more important. Efficient funds may give higher returns in spite of loads. A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units. Can a mutual fund impose fresh load or increase the load beyond the level mentioned in the offer documents? utual funds cannot increase the load beyond the level mentioned in the offer document. Any change in the load will be applicable only to prospective investments and not to the original investments. In case of imposition of fresh loads or increase in existing loads, the mutual funds are required to amend their offer documents so that the new investors are aware of loads at the time of investments. What is a sales or repurchase/redemption price? The price or NAV a unitholder is charged while investing in an open-ended scheme is called sales price. It may include sales load, if applicable. Repurchase or redemption price is the price or NAV at which an open-ended scheme purchases or redeems its units from the unitholders. It may include exit load, if applicable. What is an assured return scheme? Assured return schemes are those schemes that assure a specific return to the unitholders irrespective of performance of the scheme. A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document.

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Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year. Can a mutual fund change the asset allocation while deploying funds of investors? Considering the market trends, any prudent fund managers can change the asset allocation i.e. he can invest higher or lower percentage of the fund in equity or debt instruments compared to what is disclosed in the offer document. It can be done on a short term basis on defensive considerations i.e. to protect the NAV. Hence the fund managers are allowed certain flexibility in altering the asset allocation considering the interest of the investors. In case the mutual fund wants to change the asset allocation on a permanent basis, they are required to inform the unitholders and giving them option to exit the scheme at prevailing NAV without any load. How to invest in a scheme of a mutual fund? Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms. Forms can be deposited with mutual funds through the agents and distributors who provide such services. Now a days, the post offices and banks also distribute the units of mutual funds. However, the investors may please note that the mutual funds schemes being marketed by banks and post offices should not be taken as their own schemes and no assurance of returns is given by them. The only role of banks and post offices is to help in distribution of mutual funds schemes to the investors. Investors should not be carried away by commission/gifts given by agents/distributors for investing in a particular scheme. On the other hand they must consider the track record of the mutual fund and should take objective decisions. Can non-resident Indians (NRIs) invest in mutual funds? Yes, non-resident Indians can also invest in mutual funds. Necessary details in this respect are given in the offer documents of the schemes.

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How much should one invest in debt or equity oriented schemes? An investor should take into account his risk taking capacity, age factor, financial position, etc. As already mentioned, the schemes invest in different type of securities as disclosed in the offer documents and offer different returns and risks. Investors may also consult financial experts before taking decisions. Agents and distributors may also help in this regard. How to fill up the application form of a mutual fund scheme? An investor must mention clearly his name, address, number of units applied for and such other information as required in the application form. He must give his bank account number so as to avoid any fraudulent encashment of any cheque/draft issued by the mutual fund at a later date for the purpose of dividend or repurchase. Any changes in the address, bank account number, etc at a later date should be informed to the mutual fund immediately. What should an investor look into an offer document? An abridged offer document, which contains very useful information, is required to be given to the prospective investor by the mutual fund. The application form for subscription to a scheme is an integral part of the offer document. SEBI has prescribed minimum disclosures in the offer document. An investor, before investing in a scheme, should carefully read the offer document. Due care must be given to portions relating to main features of the scheme, risk factors, initial issue expenses and recurring expenses to be charged to the scheme, entry or exit loads, sponsor's track record, educational qualification and work experience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed, etc. When will the investor get certificate or statement of account after investing in a mutual fund?

Mutual funds are required to despatch certificates or statements of accounts within six weeks from the date of closure of the initial subscription of the scheme. In case of 38

close-ended schemes, the investors would get either a demat account statement or unit certificates as these are traded in the stock exchanges. In case of open-ended schemes, a statement of account is issued by the mutual fund within 30 days from the date of closure of initial public offer of the scheme. The procedure of repurchase is mentioned in the offer document. How long will it take for transfer of units after purchase from stock markets in case of close-ended schemes?

According to SEBI Regulations, transfer of units is required to be done within thirty days from the date of lodgment of certificates with the mutual fund. As a unit-holder, how much time will it take to receive dividends/repurchase proceeds? A mutual fund is required to despatch to the unit-holders the dividend warrants within 30 days of the declaration of the dividend and the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase request made by the unitholder. In case of failures to despatch the redemption/repurchase proceeds within the stipulated time period, Asset Management Company is liable to pay interest as specified by SEBI from time to time (15% at present). Can a mutual fund change the nature of the scheme from the one specified in the offer document? Yes. However, no change in the nature or terms of the scheme, known as fundamental attributes of the scheme e.g. structure, investment pattern, etc. can be carried out unless a written communication is sent to each unit-holder and an advertisement is given in one English daily having nationwide circulation and in a newspaper published in the language of the region where the head office of the mutual fund is situated. The unitholders have the right to exit the scheme at the prevailing NAV without any exit load if they do not want to continue with the scheme. The mutual funds are also required to follow similar procedure while converting the scheme form close-ended to open-ended scheme and in case of change in sponsor.

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How will an investor come to know about the changes, if any, which may occur in the mutual fund?

There may be changes from time to time in a mutual fund. The mutual funds are required to inform any material changes to their unit-holders. Apart from it, many mutual funds send quarterly newsletters to their investors. At present, offer documents are required to be revised and updated at least once in two years. In the meantime, new investors are informed about the material changes by way of addendum to the offer document till the time offer document is revised and reprinted. It is for consideration whether AXIS should be wholly owned and managed by the Government through participation in the Sponsoring Company. Although AXIS is not directly owned by the Government, the majority of the Sponsoring Institutions who contributed to the capital and the additional contribution and who elect the trustees are institutions which are owned or controlled by the Government. The Chairman of the Board of Trustees is also appointed by the Government. There is therefore a public perception of a Government umbrella which gives a measure of safety, security and implied guarantee to the unit-holders which is largely responsible for AXIS's success as a savings institution. At the same time, this perception imposes an implied responsibility on the Government for a possible bail-out of AXIS in the event of its failure to meet specific or implied commitments. Government did this by contributing to the SUS Scheme to the extent of Rs.3,300 crores following the recommendations of the Deepak Parekh Committee and there is a public perception that Government will need to do likewise to ensure that AXIS will meet its commitments to US-64 unit holders atleast to the extent of 3,000 units out of their aggregate holdings. Participation by Government in the sponsoring company may strengthen the perception of implied responsibility of the Government for the due fulfillment of obligations by AXIS but this responsibility may be open-ended and Government may not wish to accept such a responsibility. However, non-participation by Government in the sponsoring company may not by itself remove the perceived link between the

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Government and AXIS so long as Government continues to exercise powers such as the power to appoint the Chairman of the Board of Trustees under the AXIS Act. At the same time, it is necessary to recognise that if the perceived link with the Government is suddenly removed, - and certainly if it is removed before US-64 becomes NAV based - without providing an adequate substitute, public confidence in AXIS would be severely affected and can even lead to a flood of redemptions which could create a crisis both in AXIS and in the capital market. It is therefore necessary that if the Government does not participate in the Sponsoring Company, the participation of the Sponsoring Institutions should remain "locked-in" atleast for the initial period. An option for consideration is whether in place of the Government a strategic partner cannot be introduced. If this partner is an established player in the market who enjoys confidence of unitholders because of his reputation and competence, the risk of loss of public confidence through the removal of the perceived Government link would be largely mitigated. At the same time, having regard to the large amount of funds involved, the field for the identification of a strategic partner cannot be restricted only to Indian entities. If such a strategic partner is introduced, then it is necessary that Government should completely withdraw and leave it to the strategic partner to manage the fund subject to the supervision and regulation of SEBI as in the case of other mutual funds. To do otherwise would create the danger that Government may be perceived to be accountable for the proper functioning of AXIS without having any effective control. If on the contrary, Government attempts to effectively control the operations of AXIS, it will get unnecessarily involved in running a commercial operation for which it may not be able to impart the necessary skill and flexibility. A complete withdrawal of the Government would also achieve the objective of de-risking the Government from the operations of AXIS. A question for consideration is the size of the capital of the Sponsoring Company. This depends upon two major factors namely, the contribution which the Sponsoring Company is required to make to the Capital of the Asset Management Company and the amount of funds the Sponsoring Institutions are prepared to provide for this purpose. Taking into account both these factors, it is suggested that the initial capital of the

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Sponsoring Company to be contributed by the Sponsoring Institutions could be in the order of Rs.220 crores. The strategic partner could be required to introduce into the capital a sum of Rs.330 crores whereby of the total capital of Rs.550 crores, 40% would be held by the Sponsoring Institutions and 60% would be held by the strategic partner. The holding of the Sponsoring Institutions could be subject to a 'lock-in' of three years, though transfers between themselves would be possible. SEBI regulations require the formation of a Board of Trustees or a Trustee Company. The usual practice is to form a Trustee Company which is owned by the Sponsor but the composition of whose Board of Directors conforms to SEBI regulations. It is suggested that a Trustee Company be formed as a wholly-owned subsidiary of the Sponsoring Company. SEBI regulations do not prescribe any minimum capital for the Trustee Company but having regard to the onerous responsibilities prescribed under the regulations for a Trustee Company, it is suggested that it has a capital of Rs.5 crores which will enable it to build up the necessary infrastructure to discharge those responsibilities. AXIS Mutual Fund today announces the launch of AXIS-Thematic Fund with effect from 9th March 2007. The initial offer period is from 9th March 2007 to 25th March 2007. The scheme will re-open for sales and repurchase not later than 30 days from the closure of the initial offer. At any given point of time, there are certain sectors in the economy that perform better than others. An early identification of these sectors for investments will reap rewards for the investors. To capitalize on diverse investment opportunities across various sectors, AXIS Mutual Fund is launching AXIS-Thematic Fund as an open-end growth oriented equity scheme. The scheme will comprise of six funds, each concentrating on a distinct theme AXIS - Large Cap Fund, AXIS - Mid Cap Fund, AXIS-Basic Industries Fund, AXIS-Auto Sector Fund, AXIS-Banking Sector Fund and AXIS-PSU Fund. The investment focus of each of the six funds is as follows: AXIS -Large Cap Fund: The portfolio of the fund will consist of the universe of top 50 companies in terms of market capitalisation. AXIS -Mid Cap Fund: This fund will invest primarily in mid cap stocks.

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AXIS- Basic Industries Fund: The portfolio of this fund will consist predominantly of companies engaged in the sectors like Metals, Building Material, Oil & Gas, Power, Chemicals, Engineering etc. The fund will invest in stocks of the companies, which form the part of Basic Industries. AXIS- Auto Sector Fund: The fund will invest in the stocks of companies engaged in the automobile and auto ancillary industry. AXIS -Banking Sector Fund: The fund will invest in the stocks of the companies / institutions engaged in the banking and financial services activities. AXIS PSU Fund: The fund will invest in the stocks of companies where the State / Central Government of India owns the majority of the holding or management control is vested with State/Central Government of India. Salient Features of the AXIS- Thematic Fund

The scheme is open to resident individuals, institutions as well as to NRIs and FIIs.

Face value of units is Rs.10/Minimum amount of investment under each thematic fund is Rs.5000/- and thereafter subsequent minimum investment under a folio is Rs.1000/- per thematic fund.

Sale of units under each fund will be at face value during the initial offer period. On re-opening of the scheme, Sale of units will be at 102% of NAV. Repurchase will be at NAV.

The primary objective of the scheme is capital appreciation. However the scheme may also distribute income to the unitholders. Unitholders will have an option to reinvest income distribution, if any, at ex-dividend NAV. The benchmark of AXISLarge Cap Fund is BSE Sensex, AXIS-Mid Cap Fund is CNX Midcap 200 Index, AXIS-Basic Industries Fund is BSE 100 Index, AXIS- Auto Sector Fund is BSE Sensex, AXIS Banking Sector Fund is BSE BANKEX and AXIS- PSU Fund is BSE PSU Index. Automatic Trigger Option and Switchover facility from one fund to another are available. The Fund Managers of the six thematic funds are :

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AXIS- Large Cap Fund - Shri Manish Kumar AXIS-Mid Cap Fund - Shri Vinay Kulkarni AXIS-Banking Sector Fund - Shri Sanjay Dongre AXIS-Basic Industries Fund - Shri Sanjay Sinha AXIS- Auto Sector Fund - Shri Sanjay Sinha AXIS-PSU Fund - Shri Sanjay Sinha

Why should one invest in Mutual Funds through AXIS Bank? We meet your needs: We believe that every one has specific needs and priorities. Your needs could vary from buying a house, getting your daughter married to providing for your childs education. You might even want to travel the world. All your needs are very important for us. We can help to fulfill your needs to reality by helping you select schemes, which would be consonance with your needs. We work towards building an Investment Culture: It would be our constant endeavor to inculcate saving and organized investing habits in you. We will help you plan your investments and build a healthy mutual fund portfolio, which would be an optimal solution for your needs. Cultivating an investment culture will not only help you but also your family. We will keep you updated: A newsletter, which will keep you informed of the latest happenings in the stock markets, economy and important events, apart from giving you the NAV and other relevant information about your schemes will be sent you every month. Latest NAV of the schemes can also be found out from our various branches. We can be your One Stop Financial Solution: Apart from subscribing to Mutual fund schemes through us, you can also take advantage of our banking services and a whole range of financial products. Like - ATM card , credit card, personal loan products, depository services, loan against units/shares etc. and see your financial needs satisfied under one roof.

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With AXIS Bank- Mutual Fund services, you can consult with your own Investment Advisor and invest in a Mutual Fund Scheme that is right for you. A great opportunity, to get organized and make your investment more in line with your real needs. Risk Factors: All the investments in the securities market are subject to market risks and the NAV of schemes/plans may go up or down depending upon the factors and forces affecting securities market. Past performance is not necessarily indicative of the future. Please read the offer document before investing Types Wide variety of Mutual Fund Schemes exist to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry. TYPES OF MUTUAL FUND SCHEMES By Structure
o o o

Open - Ended Schemes Close - Ended Schemes Interval Schemes

By Investment Objective
o o o o

Growth Schemes Income Schemes Balanced Schemes Money Market Schemes

Other Schemes
o o

Tax Saving Schemes Special Schemes

Index Schemes Sector Specfic Schemes

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Importance of study Scope of study AXIS Crisis & After The Road Map for Restructure of AXIS Recommendations of the Corporate Positioning Committee The structure of AXIS should be in line with SEBI regulations as applicable to mutual funds. Accordingly there should be a i. ii. iii. Sponsor, A Trustee Company and An Asset Management Company (AMC).

The Sponsor should be a Sponsoring Company in which 40% of the share capital should be held by the institutions which hold the initial capital of AXIS of Rs.5 crores and which have made in 1999, the additional contribution of Rs.445.5 crores pursuant to the Deepak Parekh Committee recommendations.(the Sponsoring Institutions). 60% of the share capital of the Sponsoring Company should be held by a Strategic Partner who is a recognised player in the market and whose reputation and competence are expected to give the required degree of confidence to the unitholders. The field for the selection of the Strategic Partner need not be restricted to Indian entities. The suggested share capital of the Sponsoring Company should be Rs.550 crores of which Rs.220 crores will be subscribed by the Sponsoring Institutions and Rs.330 crores by the Strategic Partner. To make the desired contributions, each of the Sponsoring Institutions should convert part or whole of their existing holdings in Unit64 forming part of the initial capital of Rs.5 crores and the additional contribution of Rs.445.5. crores into shares of the Sponsoring Company. As some of the Sponsoring Institutions also own AMCs which manage mutual funds competing with AXIS, no single Sponsoring Institution should hold more than 25% of the share capital of the Sponsoring Company. To ensure that the confidence of the unit-holders should not be adversely affected by a sudden withdrawal of the Government umbrella, there should be a 'lock-in' period of 46

three years during which the Sponsoring Institutions may transfer their shareholding in the Sponsoring Company amongst themselves but not to the Strategic Partner or to third parties. A Trustee Company should be incorporated as a wholly-owned subsidiary of the Sponsoring Company. It is suggested that the Trustee Company should have a capital of Rs.5 crores.

AXIS should convert itself into an AMC and consequently the existing infrastructure and organisation of AXIS which presently form part of US-64 will become the infrastructure and organisation of the AMC. The AMC will compensate US-64 for the infrastructure taken over by the issue of bonds carrying a market rate of return and with appropriate redemption terms to be determined taking into account the AMC's expected cash flows. For this purpose, AXIS's fixed assets which currently have a book value of around Rs.850 crores will be valued at their fair market value and bonds will be issued for that amount. The capital of the AMC should be adequate not merely to finance the investment needed in the future infrastructure but also to provide a cushion as a source of comfort to the investors and when needed, an ability to infuse liquidity into the fund in the event of a crisis. It is therefore suggested that the AMC should have a capital of Rs. 1000 crores considering that AXIS has investible funds of over Rs.50,OOO crores. It is necessary that control over the large funds held by AXIS (and particularly having regard to the large block of shares held by AXIS in individual companies) should not rest with a single individual or group. It is also necessary that there should be an element of public accountability of AXIS. It is therefore suggested that the shareholding of the Sponsoring Company in the capital of the AMC should be restricted to 40% and the balance 60% should be offered to the public. In accordance with SEBI regulations, the AMC would be entitled to charge management fees to the different schemes. This income, after payment of expenses and interest on the bonds to be issued to US-64 and transfer to the Development Reserve Fund at the current rate should be sufficient to service the share capital.

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There should be a single AMC to manage all the schemes of AXIS. It is necessary that US-64 is made NAV based before the restructuring of AXIS is attempted. It is also necessary that before US-64 is made NAV based, provision is made for the contingent liability arising out of the gap, if any, between the available assets in US-64 and guaranteed price to individual unitholders' holdings upto 3000 units announced in July 2001.

It is equally necessary that provision is made for the contingent liability arising as a result of the gap between the present value of the future liability To reduce the size of this gap, the following steps should be taken The portfolios of these schemes should be recast as soon as it is practically possible, to ensure that the portfolio consists only of Government securities and debt instruments and all investments in equity are disposed off. In respect of schemes where only one year's return is assured, the returns assured should be strictly in line with the earning capacity of the schemes. The Income Tax Act should be amended to provide that dividends received on assured return schemes floated before 1st June 1999 would not be entitled to exemption of tax under Section 10(33) and correspondingly, no tax would be levied on the fund under Section 115R on dividends distributed to unitholders. The Development Reserve Fund should be transferred to the AMC free of consideration after valuing the investments of the fund at their fair market value. sub-number omitted The prospective Strategic Partner should be invited to quote the value at which AXIS's infrastructure and organisation should be converted into the AMC. If this value exceeds the value of the assets of the schemes, the excess should be credited to the various schemes in an appropriate manner. If however the value falls short of

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the value of the assets of the schemes, the shortfall, if not met by the holders of initial capital of AXIS and/or Government, will need a reduction of the benefits under the assured return schemes in an appropriate manner.

The AXIS Act should be repealed and replaced by a new enactment. In enacting this Act, it should be ensured that the Government is totally distanced from AXIS and transaction costs (e.g. stamp duties, taxes etc.) are minimised, if not eliminated and the 5wnership of the assets vests in the AMC at the lowest possible cost. If the AXIS Act were not to be repealed but merely amended, there is a danger that the Government may be left with residual responsibilities under the Act, which would result in a public perception of continued Government accountability. In such a situation, it may become necessary to give AXIS a fully Government character with senior-most positions in AXIS being manned by Government officers. Clearly this is not a preferred outcome but it is mentioned only to emphasise the fact that accountability cannot be divorced from day to day management responsibility. Review of Literature & Research Methodology BY ALL accounts, 2007 has been a wonderful year for investors in and managers of mutual funds. There has been a considerable increase in the assets under management of equity funds and profitability has thus increased for fund houses. Investors, too, have never had it so good. Many of the new mutual funds schemes in which investors poured substantial sums have performed reasonably well. And the new schemes have not been stark underperformers, as in earlier years. They have categorically reinforced the fact that mutual funds remain the most suitable avenue for retail investors to build wealth. Yet the mutual funds industry remains driven by the kind of marketing initiatives where the interest of the brokers is paramount. There are no debates on what could be done to save investors from the clutches of the brokers or on product development. Visibly, there are no attempts to link product development to feedback from investors and market performance of funds. Inefficient products are left unaddressed, suggesting a

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lack of research into product performance. Notably, communication about assessment of fund performance is simplistic and consequently, in many cases, misleading. These may be a consequence of the small size of the industry as of now. As its size improves, investor interests may regain their rightful place. There is, however, reason to believe that the industry structure does not provide scope for developments. The mutual fund industry may be forced to focus on doing simple things, mainly managing index funds better. Innovations that matter may be driven into the fold of private equity unless the incentive structure is re-worked. Inefficient products: A sore point about mutual funds is that inefficient products are just left to languish. Substantial sums invested in sector funds, index funds, bond funds, balanced funds and monthly income plans are under-performing. We are, however, yet to see the kind of restructuring necessary to make them more suitable to an investor's portfolio. For instance, indices such as BSE-100 and BSE-200 have consistently outperformed the Sensex and the Nifty by about four percentage points per annum over the past three years. There is, however, no attempt to introduce index funds at least on BSE-100. The introduction of a BSE-100 Index fund would at least provide investors with the option to switch from under-performing Sensex and Nifty funds. There is no talk of such an index fund now. But there may be when the market is in a bearish phase and investors' risk aversion has increased. It may not make sense then, though. Another case is Monthly Income Plans. They have been perennial under-performers. Monthly Income Plans have, on average, recorded returns of 9 per cent over the past 12 months. This is below the 10 per cent returns for Crisil MIP Blended Index. The actual under-performance is higher as the Crisil Index is based on Nifty returns. If you replace Nifty returns with average performance of diversified equity funds, the extent of under-performance would increase substantially. Has anything ever been done to address this issue? Communication relating to the performing class diversified equity funds too is highly simplistic. The answers to questions on what is behind performance stock selection or higher risk taken by the fund are unavailable. A dispassionate enquiry

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into equity fund performance may be beyond fund-houses. They could, however, indicate to investors how much additional risk is taken by the fund-houses, such as that increased investments in mid-cap and small-cap stocks contributed to performance. Fund of funds is a practically stillborn concept. There is also no attempt to improve the efficiency of balanced funds or market them better. Balanced funds and Fund of Funds should occupy pride of place in a retail investor's portfolio. But that is not the case. Incentive structure: This is how it looks when you take a snapshot of the mutual fund industry now. But it could change for the better. After all, the mutual fund industry even now controls less than 2 per cent of household assets. The incentive structure for managers could militate against such developments. Mutual funds take home a flat fee based on volume of assets under management and not on performance. If size of assets increases because of performance, then indirectly fees will also rise. However, if assets desert after performance, the loss to fund managers is heavy. There is nothing in the incentive structure to drive a fund manager to do the best for retail investors. There is definitely a case for working out a fee structure that pays fund managers a flat fee plus additional compensation for performance over a three or five-year period. Many talented fund managers have already left for the harsh performance-based but lucrative world of private equity investing. It may not take much to retain or regain talented fund managers. Maybe even a mere ten per cent of excess gains over a benchmark would be enough. Without sharing at least a small part of the gains, mutual fund investors can neither hope for better research nor can they hope to retain the best performing managers. As talent flees, in just 10 years, investors will be forced to seek the safe havens of low-cost index funds. Performing diversified equity funds or balanced funds would become a thing of the past. Enthusiasm of fund-houses would then be sustained only until product launches and only until that product category registers returns. As seasons change, the focus of marketing initiatives will change. Inefficient products will continue to languish as they do now. The mutual fund industry has been on a good run and, at least as of now, can boast of extremely talented people in its ranks. The status quo is, however, not the recipe for

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continuing the good show. SEBI, AMFI, fund-houses and investors need to usher in changes that help the Indian mutual fund industry achieve a unique position in the world of investing. The Government in order to protect the interests of 20-million-odd investors of Unit Trust of India (AXIS) announced a structural reform package, covering a Rs 14,561crore bail-out for the US-64 and all assured return schemes and eventual privatisation of AXIS's schemes. To start with, AXIS would be split into two entities - - AXIS-I and AXIS-II. AXIS-I would cover the US-64 and the Monthly Income Plan (MIP) schemes, while the various net asset value-based schemes will be hived off to AXIS-II. The latter would also include the units of US-64 issued after January 2002, when the scheme became NAVbased. Further, while AXIS-I will managed by a Government-appointed administrator and team of officially-nominated advisors, AXIS-II will be headed by a professional chairman and board of trustees. The brand equity of AXIS, too, will go with AXIS-II, which will eventually be disinvested or privatised. The bifurcation will be done through The Unit Trust of India (Transfer of Undertaking and Repeal) Bill, 2002, to repeal the AXIS Act, the Finance Minister, Mr Jaswant Singh, told newspersons here after the Cabinet Committee on Economic Affairs cleared the AXIS package. Investors who redeem US-64 units even after May 2006 will continue to get the administered repurchase price of Rs 12 per unit up to 5,000 units and Rs 10 per unit beyond 5,000 units, following the Government's decision to provide open endedsupport to old investors of the scheme. The move is expected to ease the redemption pressure in April and May 2006. Tax concessions will be extended for the US-64 scheme - - on dividend income and capital gains - - to make it attractive for unit holders to remain within the scheme. The Government will also reset the interest at a lower level in five MIP schemes, where only the principal amount is assured and the dividend can be reset. Foreclosure of some

52

of the MIP schemes is also being considered, subject to this being permitted under SEBI regulations. Both AXIS-I and AXIS-II would be structured as per SEBI regulations. The total asset value of all AXIS-run schemes aggregates to Rs 42,000 crore as on June 30 - - Rs 17,784 crore for the NAV-based schemes and about Rs 25,000 crore for the US-64 and other assured return schemes. "The decision to spilt the fund into two entities forms the crux of the structural reform package for AXIS. The objective is to have a working, healthy mutual fund run by a professionally-managed team," the Finance Secretary, Dr S. Narayan, said. According to him, the Government has now moved two steps forward after the decision taken by the CCEA last year to provide full assistance to the US-64 scheme. The first is the move to allow open-ended redemption for investors in US-64 and the second is the commitment to bridge the shortfall in the assured return schemes. The current shortfall in US-64 is estimated at Rs 6,000 crore, of which the AXIS has already been provided cash support of Rs 800 crore and another Rs 500 crore is in the pipeline. The projected liability of the balance Rs 5000 crore will be met through the issuance of bonds tradable in the market. A similar mechanism will be worked out for assured return scheme where the estimated liability is around Rs 8,561 crore. "The Government is fencing out the liabilities in the US-64 scheme and other assured return schemes. An investor who holds on to the US-64 unit beyond May 2006 can only sell it back to the AXIS and it cannot be re-circulated in the market. We may, however, consider allowing these units to be recirculated at NAV," said Dr Narayan. AXIS-I would effectively cease to exist once all investors move out of the US-64 and the assured return schemes. The basket of assets and liabilities of AXIS will be transferred to the two entities after the repeal of the AXIS Act. Commenting on the decision of the Government Dr.Kurian, Chairman, Association of Mutual Funds in India (AMFI) and former trustee of AXIS. in an interview to Business Line Correspondent on 08.09.2002 has stated as under:

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The AXIS development is a welcome one and gives a positive signal to the industry, investors and market because the uncertainty with regard to solving the problem of the institution is over. Since 1998, AXIS has been passing through a difficult situation. Than came the 2001 problem. Now, various committees and recommendations later, the problem has been solved. I think it is to the credit of the Government even though it has taken a pretty long time to do so. PARLIAMENT has given its nod for the bifurcation of Unit Trust of India into two companies -AXIS-I and AXIS-II - with the Rajya Sabha on Tuesday giving its assent on 03.12.2002 to the AXIS (Transfer of Undertakings) Bill, 2002 by a voice vote. The Bill has already been passed by the Lok Sabha. Addressing the Rajya Sabha, the Finance Minister, Mr Jaswant Singh, assured that the Government would meet its commitments to the investors. The Finance Minister said that AXIS-I will not float any new scheme and all existing commitments would be met by the Government, while AXIS-II would be started as a SEBI regulated, asset managed and market competing scheme. He assured the House that there would be no retrenchment of AXIS employees. "All of them would be put on the AXIS-II attendance register with an option that they could take six months to decide if they wanted to take voluntary retirement." AXIS Mutual Fund has come into existence with effect from 1st February 2006. AXIS Asset Management Company presently manages 42 NAV based domestic SEBI compliant schemes and 4 Offshore funds having a corpus Rs.15,243 crore from about 10 million investor accounts. The Important Follow-ups for AXIS Mutual Funds are Adherence to best practices: Status and Future Agenda 1. Introduction The IOSCO has set out three objectives--protection of investors, ensuring fair, transparent and efficient market and reduction of systemic risk--which securities regulations need to address.6 Further, to enhance the ability of the regulatory system to attain these objectives, the IOSCO has also laid down a set of guiding principles. (see

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Annexure II). As we have discussed in the last section, the reform initiatives taken in the past decade have addressed these objectives in varying degrees, which have resulted in the emergence of a more modern and competitive securities market. In this section, we attempt to evaluate the existing regulatory framework broadly using the IOSCO principles as criteria and to identify problem areas, which call for future reform initiatives to strengthen the current system. This chapter is divided into five sections. The second section deals with regulatory issues: the regulators' mandate, their autonomy, powers and capacity to enforce regulation and their coordination to make regulations effective. Self-regulation as well as prudential issues are also discussed under this section. The third section outlines the legal issues concerning the securities market. The fourth section deals with crosscutting themes relating to the regulated market, namely, market infrastructure, and issues relating to primary market and transparency. The challenges facing the mutual fund industry are discussed in the fifth section. The discussion in this chapter provides some examples of current practices, recognizing that these practices will and should change as the markets change and as technology and improved coordination among regulators make other strategies available. 2. Regulatory Issues 2.1 The Regulator The regulatory responsibility of the securities market is vested in the SEBI, the RBI, and two government departments--Department of Company Affairs and Department of Economic Affairs. Investigative agencies such as Economic Offences Wing of the government and consumer grievance redressal forums also play a role. The SEBI, established under the SEBI Act, is the apex regulatory body for the securities market. Besides regulation, the SEBI's mandate includes responsibilities for ensuring investor protection and promoting orderly growth of the securities market. The RBI, on the other hand, is responsible for regulation of a certain well-defined segment of the securities market. As the manager of public debt, the RBI is responsible for primary issues of Government Securities. The RBI's mandate also includes the regulation of all contracts in government securities, gold related securities, money market securities and in securities derived from these securities. To foster consistency of the regulatory processes, the SEBI is mandated to regulate the trading of these securities on recognized stock exchanges in line with the guidelines issued by RBI. Although there is

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a clear division of regulatory responsibilities between RBI and SEBI, and efforts have been made to make the regulatory process consistent, the distribution of regulatory responsibilities among a number of institutions can potentially create confusion among the regulated as to which body is responsible for a particular area of regulation. To ensure operational independence and accountability in the exercise of functions and powers by the regulators, SEBI and RBI have been constituted as autonomous bodies and are established under separate acts of the Parliament. Both regulators are accountable to the Parliament through Central Government and the regulations framed by them are required to be laid before Parliament by the Central Government. 7 There is also a system of independent judicial review of the decisions of SEBI and RBI. Although the SEBI and the RBI are operationally independent, the government can issue directions to both in policy matters. 2.2 Enforcement of Securities Regulation The SEBI has powers to carry out routine inspections of market intermediaries to ensure compliance with prescribed standards. It also has investigation powers similar to that of a civil court in terms of summoning persons and obtaining information relevant to its enquiry. Action is taken on the basis of investigation. The enforcement powers of SEBI include issuance of directions, imposition of monetary penalties, cancellation of registration and even prosecution of market intermediaries. To ensure effective and credible use of enforcement powers, the SEBI has adopted measures such as development of a stock watch system, uniform price bands and establishment of a Market Surveillance Division.8 While SEBI has powers of direct surveillance of the stock exchanges, members of stock exchanges and other market intermediaries registered with it, SEBI has no powers over listed companies. Further, the present penalty levels in many cases are not high enough to effectively deter market players from regulatory violations. In particular, the amount of monetary penalty for non-compliance with respect to disclosure, information requirements, insider trading and market manipulation is very inadequate. To cite an example, a maximum monetary penalty of only Rs.1, 000/- can be imposed in case of failure to comply with the provisions of listing agreement. Similarly, under the SEBI Act the penalty for insider trading and non-disclosure of acquisition of shares and takeovers is only Rs.5 lakh. The Group believes that there is a need to allow SEBI

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enhanced authority

and powers to impose penalty commensurate with the gravity of

the violation (i.e., disgorgement powers). 9 An additional problem relates to delays in taking action against those who commit frauds. A number of companies, which had collected funds in the past through public issues, cannot even be traced. To take action against such companies and bring their Directors to book, a number of initiatives have been taken including the establishment of Central Coordination and Monitoring Committee (CCMC), with Secretary, DCA and Chairman, SEBI as its co-chairmen. However, only limited success has been achieved. Clearly, the enforcement procedures are cumbersome, time-consuming and involve too many agencies. There is a need to streamline the procedures to quickly detect frauds and take appropriate remedial measures. In addition to the problem stated above, the slow response in case of frauds results from long delays arising from the obligation to follow due process. As a regulatory body has to be accountable for its action, by implication, it gives the alleged institution an opportunity to show cause why action should not be taken. There is a need to streamline the procedures relating to due process. Also, dealing with cases of suspected fraud often requires freezing the situation, while the legal process is being pursued. This happens in India, but the decision to freeze the situation often takes time. 2.3 Cooperation in Regulation Various segments of the domestic financial market are getting increasingly integrated. There have also been progressive linkages between the domestic and international capital markets. As a result, the regulatory interventions or their absence in one market tend to have repercussions in other markets that are more serious and more widespread than in the past. Further, with the emergence of more and more financial supermarkets and growing complexity of financial transactions, there are increasing instances of the same market intermediary coming under the purview of multiple regulatory bodies. These factors have raised the potential for regulatory gaps as well as overlaps, thereby underlining the need for greater cooperation among various regulators.

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Currently, coordination among domestic regulators is occurring through the High Level Group on Capital Markets (HLGCM) comprising the RBI, SEBI, the IRDA and Finance Ministry. The HLGCM has set up two Standing Committees: one for regulatory coordination and the other for coordination in matters relating to the development of debt markets. The Committee meets periodically to exchange information and views. Besides, to address specific issues such as DvP system or asset securitization, the RBI and SEBI have been coordinating through the institution of working groups. The Group observes that there is scope to further strengthen the coordination efforts. There may be merit in formalizing the HLGCM by giving it a legal status. Besides, the HLGCM needs to meet more frequently and its functioning needs to be made more transparent. Also, a system needs to be devised to allow designated functionaries (not necessarily only at the top level) to share specified market information on a routine and automatic basis. As regards coordination with regulators in other countries, the RBI has put in place a system of exchange of need-based information in respect of international operations. However, the powers of SEBI to assist foreign regulators or to enter into MOUs or other cooperation arrangements are not explicitly provided by legislation, although SEBI has signed a MoU with the Securities Exchange Commission of the USA. Hence, the Group is of view that necessary legislative changes need to be made to enhance SEBI's scope in this regard. 2.4 Self-Regulation The SEBI Act provides for promotion and regulation of SROs (i.e., stock exchanges). The stock exchanges are empowered to make rules and regulations for their members and for regulating the conduct of respective members. However, self-regulation is not always effective, because the current ownership and governance structures of many stock exchanges allow scope for conflict of interest.10 These exchanges are owned and managed by members who enjoy exclusive trading rights. In the broker-owned exchanges, brokers elect their representatives to regulate activities of the exchange, including those of the brokers themselves. This raises fairness issues, because the members of stock exchange governing boards have access to valuable information about market participants. Elimination of such conflict of interest through demutualization, which implies separation of ownership of exchange from the right to trade on it, can promote fairness and reinforce investor protection.

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Further, the slow evolution of the Association of Mutual Funds of India (AMFI) as a SRO has meant continuation of substantial regulatory burden on SEBI. In this regard, the Group suggests that SEBI assist the AMFI to develop into a full-fledged SRO. Similarly, in money and government securities markets, Fixed Income Money Market and Derivatives Association of India (FIMMDA) and Primary Dealers Association of India (PDAI) are operating as industry level associations, who are gradually taking on the role of SROs. There is as yet no regulatory oversight of the RBI over these emerging SROs. However, to facilitate these associations to emerge as full-fledged SROs, the RBI is engaging them in a consultative process, which needs to be further intensified. On their part, to promote integrity of the markets, FIMMDA and PDAI need to establish a comprehensive code of conduct and best practices in securities transactions and also have a mechanism to enforce such codes. The RBI can play a supportive role here. 2.5 Prudential issues With a view to contain risk, secure market integrity and protect the interest of investors, the regulators have prescribed elaborate margining and capital adequacy standards. In addition, intra-day trading limit and exposure limits have been prescribed. Brokers are subject to various types of margins, viz., daily margins, marked-to-market margin, ad hoc margin and volatility margin. In case of excessive volatility or perceived higher risk, exchanges have been given the flexibility of imposing higher margins.11 However, one lacuna that continues relates to the absence of margin requirement for institutional trades. The Group recommends that this lacuna be addressed. 3. Legal Issues 3.1 Institution-specific regulations The legal framework constrains the RBI from exercising uniform powers vis-a-vis different groups of players, even though the activity regulated is the same because of a peculiar legal arrangement. The amended Securities Contract Regulation Act (SCRA) has conferred on the RBI the responsibility of regulation of Government securities and money markets, but not the necessary enforcement powers to regulate these markets. To regulate these markets, the RBI therefore resorts to its regulatory authority over the major participants in these markets such as banks, financial institutions and primary dealers through separate institution-specific legislation. With respect to banks, the RBI 59

has statutory powers of inspection, investigation, surveillance and enforcement under Banking Regulation Act, 1949. As regards financial institutions, the regulatory powers are available to the RBI under the RBI Act 1934. The RBI's regulatory powers over FIs are not as comprehensive as over banks. With regard to Primary Dealers, the RBI exercises regulatory powers on the basis of guidelines issued by RBI and MOUs signed between PDs and RBI on a contractual basis. This underlines the need for (a) the same legislation to include both regulatory responsibilities and the authority to carry them out and (b) the focus to shift from institution-specific regulation to market-specific regulation. 3.2 Multiplicity of Acts The problem of multiplicity of regulators, as referred to earlier, emerges from the existence of multiplicity of Acts governing securities market regulation. The legal framework comprises inter alia the SEBI Act, Securities Contract Regulation Act (SCRA), Indian Contracts Act, Companies Act, Public Debt Act, the RBI Act and the Banking Regulation Act. Some acts came into being to create regulatory institutions (SEBI Act and RBI Act), some to regulate contracts (SCRA and Indian Contracts Act) and yet others to regulate issue of government securities (Public Debt Act). Although the scope of the Acts is well defined, problems of interpretation have led to confusion. There is therefore a need to simplify and streamline the legal framework. In this context, the Group believes that consolidating the SCRA and the SEBI Act in line with the recommendations of the Dhanuka Committee, will be very helpful. 4. Market issues It is important to recognize the trade-off between over-regulation and high cost of compliance. Over-regulation may minimize market friction, but can potentially kill a market. To dilute this tradeoff, it is important to modernize the microstructure. (Microstructure relates to the manner in which a market is organized and the trading and post-trading technology the market adopts.) As regulations become more and more complex, certain regulatory objectives can be more easily attained through changes in microstructure rather than further addition to regulatory law. 4.1 Market Infrastructure 4.1.1 Screen-Based Trading System

60

As enunciated in Chapter II, the equities market has witnessed a quantum improvement in trading technology during the 1990s as it moved away from the open-outcry system of trading to a computer screen-based trading. The new technology has not only increased transparency in trading, but also facilitated the integration of different trading centers into a single trading platform. Permitting of internet trading has enabled investors across the globe to route orders through the internet for execution on the Indian stock exchanges. In contrast to the equities market, the government securities market and the market for money market instruments are largely negotiated markets. Although the NSE established a wholesale debt market segment for exchange trading, members generally use this segment only for reporting trades undertaken by them in the negotiated market, rather than trading on the exchange. 4.1.2 Rolling Settlement The stock exchanges in India have traditionally followed account period settlement system, which tends to distort the price discovery process since it combines the features of cash as well as futures markets. In contrast, the current international practice is predominantly rolling settlement12 on a T+3 basis, which introduces certainty of trades and reduces risk and delay in settlement. Beginning last year, compulsory rolling settlement has been introduced in a limited number of scrips on a T+5 basis. The slow progress toward the introduction of rolling settlement is on account of (a) lack of availability of electronic funds transfer across the country and (b) a general apprehension that such a move will reduce liquidity in the market. Even though a more effective payment and clearing system through a wider availability of EFT is important for switch-over to rolling settlement , the Group is of the view that even the current payment infrastructure can support a faster phasing-in. Further, the view that rolling settlement per se will drain liquidity from the market is not borne out by international experience. The Group also suggests that RBI and SEBI expedite their scrutiny of the recent recommendations made by the joint task force of IOSCO and BIS on securities settlement systems, for early implementation. 4.1.3 Depositories and dematerialization To ensure transferability of securities with speed, accuracy and security, the Depositories Act was passed in 1996, which provided for the establishment of securities depositories and allowed securities to be dematerialized. Following the legislation, two

61

depositories (NSDL and CDSL) have so far been established. Further, the compulsory dematerialization of shares for trading purpose has been introduced in a phased manner with the aim of synchronizing the settlement of trade and transfer of securities irrespective of geographical locations, and eliminating the ills associated with paperbased securities system such as delay in transfer, bad delivery, theft and forgery. Although the process of compulsory dematerialization is nearing completion, its full benefits have not been reaped because of slow progress in introduction of rolling settlement. With the appropriate infrastructure in place, there is now scope for taking further advantage of depositories to promote retailing of government securities. The RBI has taken a step in the right direction by allowing NSDL and CDSL to have a second SGL account for depository participants who in turn can hold in custody government securities on behalf of the final investors. This will facilitate holding of government securities in demat form. 4.1.4 Clearing Corporations The stock exchanges supervise the buying and selling activities of brokers, but financial settlements are guaranteed by a clearing corporation, which creates a settlement guarantee fund to ensure settlement of trades irrespective of default by trading members. This arrangement, by nearly eliminating counterparty risk, has given a tremendous boost to investor confidence in India. Further, in contrast to the current Indian system of each stock exchange having its own clearing corporation or clearing bank, it may be appropriate to have perhaps only two clearing corporations in line with international practice, which would support many stock exchanges. Such an arrangement would allow the clearing agency to have an overall view of gross exposures of traders across the stock exchanges and would be much better geared to manage risks. 4.1.5 Delivery vs. Payment In the government securities market, DvP was introduced in 1994 for transactions put through the SGL accounts maintained in RBIs Public Debt Office (PDO), which has greatly helped in reducing the principal risk. The Special Fund Facility introduced last year has to a certain extent reduced risk of non-settlement due to gridlock. The

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Advisory Group on Payments and Settlement Systems (Headed by Shri M.G. Bhide) has made some suggestions for improving the payments and settlement systems and this Group would concur with these suggestions. In the equity market there is currently no DvP. The Group notes that SEBI and RBI are jointly trying to evolve a mechanism, which would seamlessly link the depositories with the payment system through the clearing corporation/ clearing agency to ensure DvP. The Group recommends that establishment of such a mechanism is expedited. 4.1.6 Straight-through Processing: Straight-through Processing (STP) involves verification through Internet of (i) the selling client's DP account for security balances following a sell order; and (ii) the buying clients' bank accounts for cash balances following a buy order. This system can eliminate nearly all settlement and payment risk. The significant changes taking place in technological and trading environment worldwide are driving the global securities industry towards STP. However, at present, all the pre-requisites for STP are not yet available in India. While automated trading and dematerialization have been largely achieved, the limited availability of EFT and absence of RTGS have constrained the introduction of STP. These constraints are likely to be eliminated in the near future.

4.2 Primary Issues and Transparency 4.2.1 Private Placement Market High costs of regulatory compliance associated with public issues of debt have made issuers prefer the private placement market. The private placement market has registered tremendous growth in the last few years. In 1999/2000, private placements accounted for 84 percent of total resources mobilized by the corporate sector. Preponderance of private placement can potentially strip the market of its ability to discipline issuers and thereby enhance systemic risk. Once investors have used the private placement route, they cannot signal their changing evaluation of the business prospects of the issuers, because there is no market in which they can sell. The dominance of private placement in primary issue market possibly reflects an absence of regulatory level playing field in the sense that public issues may be over-regulated

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while private placements could be under-regulated. Some recent initiatives such as the amendment to the Companies Act, making it mandatory for companies issuing debentures through private placement route to set up debenture redemption reserves as in the case of public issues, can partially restore the balance. 13 These initiatives need to be complemented by simultaneous efforts to ease some of the regulations governing public issues. 4.2.2 Corporate disclosure With a view to enabling investors to take informed decisions as well as to promote transparency, regulations have over the years become more stringent by requiring disclosure to be more frequent and wider in scope. Currently, disclosure in India extends to material having a bearing on the price of a security, and entities who either have significant interest in a company or seek management control. A company offering securities is required to make a public disclosure of all relevant information through its offer documents. After a security is issued to the public and subsequently listed on a stock exchange, the issuing company is required to make continuous disclosures, including through publication of yearly audited balance sheets and quarterly un-audited financial results. Moreover, the disclosure of material information, which could have a bearing on the performance of the company, has to be made available to the public immediately. Among the drawbacks, the timing and contents of disclosure of material events that impact prices are not unambiguously specified and followed. Recently, it has been decided that companies would be required to make decisions regarding dividend bonus and rights announcements or any other material event within 15 minutes of the conclusion of the board meeting where the decisions are taken. In terms of contents of disclosure, the following initiatives are necessary: (i) group company disclosures may be limited to top 5 companies by market capitalization or turnover, to avoid cumbersome exercise of gathering information from all companies falling under the definition of promoter group; and (ii) risk factors need to be given in greater detail as per international practices, although management perceptions of risks need not be given.

4.2.3 Transparency in the debt market 64

As regards transparency in trading, the debt market is lagging behind the equity market. The cash market in debt securities throughout the world prefers to operate through negotiated deals either through telephone or an electronic dealing system like Bloomberg. This is because unlike the equity market, the bond market participants are generally wholesale institutional investors who put in large deals at a time, which may not always be possible through the screen based order driven system. It is only in the futures market that the principles of anonymity, price time priority, nationwide market and settlement guarantee are known to work. As stated earlier, wholesale institutional investors have yet to show adequate inclination to use the anonymous order matching system for executing their debt securities transactions. Under the circumstances, SEBI has taken initiatives to foster transparency through regulatory fiat by prohibiting negotiated deals on the exchanges in respect of listed corporate debt securities and prescribing that all such trades would be executed on the basis of price and order matching mechanism of stock exchanges as in the case of equities. However, negotiated deals are still continuing, albeit outside the exchange, and there is no market dissemination of information on such transactions. Since almost all deals in the government securities market are settled through the Subsidiary General Ledger (SGL), the daily dissemination of such information (albeit with a one day lag) has proved to be important in the price discovery process.) This, together with the data available from the NSE's Wholesale Debt Market (WDM) segment has contributed to greater transparency in the secondary market for government securities. Transparency will be further boosted by the current initiative to put in place an electronic negotiated dealing system for the SGL participants, which will disseminate information on a near real time basis. 5. Mutual Funds SEBI is the principal regulator of the mutual fund industry. Mutual funds in India are constituted in the form of trusts. The funds sponsor executes the trust deed, which outlines the liabilities and obligations of the trustees in relation to the unitholders. The day-to-day operations of the fund are carried out by the asset management company (AMC).
14

The board of trustees oversees the funds activities and enters into a

management agreement with the AMC.

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SEBI has put in place standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme. Eligibility criteria have been set in terms of net worth, track record and internal management procedure. The regulations lay down disclosure requirements, procedures for calculating and declaring net asset values (NAV) of mutual fund schemes, accounting standards and a code for advertisements. Regulations are also prescribed to ensure arms-length relationship between the trustees and the AMC. SEBI is responsible not only for registration and authorization of schemes, but also for inspection of registered mutual funds and remedial action against any regulatory infraction. Disclosure standards of mutual funds have been under regulatory focus. SEBI requires disclosure to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investors interest in the scheme. Regulations have prescribed specified format for offer documents as well as a disclosed basis for asset valuation and the pricing and the redemption of units in a mutual fund. With a view to make unitholders aware of the securities in which the funds have been invested by the mutual fund, it has been made mandatory for mutual funds to send to all unitholders a complete statement of the scheme portfolio on a half-yearly basis. The mutual fund industry has played a significant role in mobilization of domestic savings. Substantial progress has been made in strengthening regulation and improving transparency in the mutual fund industry through the Mutual Funds Regulations of 1996 and subsequent amendments. However, a number of challenges still remain, which are outlined below. The AXIS is the largest mutual fund in India, which was set up by an Act of the Parliament (the AXIS Act, 1963). As such it is bound by the AXIS Act and not by mutual funds regulations, although under a voluntary arrangement, SEBI oversees all the investment schemes launched by AXIS since 1994. The organizational structure of the AXIS differs from other mutual funds in two additional ways. First, there is no separate AMC with an independent Board of Directors. Second, there has been no separation of management groups managing schemes launched prior to 1994; regulations apply only to schemes established after 1994. Currently, there are four AXIS schemes--US-64, ULIP-71, CRTS-81 and CCCF-93--which do not comply with SEBI regulations. The US-64, the flagship scheme of the AXIS and the largest scheme in India, does not have a disclosed basis for asset valuation or pricing of units although

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it has plans to move towards this. 15 Bringing the AXIS under SEBI's purview as well as the introduction and implementation of international accounting principles across the mutual fund industry will help promote fairness and stability of the sector. Currently, regulations appropriately require that the sale and redemption of funds should be based on their NAVs, which have to be computed according to specified rules. However, there is scope for further improvement in one significant area: AMCs still have considerable room for discretion in adopting valuation of thinly traded or nontraded securities, as regulations specify only broad guidelines. There is a need to reduce the AMCs' discretion in this regard. Finally, a couple of issues relating to prudential norms and corporate governance need to be examined. Regulations provide that a fund's ownership in any single company should not exceed 10 percent of a company's voting shares, although there is no upper limit on the total holdings of voting and non-voting shares of any single company. Further, there appears to be no restriction on corporate investment in a mutual fund's units.

IOSCO Guiding Principles This annexure sets out 30 principles of securities regulation, which are based upon three objectives of securities regulation. These are:
o o o

The protection of investors;16 Ensuring that markets are fair, efficient and transparent; The reduction of systemic risk.

The 30 principles need to be practically implemented under the relevant legal framework to achieve the objectives of regulation described above. The principles are grouped into eight categories. A. Principles Relating to the Regulator The responsibilities of the regulator should be clear and objectively stated.

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 The regulator should be operationally independent and accountable in the exercise of its functions and powers The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers. The regulator should adopt clear and consistent regulatory processes. The staff of the regulator should observe the highest professional standards including appropriate standards of confidentiality. B. Principles for SelfRegulation 6 The regulatory regime should make appropriate use of SelfRegulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities. C. Principles for the Enforcement of Securities Regulation The regulator should have comprehensive inspection, investigation and surveillance powers. The regulator should have comprehensive enforcement powers. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program. D. Principles for Cooperation in Regulation The regulator should have authority to share both public and nonpublic information with domestic and foreign counterparts.

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 Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers. E. Principles for Issuers There should be full, timely and accurate disclosure of financial results and other information that is material to investors' decisions. Holders of securities in a company should be treated in a fair and equitable manner. Accounting and auditing standards should be of a high and internationally acceptable quality. F. Principles for Collective Investment Schemes The regulatory system should set standards for the licensing and the regulation of those who wish to market or operate a collective investment scheme. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor's interest in the scheme. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme. G. Principles for Market Intermediaries Regulation should provide for minimum entry standards for market intermediaries.

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 There should be initial and ongoing capital and other prudential requirements for market intermediaries. 23 Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients and under which management of the intermediary accepts primary responsibility for these matters. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk. H. Principles for the Secondary Market The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants. Regulation should promote transparency of trading. Regulation should be designed to detect and deter manipulation and other unfair trading practices. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption. The system for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that it is fair, effective and efficient and that it reduces systemic risk.

The Report is subject to comments from SEBI.

1

The Bombay Stock Exchange is over a hundred years old.

70

During the 1990s, this meant that public sector mutual funds and other financial

entities supported the government's divestment program.

3

A member places an order on the computer stating the quantities of securities and the

price at which he wants to transact and the order is executed when it finds a matching sale or buy order from a counter-party. It is possible for market participants to see the full market, which has made the market more transparent.
4

Earlier, brokers routinely inflated (deflated) the prices at which they bought (sold)

shares for their clients, thus earning a hidden margin.

5

Government debt constitutes about three-fourth of the total outstanding debt. International Organization of Securities Commissions, 1998, Objectives and Principles

of Securities Regulation, September.

7

For example, the regulations framed by the SEBI under the SEBI Act are required to

be laid before each house of the Parliament, and consequently published in the Gazette of India, thereby facilitating a clear and consistent regulatory process.
8 *

This division oversees the surveillance activities of the stock exchanges. Under implementation: The Finance Minister has announced on March 13, 2001 in the

Parliament that the Government intends to propose legislative changes to "further strengthen the provisions in the SEBI Act, 1992 to ensure investor protection".
9

To give an example of powers of disgorgement, the US Securities Exchange

Commission can penalize the guilty by up to three times its profit made or loss avoided through a regulatory violation. Incidentally, the RBI has disgorgement powers.
10

Most of the exchanges are incorporated as "Association of Persons", possibly because Under implementation: On March 13, 2001 the Finance Minister announced in the

of the tax benefits and ease of compliance that such a form entails.
*

Parliament that administrative steps would be taken, and legislative changes would be proposed, if required, in order to corporatize stock exchanges by which ownership, management and trading membership would be segregated from each other. The process is currently under way.
11

In case of primary and satellite dealers in government securities, the RBI has

prescribed detailed prudential guidelines.

12

Unless the funds move quickly--that is on the same day or at best the next day--

traders will face liquidity problem. Hence electronic funds transfer is critical to the introduction of rolling settlement. Currently, EFT facility is available in 14 centers. The 71

RBI is mandated to facilitate electronic movement of funds through the entire banking system within a year.
*

Under implementation: SEBI has since decided to extend rolling settlement to more

than 200 stocks with relatively high liquidity on a nationwide basis from July 2, 2001. These shares, which account for over 95 percent of daily market transactions, are to be traded only in rolling settlement mode. Meanwhile, on April 26, 2001 a Sebi group on rolling settlement has recommended that from July 2, 2001 the approved deferral products including Automated Lending and Borrowing Mechanism, Borrowing and Lending of Securities System and Continuous Net Settlement cease to be available for all the scrips and that Sebi and the exchanges should work towards introduction of individual stock derivatives--such as options and futures of selected stocks--which would substitute the hedging functions currently being performed by the above deferral products.
13

Further, issuance to more than 50 individuals will now deemed to be a public issue.

With this, it has become more difficult to disguise public issues as private placement.
14

The fund's sponsor must contribute at least 40 percent of the net worth of the AMC. The US-64 has a corpus of about Rs.20, 000 crore, about a fifth of the total assets

15

under management of all mutual funds. Following financial trouble in the scheme, the AXIS constituted a committee (the Deepak Parekh Committee). The recommendations of the committee are being implemented to restructure the US-64. Research Methodology Research Hypothesis: The concept of mutual funds in India dates back to the year 1963. The era between 1963 and 1987 marked the existance of only one mutual fund company in India with Rs. 67bn assets under management (AUM), by the end of its monopoly era, the Unit Trust of India (AXIS). By the end of the 80s decade, few other mutual fund companies in India took their position in mutual fund market. The new entries of mutual fund companies in India were SBI Mutual Fund, Canbank Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund. The succeeding decade showed a new horizon in indian mutual fund industry. By the end of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector funds started penetrating the fund families. In the same year the first Mutual Fund

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Regulations came into existance with re-registering all mutual funds except AXIS. The regulations were further given a revised shape in 1996. Kothari Pioneer was the first private sector mutual fund company in India which has now merged with Franklin Templeton. Just after ten years with private sector players penetration, the total assets rose up to Rs. 1218.05 bn. Today there are 33 mutual fund companies in India. Major Mutual Fund Companies in India ABN AMRO Mutual Fund ABN AMRO Mutual Fund was setup on April 15, 2007 with ABN AMRO Trustee (India) Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO Asset Management (India) Ltd. was incorporated on November 4, 2006. Deutsche Bank A G is the custodian of ABN AMRO Mutual Fund. Birla Sun Life Mutual Fund Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life Financial. Sun Life Financial is a golbal organisation evolved in 1871 and is being represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart from India. Birla Sun Life Mutual Fund follows a conservative long-term approach to investment. Recently it crossed AUM of Rs. 10,000 crores. Bank of Baroda Mutual Fund (BOB Mutual Fund) Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30, 1992 under the sponsorship of Bank of Baroda. BOB Asset Management Company Limited is the AMC of BOB Mutual Fund and was incorporated on November 5, 1992. Deutsche Bank AG is the custodian. HDFC Mutual Fund HDFC Mutual Fund was setup on June 30, 2000 with two sponsorers nemely Housing Development Finance Corporation Limited and Standard Life Investments Limited. HSBC Mutual Fund HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital Markets (India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fund acts as the Trustee Company of HSBC Mutual Fund. ING Vysya Mutual Fund

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ING Vysya Mutual Fund was setup on February 11, 1999 with the same named Trustee Company. It is a joint venture of Vysya and ING. The AMC, ING Investment Management (India) Pvt. Ltd. was incorporated on April 6, 1998. Prudential ICICI Mutual Fund The mutual fund of ICICI is a joint venture with Prudential Plc. of America, one of the largest life insurance companies in the US of A. Prudential ICICI Mutual Fund was setup on 13th of October, 1993 with two sponsorers, Prudential Plc. and ICICI Ltd. The Trustee Company formed is Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI Asset Management Company Limited incorporated on 22nd of June, 1993. Sahara Mutual Fund Sahara Mutual Fund was set up on July 18, 1996 with Sahara India Financial Corporation Ltd. as the sponsor. Sahara Asset Management Company Private Limited incorporated on August 31, 1995 works as the AMC of Sahara Mutual Fund. The paidup capital of the AMC stands at Rs 25.8 crore. State Bank of India Mutual Fund State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch offshor fund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately. Today it is the largest Bank sponsored Mutual Fund in India. They have already launched 35 Schemes out of which 15 have already yielded handsome returns to investors. State Bank of India Mutual Fund has more than Rs. 5,500 Crores as AUM. Now it has an investor base of over 8 Lakhs spread over 18 schemes. Tata Mutual Fund Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsorers for Tata Mutual Fund are Tata Sons Ltd., and Tata Investment Corporation Ltd. The investment manager is Tata Asset Management Limited and its Tata Trustee Company Pvt. Limited. Tata Asset Management Limited's is one of the fastest in the country with more than Rs. 7,703 crores (as on April 30, 2007) of AUM.

Kotak Mahindra Mutual Fund Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It is presently having more than 1,99,818 investors in its various schemes. KMAMC started its operations in December 1998. Kotak Mahindra Mutual Fund offers schemes 74

catering to investors with varying risk - return profiles. It was the first company to launch dedicated gilt scheme investing only in government securities. Unit Trust of India Mutual Fund AXIS Asset Management Company Private Limited, established in Jan 14, 2006, manages the AXIS Mutual Fund with the support of AXIS Trustee Company Privete Limited. AXIS Asset Management Company presently manages a corpus of over Rs.20000 Crore. The sponsorers of AXIS Mutual Fund are Bank of Baroda (BOB), Punjab National Bank (PNB), State Bank of India (SBI), and Life Insurance Corporation of India (LIC). The schemes of AXIS Mutual Fund are Liquid Funds, Income Funds, Asset Management Funds, Index Funds, Equity Funds and Balance Funds. Reliance Mutual Fund Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882. The sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is the Trustee. It was registered on June 30, 1995 as Reliance Capital Mutual Fund which was changed on March 11, 2007. Reliance Mutual Fund was formed for launching of various schemes under which units are issued to the Public with a view to contribute to the capital market and to provide investors the opportunities to make investments in diversified securities.

Standard Chartered Mutual Fund Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored by Standard Chartered Bank. The Trustee is Standard Chartered Trustee Company Pvt. Ltd. Standard Chartered Asset Management Company Pvt. Ltd. is the AMC which was incorporated with SEBI on December 20,1999. Franklin Templeton India Mutual Fund The group, Frnaklin Templeton Investments is a California (USA) based company with a global AUM of US$ 409.2 bn. (as of April 30, 2007). It is one of the largest financial services groups in the world. Investors can buy or sell the Mutual Fund through their financial advisor or through mail or through their website. They have Open end Diversified Equity schemes, Open end Sector Equity schemes, Open end Hybrid schemes, Open end Tax Saving schemes, Open end Income and Liquid schemes, Closed end Income schemes and Open end Fund of Funds schemes to offer.

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Morgan Stanley Mutual Fund India Morgan Stanley is a worldwide financial services company and its leading in the market in securities, investmenty management and credit services. Morgan Stanley Investment Management (MISM) was established in the year 1975. It provides customized asset management services and products to governments, corporations, pension funds and non-profit organisations. Its services are also extended to high net worth individuals and retail investors. In India it is known as Morgan Stanley Investment Management Private Limited (MSIM India) and its AMC is Morgan Stanley Mutual Fund (MSMF). This is the first close end diversified equity scheme serving the needs of Indian retail investors focussing on a long-term capital appreciation. Escorts Mutual Fund Escorts Mutual Fund was setup on April 15, 1996 with Excorts Finance Limited as its sponsor. The Trustee Company is Escorts Investment Trust Limited. Its AMC was incorporated on December 1, 1995 with the name Escorts Asset Management Limited. Alliance Capital Mutual Fund Alliance Capital Mutual Fund was setup on December 30, 1994 with Alliance Capital Management Corp. of Delaware (USA) as sponsorer. The Trustee is ACAM Trust Company Pvt. Ltd. and AMC, the Alliance Capital Asset Management India (Pvt) Ltd. with the corporate office in Mumbai.

Benchmark Mutual Fund Benchmark Mutual Fund was setup on June 12, 2001 with Niche Financial Services Pvt. Ltd. as the sponsorer and Benchmark Trustee Company Pvt. Ltd. as the Trustee Company. Incorporated on October 16, 2000 and headquartered in Mumbai, Benchmark Asset Management Company Pvt. Ltd. is the AMC.

Canbank Mutual Fund Canbank Mutual Fund was setup on December 19, 1987 with Canara Bank acting as the sponsor. Canbank Investment Management Services Ltd. incorporated on March 2, 1993 is the AMC. The Corporate Office of the AMC is in Mumbai.

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Chola Mutual Fund Chola Mutual Fund under the sponsorship of Cholamandalam Investment & Finance Company Ltd. was setup on January 3, 1997. Cholamandalam Trustee Co. Ltd. is the Trustee Company and AMC is Cholamandalam AMC Limited. LIC Mutual Fund Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. It contributed Rs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund was constituted as a Trust in accordance with the provisions of the Indian Trust Act, 1882. The Company started its business on 29th April 1994. The Trustees of LIC Mutual Fund have appointed Jeevan Bima Sahayog Asset Management Company Ltd as the Investment Managers for LIC Mutual Fund. GIC Mutual Fund GIC Mutual Fund, sponsored by General Insurance Corporation of India (GIC), a Government of India undertaking and the four Public Sector General Insurance Companies, viz. National Insurance Co. Ltd (NIC), The New India Assurance Co. Ltd. (NIA), The Oriental Insurance Co. Ltd (OIC) and United India Insurance Co. Ltd. (UII) and is constituted as a Trust in accordance with the provisions of the Indian Trusts Act, 1882. Analysis of Data: AXIS Mutual Fund has come into existence with effect from 1st February 2006. AXIS Asset Management Company presently manages 42 NAV based domestic SEBI compliant schemes and 4 Offshore funds having a corpus Rs.15,243 crore from about 10 million investor accounts. AXIS Mutual Fund has a track record of managing a variety of schemes catering to the needs of every class of citizenry over a period of 39 years. It has a nationwide network consisting 54 branch offices, 3 AXIS Financial Centres (UFCs) and representative offices in Dubai and London. Ms. Anita Madan, Fund Manager, has over 17 years experience in the MF industry. Her qualifications include CIIA from London, CFA, CAIIB and Msc (Maths). From October 2001, she has been managing the DFM Income schemes. Speaking with Anil Mascarenhas and Sanket D Padhye of India Infoline, Ms Anita Madan says profits may be booked at regular intervals and investors can look to reenter at lower levels again depending on their investment needs and investment horizon. 77

Could you briefly tell us about the funds you manage? The funds managed include AXIS Unit Linked Insurance Plan (ULIP) which has a corpus over Rs4,100 crores. This is an insurance cum tax benefit cum savings plan. The second is the Charitable and Religious Trust Societies (CRTS-81) with a corpus of over Rs380 crores. Both are balanced funds. ULIP has an equity exposure of cap of 40% while CRTS has an equity cap of 30%. ULIP is the largest balanced fund in the industry and is the third largest fund in the industry. In terms of returns it is one of the top performing funds. It is benchmarked against CRISIL MIP Blended index. What are your views on the ongoing rally in the stock markets? The foundation for the current rally, which we are witnessing, was laid a number of years ago. Corporates have undertaken various prudential measures such as cost reduction, debt restructuring, backward integration, exploration of new markets and exiting from non-synergistic diversification, all of which are now being reflected in their re-rating in the stock markets. Outsourcing by companies is another important factor, which was initially limited to the IT sector. With India becoming a competitive hub, outsourcing is witnessed across other sectors such as auto and pharma sectors. Therefore, the rally should continue as there is still more value in the markets today, of course baring unforeseen events. There is still lot of value across sectors as is seen by the depth and breadth in the markets. Do you see any cause for concern in this sustained rally? Yes. As in any rally, penny stocks have also been moving up, which is a cause of concern. The retail investors should avoid taking exposure in such stocks without being fully aware of the fundamentals and the nature of business of these stocks. The risks in the stock markets are best handled by professionally managed mutual funds. Although investors are getting more savvy and systematic investment is advisable for all classes of investors, which will give adequate returns. Investors should go in for investment over regular periods of time depending on their investment horizon and investment needs. What is your view on the investigations being carried out by SEBI?

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The rally, which we are witnessing today, started almost 12 months ago. The rally was mainly in small cap and mid cap stocks but now it has moved to large cap stocks. In any rally there may be a few stocks in which unwarranted activity may be witnessed and these could come under the lens and rightly so as the intention is protection of the investors. As far as we are concerned, the fund invests only based on values and fundamentals. The fund is very firm on following ethics and we do not adopt any unethical practice in fund management. What is your investment philosophy? Our investment philosophy is guided by our investors. Both ULIP and CRTS investors are long term investors who look for long term growth and not short-term momentum. We follow dynamic asset allocation approach. The fund follows both top-down as well as bottom-up approach. Top-down is for the long term while the bottom-up approach is for the short-term investments and trading profits. Which are the sectors you are bullish and bearish about? We are bullish about all sectors and not bearish on any, as almost all sectors are looking good. Given the improving sentiment and re-rating of Indian stocks coupled with the agriculture driven growth expected during the year we expect most sectors to perform well. The concerns lurking on the tech front are expected to get resolved sooner than later and we will see it back in action soon. The toppers of today become laggards of tomorrow and vice-versa. What are your views on the steel and pharmaceutical sectors? Steel sector as such should be doing well although some stocks have run too much too soon. So there is some worry there. But there is still a lot of value in many of the steel stocks. There is demand from the export market. China is a big market and domestic consumption has been going up. On the pharmaceutical sector we are bullish on the Indian pharmaceutical sectors and MNC pharma companies could get re-rated in the near future. What risk control measures does the scheme follow? How do they apply to the stock and stock exposures?

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AXISMF has a full-fledged risk management and control department which monitor risks on a continuous basis across asset classed o fall schemes. SEBI has already laid down prudential guidelines for containing exposures. The SEBI guidelines are monitored by a full-fledged compliance department, which alert schemes even before violations can occur requiring remedial action. In addition to all of the above the front office dealing system has been parameterised for all quantifiable risk controls. Each fund management team has their own internal risk assessment systems by which the sectoral and stock risks are monitored. Each investment is therefore monitored periodically at the scheme level for appropriate action the emphasis being on pro-active management of perceived risks. What are your forecasts on the interest 6-months down the line? There has been a lot of talk about hardening of interest rates but looking at the fundamentals and data, we feel that softening of interest rates would continue. AXIS has so many schemes. So how do you go about selling your schemes? Each scheme has a unique selling proposition and are niche kind of products like ULIP and CRTS. The fund has no problems selling these products. Possibly, there is a conflict in a diversified equity fund and the fund has been working towards positioning each of these equity schemes. All the others are distinct products catering to almost every member of the family and at every stage of life. What impact would RBI OMO amounting to Rs120bn and state government bond auction of Rs80bn have on liquidity? There is ample liquidity in the system today and RBI is expected to continue with its soft rate bias. Concerns have been expressed over the flattening of yield curves which would probably see the yields structure change slightly but it would be very short term. We expect the soft bias to continue. What are the factors that would affect returns from debt funds in the future? It would depend upon the interest rate movements. If the interest rates go down, we would see capital appreciation and the returns are safeguarded. In case of adverse movements, we have options like interest rate futures so that we can safeguard our returns. 80

With the equities markets doing well is there any option of increasing your exposure to equity? We are comfortable with the current position and we are outperforming the Sensex. What impact would the resurgent India bonds (RIB) repayment of 4.1 bn $ have on liquidity and exchange rate? The exchange rate would not be affected much as we are comfortable on the reserve position and in fact there has been a gain as rupee has been appreciating. So there wont be a major impact either on the liquidity or the exchange rate as the repayment has been well planned. Moreover we expect 30-50% of the money to stay on. Any message for the retail investors who would want to enter mutual funds as investment option? I recommend systematic investment through select mutual fund products based on the investment needs and investment horizons. Profits may be booked at regular intervals and investors can look at re-entering at lower levels again depending on their investment needs and investment horizon. Schemes like AXIS ULIP and AXIS CRTS meet the needs of the investors through growth over the long term and regular income respectively.

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SEBI guidelines regarding AXIS Mutual fund

SEBI has done an analysis of the unit holding pattern of mutual funds industry as on March 31, 2006. The details are given below:A] MUTUAL FUNDS INDUSTRY UNITHOLING PATTERN

From the data collected from the mutual funds, the following has been observed i) As on March 31, 2006 there are a total number of 1.6 crore investors accounts (it is likely

that there may be more than one folio of an investor which might have been counted more than once and actual number of investors would be less) holding units of Rs. 79,601 crore. Out of this total number of investors accounts, 1.56 crore are individual investors accounts, accounting for 97.42% of the total number of investors accounts and contribute Rs.32,691 crore which is 41.07% of the total net assets. The total number of investors account is lower in comparison with the total number of investors accounts as on March 31, 2002 as the above data includes information only of AXIS Mutual Fund (which is registered with SEBI on January 14, 2006). The data of the Specified Undertaking of AXIS (not registered with SEBI) is not available with us. ii) Corporates and institutions who form only 2.04% of the total number of investors

accounts in the mutual funds industry, contribute a sizeable amount of Rs.45,470 crore which is 57.12% of the total net assets in the mutual funds industry. iii) The NRIs/OCBs and FIIs constitute a very small percentage of investors accounts

(0.54%) and contribute Rs.1440.18crore (1.81%) of net assets. The details of unitholding pattern are given in the following table: UNITHOLDING PATTERN OF MUTUAL FUNDS INDUSTRY

CATEGORY

NUMBER OF % TO TOTAL NET INVESTORS ACCOUNTS INVESTORS ACCOUNTS 97.42 0.53 0.01 2.04 VALUE

ASSET % ASSET VALUE

TO

TOTAL NET

(RS.CRORE) 32,691.12 878.51 561.67 45,469.53

Individuals NRIs/OCBs FIIs Corporates/

15,557,506 84,311 2,058 324,979

41.07 1.10 0.71 57.12

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Institutions/ Others TOTAL 15,968,854 100.00 79,600.83 100.00

* Note: Erstwhile AXIS has been divided into AXIS Mutual Fund (registered with SEBI) and the Specified Undertaking of AXIS (not registered with SEBI). Above data contains information only of AXIS Mutual Fund. B] UNITHOLDING PATTERN PRIVATE/PUBLIC SECTOR MUTUAL FUNDS From the analysis of data on unitholding pattern of Private Sector Mutual Funds and Public Sector Mutual Funds, the following observations are made:1. Out of a total of 1.6 crore investors accounts in the mutual funds industry, (it is likely that

there may be more than one folio of an investor which might have been counted more than once and therefore actual number of investors may be less) 42.93 lakh investors accounts i.e 27% of the total investors accounts are in private sector mutual funds whereas the 1.17 crore investors accounts ie.73% are with the public sector mutual funds which includes AXIS Mutual Fund. However, the private sector mutual funds manage 71.2% of the net assets whereas the public sector mutual funds own only 28.8% of the assets 2. AXIS Mutual Fund has 97. 12 lakh investors accounts which is 60.82% of the total

investors accounts in the mutual funds industry. Details of unitholding pattern of private sector and public sector mutual funds are given in the following tables:

UNITHOLDING PATTERN OF PRIVATE SECTOR MFS CATEGORY NUMBER OF % TO TOTAL NET INVESTORS ACCOUNTS INVESTORS ACCOUNTS VALUE (RS.CRORE) ASSET % ASSET VALUE Individuals NRIs/OCBs FIIs Corporates/ 4001841 38416 1317 250972 93.23 0.89 0.03 5.85 17956.48 723.02 528.51 37465.91 31.68 1.28 0.93 66.11 TO

TOTAL NET

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Institutions/ Others TOTAL 4292546 100.00 56673.92 100.00

UNITHOLDING PATTERN OF PUBLIC SECTOR MFS (INCLUDING AXIS MF *) CATEGORY NUMBER OF % TO TOTAL NET INVESTORS ACCOUNTS INVESTORS ACCOUNTS VALUE (RS.CRORE) ASSET % ASSET VALUE Individuals NRIs/OCBs FIIs Corporates/ Institutions/ Others TOTAL 74007 11676308 0.63 100.00 8003.62 22926.91 34.91 100.00 11,555,665 45895 741 98.97 0.39 0.01 14734.64 155.49 33.16 64.27 0.68 0.14 TO

TOTAL NET

* Note: Erstwhile AXIS has been divided into AXIS Mutual Fund (registered with SEBI) and the Specified Undertaking of AXIS (not registered with SEBI). Above data contains information only of AXIS Mutual Fund. Risk Factors Mutual Funds and securities investments are subject to market risks and there can be no assurance or guarantee that the Schemes objectives will be achieved. As with any investment in securities, the Net Asset Value of Units issued under the Schemes may go up or down depending on the various factors and forces affecting the capital market. Past performance of the Sponsors/ AMC/ Mutual Fund/ Schemes and its affiliates do not indicate the future performance of the Schemes of the Mutual Fund. The Sponsors are not responsible or liable for any loss or shortfall resulting from the operations of the Schemes beyond their contribution of Rs.10,000/- each made by them towards setting of the Mutual Fund The Names of the Schemes do not in any manner indicate either the quality of the Schemes or their future prospects and returns. Investors in the Schemes are not being offered any guarantee / assured returns. Please read the Offer Documents carefully before investing. 84

Statutory Details In terms of The Unit Trust of India (Transfer of Undertaking and Repeal) Act 2002 (Act), the assets and liabilities of the erstwhile Unit Trust of India have been bifurcated into two parts the specified undertaking and the specified company. The Administrator of the Specified Undertaking of The Unit Trust of India comprises of US 64 and the assured return schemes (most of which have since been converted into tax free bonds, the present investment is guaranteed by the Govt. of India) . The Specified Company has been set up as a mutual fund viz. AXIS MF, comprising of all net asset value based schemes. AXIS MF has been structured in accordance with SEBI (Mutual Funds) Regulations, 1996 The mutual fund was registered with SEBI on January 14, 2006 under Registration Code MF/048/03/01. SEBI okays Fidelity plans Fidelity Investments has received permission from SEBI to launch equity funds in India. Fidelity has already filed a draft prospectus with SEBI for its maiden equity fund, Fidelity Equity. The proposed fund will invest across sectors. The portfolio will comprise 60-80 stocks. The fund will ordinarily invest up to 95 per cent of its assets in equities, but may invest up to 20 per cent in money market instruments. SBI Mutual Fund has launched a mid-cap fund, Magnum MidCap Fund. It will invest in stocks with a market capitalisation of Rs 200-2,000 crore. The minimum investment amount is Rs 5,000. The fund offers dividend and growth options. The offer closes on March 17. Principal Mutual has declared dividend of 100 per cent on Principal Resurgent India Equity Fund. The record date is February 24. Sundaram Mutual has declared dividends of 20 per cent each on Sundaram Select Focus and Sundaram Growth. The record dates are March 4 and March 11 respectively. AXIS Mutual Fund has declared a maiden dividend of 12 per cent for AXIS Basic Industries Fund and a dividend of 25 per cent for AXIS Growth and Value Fund. The record date for both the dividend payments is March 10. The fund house has also declared a dividend of 18 per cent for AXIS Balanced Fund. The record date is March 17.

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 Franklin Templeton Mutual Fund has proposed a dividend for Franklin India Taxshield. The record date is March 18. HDFC Mutual proposes to declare dividend on HDFC Prudence and HDFC

Balanced Fund. The record date for the dividend will be March 18. Franklin Templeton Mutual has mopped up Rs 1,950 crore from the initial offering of Franklin Flexicap. This is the largest amount mobilised by any open-end fund IPO. The fund will be open for an ongoing basis from March 7. SEBI's new checks and balances S. Vaidya Nathan GILT Funds, or G-Sec Funds, which invest in Government of India securities, have steadily gained in popularity in the last two years. The Securities and Exchange Board of India has now issued new guidelines they should follow to provide for better checks and balances. The following are the salient features of the new requirements: Public debt offices of the RBI will issue monthly statements to mutual funds maintaining SGL/CSGL accounts. Mutual funds have to reconcile their balances with the monthly RBI reports. Internal audit, continuous checks by auditors and reports to audit committees form part of the requirements. The same report must also be placed before the boards of the asset management company and trustee company/ Mutual funds will have to submit a compliance certificate to the RBI on a quarterly basis, indicating adherence to these prescribed norms. Alliance Capital Advisor: Alliance Capital Management Holding LLP has appointed Blackstone Group LP to advise it on its Indian operations. The latter will look at strategic options for the mutual fund business. There have been indications that Alliance may want to wind up its mutual fund operations in India.

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Franklin Templeton International Fund: Templeton Mutual Fund is to launch Franklin India International Fund. This open-end fund will invest in foreign securities. The scheme will invest in Franklin US Government Fund, which has a track record of more than 10 years and an asset base of $2.5 billion. The initial offering period is between December 2 and 20. The minimum investment amount is Rs 25,000 and multiples of Rs 1,000 thereafter. There is no entry load during this period. Templeton MIP dividend: Templeton Mutual Fund has declared a dividend of 0.75 per cent for the Monthly Dividend Option of the Templeton Monthly Income Plan. The dividend is for 31 days and the record date is November 11.

Dundee dividend: Dundee Mutual Fund has announced monthly dividend of 1 per cent for Dundee Sovereign Trust and 0.35 per cent each for Dundee Corporate Bond Fund and Dundee Public Sector Fund. DSP Tech Fund: DSP Merrill Lynch Mutual Fund has altered the investment strategy of the DSP Merrill Lynch Technology Fund by deciding on the BSE TEXK Index as the benchmark index. It will invest in stocks outside the index too. Since this is a fundamental change, investors have an option to exit the scheme at NAV before December 13. If they do not do so, they will be deemed to have accepted the change. New BoB schemes: BoB Mutual Fund, sponsored by Bank of Baroda, plans to launch a Growth Fund and a Balanced Fund with growth, dividend and dividend re-investment options. The fund has filed with SEBI for this purpose. Deutsche MF schemes: Deutsche Bank has launched its mutual fund with four products set to be launched. 87

The four schemes planned are Deutsche Alpha Equity Fund, Deutsche Insta Cash Fund, Deutsche Premier Bond Fund and Deutsche Short Maturity Fund. All the income products will be managed by Mr Suresh Soni, while the equity fund will be managed by Mr B. P. Singh. AXIS split: The Government has provided for more tax concessions in the process of splitting Unit Trust of India (AXIS) into two parts AXIS-I, which will administer US-64 and other assured returns schemes of the AXIS for which government support is needed, will be exempt from tax for five years. Tax exemption will cover any income, profits and gains received by AXIS-I. Capital gains tax has also been waived on all units issued and the unit schemes of AXIS- I. Stamp duty exemption on transfer of net asset value of NAV-based schemes to AXIS-II and assured returns schemes to AXIS-I has been provided. AXIS-I will reset interest rates and foreclose some assured return schemes with the approval of SEBI. AXIS employees transferred to AXIS-II will enjoy the same benefits as before. These have been provided for in the Unit Trust of India (Transfer of Undertaking and Repeal) Bill tabled in Parliament. AXIS-I and AXIS-II CEO: Mr M Damodaran, the present Chairman of AXIS, will head both AXIS-I and AXIS-II for now. AMFI demand: Dividends declared by mutual funds should be exempt from tax is the core demand made by the Association of Mutual Funds of India (AMFI) to the Finance Minister as one more Budget nears. The AMFI has based its position on the Kelkar panel recommendation to exempt dividend on equity shares from tax. Unique Features of AXIS their Impact on its Functioning [Extract from the Report of "Corporate Positioning" Committee] In the initial stages, AXIS had been performing a hybrid role of both a financial institution and a mutual fund. However, over the last few years, its role as a financial institution has significantly diminished and it has positioned itself purely as the largest 88

mutual fund in the country. There is also a significant trend emerging which suggests that financial institutions will gradually wither away or merge into universal banks. In this scenario, commercial banks and mutual funds will emerge as the primary institutions for the mobilisation of household savings. This reinforces the need for AXIS to evolve as a pure mutual fund. At the same time, consideration has to be given to the fact that AXIS has promoted and holds controlling interest in a number of institutions outside the pure mutual fund industry. As noted earlier, AXIS's management structure is at variance with the structure prescribed for mutual funds under SEBI regulations. These regulations provide for four separate entities, namely a Sponsor, an Independent Trustee, an Asset Management Company and the Fund. It is necessary that AXIS as the largest player in the Mutual Fund industry should, as recommended by the Vaghul Committee, lend itself to SEBI's regulatory jurisdication and conform to the form of structure prescribed in SEBI regulations. As stated earlier, out of 73 domestic schemes, 67 schemes have already been brought under SEBI regulations and apart from US-64 and SUS-99, the remaining schemes have finally suspended sales and/or are nearing termination. It only remains for the structure of AXIS also to be made SEBI compliant. While the present structure of AXIS provides for separate Asset Management Committees for US-64, equity schemes and for income/debt schemes, the degree of control exercised and direction imparted by these Committees appears to be restricted and inadequate. The key mandate of the Committees is to review performance of unit schemes of AXIS and provide guidance. The Committees discharge this role of independent review of scheme performance through the mechanism of periodic meetings. Given the limitation of a "review committee" format, the Committees have not found it possible to resolve "embedded" problems stemming from "historical" decisions. The Committees, therefore, cannot replace Asset Management Companies. There is therefore need for an independent Trustee and an independent AMC, as provided under SEBI regulations with wider powers of control and direction. AXIS has no identified Sponsor but the institutions which contributed to the initial capital of Rs.5 crores and the additional amount of Rs.445.5 crores in 1999 may be considered as Sponsoring Institutions. SEBI regulations impose certain responsibilities and obligations on sponsors and it would be difficult to discharge these responsibilities and obligations when there are a large number of sponsors. It is therefore necessary that

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the Sponsor should be a separate company. It is suggested that this company can be formed with the initial shareholders being the Sponsoring Institutions who will convert the whole or part of their present holdings in the initial capital of Rs.5 crores and the additional contribution of Rs.445.50 crores made in June 1999 into the capital of the Sponsoring Company. This conversion can be made at the NAV of the units when US64 becomes NAV based. It is desirable that no single member of the Sponsoring Institutions ultimately holds more than 25% of the ultimate capital of the Sponsoring Company, particularly since many of them already own or have participation in AMCs managing other mutual funds. It is for consideration whether AXIS should be wholly-owned and managed by the Government through participation in the Sponsoring Company. Although AXIS is not directly owned by the Government, the majority of the Sponsoring Institutions who contributed to the capital and the additional contribution and who elect the trustees are institutions which are owned or controlled by the Government. The Chairman of the Board of Trustees is also appointed by the Government. There is therefore a public perception of a Government umbrella which gives a measure of safety, security and implied guarantee to the unit-holders which is largely responsible for AXIS's success as a savings institution. At the same time, this perception imposes an implied responsibility on the Government for a possible bail-out of AXIS in the event of its failure to meet specific or implied commitments. Government did this by contributing to the SUS Scheme to the extent of Rs.3,300 crores following the recommendations of the Deepak Parekh Committee and there is a public perception that Government will need to do likewise to ensure that AXIS will meet its commitments to US-64 unit holders atleast to the extent of 3,000 units out of their aggregate holdings. Participation by Government in the sponsoring company may strengthen the perception of implied responsibility of the Government for the due fulfillment of obligations by AXIS but this responsibility may be open-ended and Government may not wish to accept such a responsibility. However, non-participation by Government in the sponsoring company may not by itself remove the perceived link between the Government and AXIS so long as Government continues to exercise powers such as the power to appoint the Chairman of the Board of Trustees under the AXIS Act.

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At the same time, it is necessary to recognise that if the perceived link with the Government is suddenly removed, - and certainly if it is removed before US-64 becomes NAV based - without providing an adequate substitute, public confidence in AXIS would be severely affected and can even lead to a flood of redemptions which could create a crisis both in AXIS and in the capital market. It is therefore necessary that if the Government does not participate in the Sponsoring Company, the participation of the Sponsoring Institutions should remain "locked-in" atleast for the initial period. An option for consideration is whether in place of the Government a strategic partner cannot be introduced. If this partner is an established player in the market who enjoys confidence of unitholders because of his reputation and competence, the risk of loss of public confidence through the removal of the perceived Government link would be largely mitigated. At the same time, having regard to the large amount of funds involved, the field for the identification of a strategic partner cannot be restricted only to Indian entities. If such a strategic partner is introduced, then it is necessary that Government should completely withdraw and leave it to the strategic partner to manage the fund subject to the supervision and regulation of SEBI as in the case of other mutual funds. To do otherwise would create the danger that Government may be perceived to be accountable for the proper functioning of AXIS without having any effective control. If on the contrary, Government attempts to effectively control the operations of AXIS, it will get unnecessarily involved in running a commercial operation for which it may not be able to impart the necessary skill and flexibility. A complete withdrawal of the Government would also achieve the objective of de-risking the Government from the operations of AXIS. A question for consideration is the size of the capital of the Sponsoring Company. This depends upon two major factors namely, the contribution which the Sponsoring Company is required to make to the Capital of the Asset Management Company and the amount of funds the Sponsoring Institutions are prepared to provide for this purpose. Taking into account both these factors, it is suggested that the initial capital of the Sponsoring Company to be contributed by the Sponsoring Institutions could be in the order of Rs.220 crores. The strategic partner could be required to introduce into the capital a sum of Rs.330 crores whereby of the total capital of Rs.550 crores, 40% would

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be held by the Sponsoring Institutions and 60% would be held by the strategic partner. The holding of the Sponsoring Institutions could be subject to a 'lock-in' of three years, though transfers between themselves would be possible. SEBI regulations require the formation of a Board of Trustees or a Trustee Company. The usual practice is to form a Trustee Company which is owned by the Sponsor but the composition of whose Board of Directors conforms to SEBI regulations. It is suggested that a Trustee Company be formed as a wholly-owned subsidiary of the Sponsoring Company. SEBI regulations do not prescribe any minimum capital for the Trustee Company but having regard to the onerous responsibilities prescribed under the regulations for a Trustee Company, it is suggested that it has a capital of Rs.5 crores which will enable it to build up the necessary infrastructure to discharge those responsibilities.

Performance evaluation of AXIS Mutual Fund

AXIS Master Value Fund declares second consecutive tax-free (Jan 13, 2007) AXIS Mutual Fund declares second consecutive dividend of 100% (Rs 10.00 per unit on face value of Rs.10/-) under AXIS-Master Value Fund (AXIS-Value Fund). The record date for the dividend is February 7, 2007. The dividend is tax-free for the investors, so the post-tax return for the investors works out to be much higher. Investors who will join the scheme on or before February 7, 2007 will also be eligible for the dividend. The NAV of the scheme as on January 12, 2007 was Rs.27.82 (Post dividend distribution, NAV will fall to the extent of the pay out). During the calendar year 2006, AXIS Master Value Fund had declared a total dividend of 140% (Rs 14.00 per unit on face value of Rs.10/-). The performance of the scheme is given in the table below: Scheme Performance as on December 31, 2007 (NAV- Rs.29.59) 92

Performance Comparison with benchmark index Compounded Annualised Return NAV Over last one year Over last three years Over last five years Since Inception 25.38% 60.72% 17.82% 28.52% CNX Mid Cap 200 44.61% 61.14% 17.96% 28.92%

Assuming that all pay outs during the period have been reinvested in the units of the scheme at the immediate ex-dividend NAV Past Performance may nor may not be sustained in the future

AXIS Master Value Fund is an open-ended equity oriented value fund, which was launched in June 1998 as the close-ended fund and made open-ended from 17th February 2006. The investment objective of the scheme is to provide investors the benefits of capital appreciation and income distribution through investment in stocks that are relatively undervalued to their expected long-term earnings growth. The scheme will invest upto 80% of the net assets in the scrips having anyone or more of the following characteristics at the time of acquisition: a) Low P/E ratio (PE ratio lower than the market PE or the sector PE) OR b) Attractive dividend yield OR c) Low price to book value ratio OR d) Companies with positive Economic Value Added (EVA) Up to 20% of net assets is invested in equity / equity related instruments issued by blue chip companies with a potential for consistent growth and with management of high quality and track record. Shri Vinay Kulkarni, the Fund Manager of the scheme said AXIS-Master Value Fund is positioned as a pure value scheme with clearly defined investment criteria for investing in value stocks. The scheme invests in stocks that are relatively undervalued

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to their intrinsic value and which will create wealth for the various stakeholders in the medium to long term. Going forward also the scheme will attempt to identify value stocks across the sectors, which are best placed to report strong earning momentum and are available at attractive valuation. About AXIS MF AXIS Mutual Fund was carved out of Unit Trust of India as a SEBI registered mutual fund by repealing the Unit Trust of India Act (1963) on 1st February 2006. AXIS Mutual Fund (AXIS MF) manages the pure Mutual Fund schemes, which are fully SEBI compliant and in line with the best global practices, while, Specified Undertaking of the Unit Trust of India (SUAXIS) manages schemes which involve the commitment of the Government of India. Let us start the discussion of the performance of mutual funds in India from the day the concept of mutual fund took birth in India. The year was 1963. Unit Trust of India invited investors or rather to those who believed in savings, to park their money in AXIS Mutual Fund. For 30 years it goaled without a single second player. Though the 1988 year saw some new mutual fund companies, but AXIS remained in a monopoly position. The performance of mutual funds in India in the initial phase was not even closer to satisfactory level. People rarely understood, and of course investing was out of question. But yes, some 24 million shareholders was accustomed with guaranteed high returns by the begining of liberalization of the industry in 1992. This good record of AXIS became marketing tool for new entrants. The expectations of investors touched the sky in profitability factor. However, people were miles away from the praparedness of risks factor after the liberalization. The Assets Under Management of AXIS was Rs. 67bn. by the end of 1987. Let me concentrate about the performance of mutual funds in India through figures. From Rs. 67bn. the Assets Under Management rose to Rs. 470 bn. in March 1993 and the figure had a three times higher performance by April 2007. It rose as high as Rs. 1,540bn. The net asset value (NAV) of mutual funds in India declined when stock prices started falling in the year 1992. Those days, the market regulations did not allow portfolio shifts into alternative investments. There were rather no choice apart from holding the cash or to further continue investing in shares. One more thing to be noted, since only

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closed-end funds were floated in the market, the investors disinvested by selling at a loss in the secondary market. The performance of mutual funds in India suffered qualitatively. The 1992 stock market scandal, the losses by disinvestments and of course the lack of transparent rules in the whereabout rocked confidence among the investors. Partly owing to a relatively weak stock market performance, mutual funds have not yet recovered, with funds trading at an average discount of 1020 percent of their net asset value. The supervisory authority adopted a set of measures to create a transparent and competitve environment in mutual funds. Some of them were like relaxing investment restrictions into the market, introduction of open-ended funds, and paving the gateway for The mutual more the funds variety to offered, the launch quantitative pension will be schemes. investors. The measure was taken to make mutual funds the key instrument for long-term saving. At last to mention, as long as mutual fund companies are performing with lower risks and higher profitability within a short span of time, more and more people will be inclined to invest until and unless they are fully educated with the dos and donts of mutual funds.

SCOPE OF THE STUDY

AXIS Crisis & After How the Crisis Originated What was the Crisis that Overtook AXIS during 1999 to 2002 Mr.Yogi Aggarwal, columnist of "india-syndicate.com/" further points out in his illuminating articles published online"The figure of Rs 5.81 for the net asset value (NAV) of Unit-64 marked a nadir for AXIS and revealed to a shocked public just how deep the rot had set in the government run financial sector. "The facts as revealed by the government appointed Tarapore Committee and the other committees which preceded it show a trail of bungling, structural flaws and AXIS officials using public money in an "imprudent" manner to help various controversial and powerful companies in stock exchange dealings that cost the AXIS several thousands of crores and severely eroded investor wealth. What they reveal is not just incompetence but a flouting of all prudential norms to favour certain individuals and companies. 95

"While the Tarapore Committee saw no reason to believe in any "breach of confidentiality" leading to the large scale redemptions in Unit-64 during April and May 2001 when around Rs 5,000 crore was taken out by big corporates and banks from Unit-64, it severely criticized the way the scheme worked. A fundamental flaw was that Unit-64 lived beyond its means, rewarding unitholders with dividends beyond its capabilities and propping up the price of Units well beyond their real worth. "AXIS could keep going because new people were always willing to put their money in Unit-64, thus paying for the dividends and helping hide the real state of affairs. The classic case which comes to mind is that of the Ponzi scam in the west in the early part of the last century, in which investors were promised and paid huge returns by the simple expedient of having new investors come in so that the kitty was always full. so long as the inflow from fresh investors was large enough to pay for the hefty returns promised. "The Tarapore Committee commented, "The pricing mechanism was clearly faulty and had all the ingredients of a ponzi scheme under which new entrants and those continuing in the scheme had to bear the burden of redemption at relatively high prices." The government run financial sector had clearly failed in its responsibilities by trying to meet up to unrealistic expectations which it had created in the middle class constituency. "At the same time the government's constant instructions to the AXIS to prop up or help this or that business house led to bad investment decisions to the detriment of unitholders. It is noteworthy that matters seem to have worsened from mid-1998 onwards, when the present government took office and when P S Subramanayam was appointed chairman. Inter scheme transfers between different AXIS funds were one reason for the drain on Unit-64s resources. These jumped ten times from around Rs 1,000 to Rs 2,000 crore per year in the period preceding to Rs 10,000 to Rs 20,000 crore a year thereafter. "These transfers were used to prop up other AXIS schemes at the cost of the Unit-64. To illustrate consider the following: In December 2000 Unit-64 got Rs 3,333 crore from other AXIS schemes for 230 sale transfers. These were reversed the next month but for this the Unit-64 had to shell out Rs 3,447 crore. This paper exercise meant a loss of Rs 116 crore for Unit-64 which went to boost the revenues of other AXIS schemes.

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"The AXISs decision to offer unitholders of upto 5,000 units the option of reselling their unit back to AXIS at a price of Rs 10 in January 2002 rising by 10 paise each month till May 2006 only involves a postponement of a difficult choice. Unless the sensex rises to an unrealistic level of around 7,000 (from the present of approximately 3,400) the NAV of Unit 64 cannot be above Rs 10. Since the government is committed to buying back all units at Rs 10 in May 2006 there would be sharp redemptions at that time. Depending on how the stockmarket behaves estimates of the government's liability to bail out AXIS at that time range from Rs 6,000 crore to Rs 8,000 crore. "What is perhaps most scandalous is the manner in which AXIS was used to prop up share prices of certain companies in a dubious manner. The top management consistently ignored the advice of its equity research cell. The Tarapore Committee found that in all 19 cases it picked for examination there were signs of "imprudence". These companies included such as Himachal Futuristic, DSQ Software, Pentamedia Graphics, Ispat Industries, Jindal Vijayanagar, Essar Oil and Essar Steel, and Reliance and Reliance Petro. "A majority of these deals were through private placement and off-market deals making them less transparent and the value of these deals in the three years to June 2001 was around Rs 18,000 crore. The committee noted, "there are a number of cases where the chairman's powers have been exceeded," and "investments have been made in one company of a group while there was default in another company of the group." "Further, the AXIS invested around Rs 2,500 in the equity of thinly traded or unlisted companies from which it will be very difficult for the AXIS to exit. Many of these investments (it's perhaps more accurate to call them "gifts") were made at the behest of the political masters though the Committee does not go into this. In one famous case AXIS was used to bail out brokers involved inthe Calcutta Stock Exchange crisis of March 2001 by purchasing 1.3 million shares of DSQ Software for Rs 25.1crore. In the next article we give the recommendations as made by the Deepak Parekh Committee

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Strength and weakness of AXIS Mutual Fund

AXIS is a statutory corporation established under the Unit Trust of India, Act 1963 with a view to encouraging saving and investment and participation in the income, profits and gains accruing to the Corporation from the acquisition, holding, management and disposal of securities. The Act came into force on 1st February 1964. The initial capital of AXIS was Rs.5 crores which has been contributed as under: Reserve Bank of India (RBI) Rs.2.50 crores Life Insurance Corporation of India (LIC) Rs.0.75 crores State Bank of India (SBI) and its subsidiary banks Rs.0.75 crores Scheduled banks (other than SBI and its subsidiary banks) and notified financial institutions Rs.1.00 crore The initial capital forms part of US-64 and the subscribers hold units in that Scheme. In 1975, the AXIS Act was amended and by virtue of the amendment, the Industrial Development Bank of India (IDBI) took over the rights and responsibilities of RBI under the Act and the share of the initial capital held by RBI was transferred to and vested in IDBI. he general superintendence, direction and management of the affairs and business of AXIS rests in a Board of Trustees which exercises all powers and does all acts and things which may be exercised or done by AXIS. The composition of the Board of Trustees is as under : The Chairman to be appointed by the Central Government in consultation with IDBI. One trustee to be nominated by RBI. Four trustees to be nominated by IDBI of whom not less than three shall be persons having special knowledge of, or experience in commerce, industry, banking, finance or investment.

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 One trustee to be nominated by LIC. One trustee to be nominated by SBI. Two trustees to be elected by other contributing institutions viz scheduled banks (other than SBI and its subsidiary banks) and notified financial institutions. An executive trustee to be appointed by IDBI, provided that such an appointment may not be necessary if the Chairman is whole-time. The Board meets not less than six times a year and atleast once in two months. The Act provides that where the whole of the initial capital has been refunded to the contributory institutions, the Central Government may, after consultation with IDBI, by order, provide for reconstitution of the Board. The Act also provides that regulations made by the Board have to be with the prior approval of IDBI. There is an Executive Committee which, subject to such general or special directions as the Board may, from time to time, give, has the power to deal with any matter within the competence of AXIS. The Executive Committee consists of : The Chairman of the Board. The Executive Trustee where such trustee has been appointed and Two other trustees nominated in this behalf by IDBI. The Executive Committee usually meets once in a month. The day-to-day business operations of AXIS are looked after by a full time Chairman. A team of Executive Directors and Chief General Managers assists him. Presently the Board has created posts of eight Executive Directors and twelve Chief General Managers though all posts have not been filled. The post of Executive Trustee has remained vacant from 1st January 2000. AXIS has a three-tier organisational set up with a Corporate Office, four zonal offices and fifty four branch offices. It has about 4.1 crores unitholding accounts (with more than one account held by a single person) under 73 domestic schemes having investible funds at market value as on 30th June 2001 of Rs.56,057 crores. In addition, it has six 99

off shore funds and four venture capital funds. Its management expenses amount to about 1% of the investible funds. The Board has powers to constitute such other committees whether consisting wholly of trustees or wholly of other persons or partly of trustees and partly of other persons as it thinks fit and for such purpose as it may decide. In May 1997, at the instance of SEBI, the Board constituted three Asset Management Committees for AXIS's domestic schemes, one each for US-64 equity schemes and income/debt schemes. Each Asset Management Committee consists of seven members of whom not less than five are independent outside experts. No person is a member of more than one committee. The Committees' scope of activity includes : Overseeing and ensuring that each scheme addresses to/complies with the stated objectives of the scheme, AXIS General Regulations, SEBI (Mutual Fund) Guidelines and the prudential investment norms laid down by the Board of Trustees from time to time; Reviewing scheme performance regularly and guiding fund managers on the future course of action to be adopted; Considering other key issues such as product designing, marketing, investor servicing, compliance, taxation and accounting policy. There is also an Audit Committee consisting of five trustees which reviews the systems and controls and interacts with the internal and external auditors. In addition to Board Committees, there are a number of Committees constituted of the executives of which the most important are : A First-Tier Audit Committee which reviews the reports of all sections/departments of AXIS and initiates necessary corrective action.

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 An Investment Valuation Committee which reviews the system and practice of valuation of securities. A Primary Market Investment Committee for considering primary market proposals. A Property Management Committee to appraise proposals approved by the Building Committee. An Internal Committee for settlement of dues. While the power to take decisions related to investment of the funds has been delegated by the Board of Trustees to the Executive Committee and to a lesser extent to the Chairman, exposure limits have been laid down in AXIS General Regulations, 1964 and further restrictive limits have been specified by the Board. The broad investment policy of each scheme is laid down under the provisions of each scheme approved by the Board of Trustees or the Executive Committee. The Board reviews the delegation of powers from time to time. For investments in the primary market, there is a Primary Market Investment Committee consisting of 4 Senior Executives which vets all proposals and submits the same to the Chairman with their recommendations. The secondary market transactions in equity as well as debt are decentralised to individual fund managers who decide on buy and sell strategy after consultation with research analysts. All stock market transactions are reported to the Executive Committee which gives overall direction in respect of secondary market transactions. Report of secondary market transactions is also placed before the Board. AXIS has promoted a number of associated companies and institutions. The details of its investment in those companies/institutions are as under :-

Company/Institution

Book of

Value % Holding

Investment as at 30/6/2001 101

(Rs. lakhs) AXIS Bank Ltd 8,912 61 100 100 78 100

AXIS Securities Exchange Ltd. 3,174 AXIS Investor Services Ltd AXIS Investment Advisory 1000 247 146

Services Ltd. AXIS International Ltd.

In addition, it has participated with other institutions in promoting a number of capital market intermediaries like The Stock Holding Corporation of India Ltd., Infrastructure Leasing and Financial Services Co. Ltd., National Securities Depository Ltd. etc. The investments in associated companies and institutions has been financed out of the Development Reserve Fund. As on June 30, 2001, the Fund amounted to Rs.1,535 crores. The Act provides that in the discharge of its functions under the Act, AXIS shall be guided by such directions in matters of policy involving public interest as IDBI may give to it in writing and if any question arises whether the direction relates to a matter of policy involving public interest, IDBI's decision is final.

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Unique Strength & Weakness of AXIS AXIS is the largest player in the mutual fund industry with total investible funds of domestic schemes (at Market Value) as at 30th June, 2001 of Rs.56,057 crores constituting about 57% of the total investible funds of the industry. US 64 with a total unit capital as at 30th June 2001 of Rs.12,786 crores had a substantial share of these investible funds. It has certain unique strengths notable amongst them being : Its large size with consequential economies of scale; Its nation-wide well entrenched distribution network and consequently its wide reach and capacity to mobilise large resources; Its brand image arising out of a public perception that the safety of funds is assured by its pseudo Government character, which may not be entirely unjustified. The fact that it does not have an AMC to whom management fees would have to be paid which results in higher returns available to unitholders. It also has certain pronounced weaknesses: Being the largest player in the mutual fund industry, it also has large investments in individual companies. Its ability to turnaround its portfolio quickly is therefore somewhat limited. The fact that it combines within itself the roles of an AMC and the Trustee results in the absence of a degree of accountability which an AMC normally owes to the Trustee and the control which the latter enforces upon the former. There is a lack of transparency, particularly with regard to US-64 where the sale and repurchase price are not linked to the NAV and the NAV is not disclosed to the unitholder. The fact that AXIS is perceived as having a pseudo Government character is as much its weakness as it is its strength, particularly in respect of US-64. While it enchances its ability to sell the units, it also gives a false sense of comfort which may not be true or even desirable. Moreover, in a highly competitive market, public

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perception of AXIS as a pseudo - Government institution may affect its ability to attract and retain the best professional talent or to adequately motivate it.

Govt. Role on Mutual Funds:

Mutual funds to be more transparent Finance Minister Yashwant Sinha called upon the mutual funds to focus on product innovation, equity research, risk management and market reach, and endeavour to instil greater confidence among investors. He was addressing the sixth annual seminar of the mutual fund industry in Bombay on Thursday. Citing RBI data and the SEBI NCAER survey, Sinha said out that less than 8 per cent of households channelise their savings into capital markets and that just 1 per cent of household investment is in equity markets. Sinha felt that higher transparency and good corporate governance by mutual funds could attract greater quantity of household savings, which they could cost effectively deploy in the capital markets. Sinha said that inadequate institutional mechanisms may be the reason for households shying away from the market. He said all that the retail investor looked for was to maximise return on investments, while the market volatility had placed some constraints. He opined that mutual funds should spread their findings of equity research, educate the investors and raise their level of awareness. This would have an impact and then capital market investment can become a reasonable proposition for retail investors. Referring to the stock market, Sinha said that the popular perception of bulls and bears impacting the market has undergone a sea change. He felt that a better way to correct short-term volatility is to place more emphasis on investments that could be governed by medium- and long-term views based on scientific research. He asserted these developments will enable mutual funds to create greater confidence in the mind of investors.

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The finance minister stressed that market manipulation can be ended and excess volatility arrested if there is more market depth. Mutual funds have to increase their market reach to rural areas as Life Insurance Corporation has done and bring such money into the market and create that depth. Sinha looked forward to receiving specific proposals from RBI and SEBI on the need to create a level-playing field for the mutual funds vis--vis foreign institutional investors. This would not only strengthen the mutual fund industry but also help the domestic savings to be channelled into the capital markets through mutual funds. Mutual funds have a primary responsibility of creating investor awareness and offer a sustainable return over a medium to long-term period. Finally, the finance minister recalled that the prime minister had set forth an objective to double the per capita income which would translate into achieving a growth rate of 9 per cent. On this basis, the savings rate of 25 per cent of GDP is inadequate as seen against the stiff GDP growth target of 9 per cent. The only way to meet the growth target is to broadbase the investor segment by taking it retail and by bringing more household savings into capital markets, Sinha indicated. Bimal Jalan, RBI Governor, pointed out that mutual funds can provide financial and macro-economic stability. Towards this end, he urged mutual funds to offer products which cover the entire spectrum of risk-return profile in order to meet wide-ranging saving habits among Indians. Expressing unease with assured return schemes, he said: "We have to build riskmanagement systems which are able to create a good asset-liability match in portfolio taking into account the time profile of the scheme." D R Mehta, chairman, SEBI, while sketching the growth of the mutual fund industry, pointed out that the participation of the households in the mutual fund industry is still low, considering the size of savings flow and offers scope for growth. He said that the competition, regulatory initiatives and product choice in the mutual fund industry should result in greater amounts of investor funds being intermediated through the mutual fund industry, rather than being directly invested in the capital markets. 105

He indicated that investor confidence in the industry will go up only when operational freedom of mutual funds and levels of compliance of the players go up. He also outlined the initiatives SEBI is taking, through the various committees. Among the issues under active consideration are:

Reduction in the processing of investor applications in the initial offer period to 42 days from 90 days;

Use of unclaimed funds lying with mutual funds for investor education; Creation of level playing field between mutual funds and FIIs in the context of international investing

Formulation a code of conduct and development of best practices in the industry;

Standardisation of portfolio disclosures; Modification in the structure of mutual funds to company form of organisation; and

Publication of the annual reports of asset management companies. He said that the Indian markets are very safe, despite the growing volatility that has been seen in the recent period. AXIS chairman, P S Subramanyam said that the quality of investor services in the industry has grown over the years. He said there is a scope to increase the penetration and volumes in the mutual fund industry by reaching out to more investors. He noted that technology has significantly altered the manner in which mutual funds conduct their business. In the context of globalisation of capital markets, he pointed out that risk management has become critical for mutual funds. He also indicated that corporations will have to adopt best practices in information disclosure and dissemination. He said that as stakeholders in companies in which they invest, mutual funds have the responsibility to ensure acceptable standards of disclosures. They have a constructive role to play in creating an environment that help in adoption of best practices and good

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governance. This will go a long way in enhancing shareholder value leading to enhancement of unit-holder value. A P Kurien, chairman, Association of Mutual Funds of India, mentioned that it is for the first time that the finance minister, the RBI governor and the SEBI chairman came together on a common platform to address mutual funds. This is indicative of high growth prospects, he opined. He suggested that the pension fund segment be opened to the mutual fund industry. The mutual fund industry gets together every year to take stock of the past and future strategies, keeping the investor's preferences in sharp focus. AXIS, the industry leader, the AXIS Institute of Capital Markets and AMFI have taken the initiative to create the right forum for meaningful discussions on the issue. IN a report that is not distinguished by particularly sharp insights, the Joint Parliamentary Committee (JPC) which conducted a prolonged inquiry into the stock market meltdown of March 2001, provides one useful nugget. The scandal that rocked the markets in 1992, it observes, was one of great depth and intensity, in which a relatively small number of people were involved. The March 2001 episode, in comparison, was one of great width and expanse. It involved a large cast of characters, though none was as deeply implicated as the key players of 1992. The observation comes exactly nine years after a predecessor body submitted a voluminous report on the 1992 scam and recommended a number of remedial measures. When Harshad Mehta, Bhupen Dalal and various others fought their epic battles on the bourses in 1992, liberally dipping into bank treasuries for ammunition, the government had a number of alibis available: the Reserve Bank of India (RBI) was burdened by an outmoded system of overseeing the integrity of funds management by banks, the Securities and Exchange Board of India (SEBI), though in existence for four years, was not armed with statutory powers to check abuses in the stock markets, and the government for its part had mistakenly been looking at the options available in controlling the financial sector rather than in governing it. The institutional lacunae were bridged within months. The RBI had a fully automated audit system in place before 1992 had run its course and SEBI was invested with the requisite statutory powers by an act of Parliament. The philosophical problem of altering the outlook of the government was also addressed in substance over the decade, 107

with the respect for the free play of market forces becoming entrenched within official circles. How then did 2001 bring a virtual replay of the 1992 scam, with perhaps more damaging long-term consequences? This is a question the more recent JPC fails to address seriously, rendering its report an exercise in evasion. The JPC observes, rather portentously, that all its findings and recommendations would be futile if the implementation process were to falter. And to ensure that its recommendations are put into practice, the JPC chose to examine what was the fate of the recommendations of its predecessor body in 1993. And the record here is fairly dismal. The JPC found that inspections by the RBI, when they were conducted, were cursory. There was "a lack of concern" and "strict action" was taken only when matters "went out of hand". SEBI for its part seemed absent without leave when its presence was most required. The JPC's inquiries revealed that SEBI's nominee directors on the Calcutta Stock Exchange (CSE) Board established a record of sorts in absenting themselves from supervisory meetings. In the period preceding the payments crisis that paralysed the CSE in March 2001, one of the SEBI nominees had not attended even one of the 26 meetings held during his tenure; another attended a mere three out of 13, though the third nominee had a more respectable record of attending 25 of 62 meetings. SEBI's record of absence is considered crucial by the JPC, since, in its narrow reading, the CSE crisis was a direct outcome of the failure to enforce margin money requirements on share transactions. SEBI's negligence was compounded by the deliberate design of a cabal of brokers on the CSE. But this is an aspect that the JPC chooses not to probe too deeply. What could possibly account for the impunity with which brokers operate, and where could they be obtaining the funds and the guidance for their periodic speculative rampages through the bourses? There are several junctures at which the JPC points towards the nexus between big business houses and the broker community. But having broached the subject, it retreats into extreme diffidence, unwilling to get tangled up in the issue. The JPC reveals that following the recommendations of its predecessor body, a "special cell" was set up in Mumbai, headed by the Director-General of Income Tax, Mumbai, and comprising representatives from the RBI, the Department of Company Affairs 108

(DCA) and the Central Bureau of Investigation (CBI), to examine and monitor the role of big business houses in the stock markets. The cell died an early death. The SEBI Chairman was the first to spurn it, arguing that no useful purpose would be served by nominating a SEBI representative to serve on it. In May 1995, after the cell had met precisely five times in a life of 17 months, it sent a representation to the Central Board of Direct Taxes (CBDT), seeking the deployment of adequate manpower to fulfil its mission. The CBDT replied that given its limited mandate, the cell could function with the available manpower. There was no further meeting of the cell until March 2001, when a newly minted broker coterie unfurled its own re-enactment of 1992 on the nation's bourses. Ketan Parekh. As it went about its inquiries, the JPC asked the Director-General of Income Tax, Mumbai, to examine afresh the possibility of collusion between the broker lobby and big business houses. The reply was perfunctory: there was no reason in the prevalent circumstances, said the official concerned, to believe that there was any such nexus. "No cases were found," the JPC records, "where funds were placed by industrial houses directly with the brokers enabling them to play... (the market) with a view to create artificial booms or depressions so as to book abnormal profits to the detriment of the common investor." As a body with wide-ranging powers of summoning evidence, the JPC could not obviously remain content with this evasion of reality. But its own inquiries were, by all accounts, clouded by a wilful desire to mystify rather than illuminate. After identifying no fewer than 727 scrips which witnessed rapid and unexplained rises in values in the months preceding March 2001, and 199 which witnessed a rapid fall in prices following the discovery of the scam, the JPC asked SEBI for detailed explanations. The outcome was inconclusive: the JPC has identified no fewer than 15 companies where there is evidence to believe that the collusive nexus between brokers and promoters could have had a serious impact on market behaviour. These include well-known companies like Zee Telefilms, Ranbaxy and Lupin Laboratories, as well as companies that have deservedly entered the annals of infamy, like Cyberspace Infosys, Himachal Futuristic and DSQ Software. MOST revealingly, the JPC has virtually disowned its responsibility to ascertain the true picture, offering an alibi that must seem rather lame. As the JPC explains in the rather tortured syntax that its report is suffused with: "SEBI furnished four sets of

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interim reports inclusive of its investigation regarding scrips of certain corporate bodies. The Committee's insistence for SEBI's final findings regarding the role of promoters/corporate bodies in the price manipulation of the scrips yielded yet another set of reports, most of which were again of interim nature and were received as late as November 2002. Due to non-availability of final report from SEBI, the Committee could not have the opportunity to take oral evidence of these corporate bodies. The Committee urge SEBI, the Department of Company Affairs and other investigative agencies to expedite and complete their investigations..." This must seem a rather disappointing abdication of responsibility by the JPC, especially since it is followed by the definitive finding that "there are valid reasons to believe that the corporate house-broker-bank-FIIs (foreign institutional investor) nexus played havoc in the Indian capital market quite sometime (sic) now through fraudulent manipulations of prices at the cost of the small investors". But there is also a telling admission thrown in that the abdication of responsibility is a direct consequence of the JPC's failure to exercise its powers appropriately: "This Committee were severely handicapped in the matter of making any purposeful recommendations because of nonavailability of required support from concerned regulatory and other bodies with necessary material." By any criterion, this admission of helplessness by a committee of Parliament, which has endowed the regulatory authorities with all their powers, must seem extraordinary. And by any reasonable evaluation, the material that the JPC had to draw its inferences from was nowhere near as meagre as it has made out. SEBI had submitted a series of voluminous reports early in 2002, which went into a microscopic examination of the many dubious transactions that culminated in the short-lived bull run in the markets after the Union Budget was presented in February 2001. The picture it drew was fairly clear: though the Budget in itself provided rather a scant basis for a broad-based investment fervour, a small cartel of bull operators sought to utilise the momentary euphoria it had engendered to drive up prices and liquidate the long exposures they had taken. It was a self-defeating exercise since a rival cartel of bear operators knew from prolonged observation, just where the vulnerabilities of the bulls lay. Shrewd shortselling in the expectation of profits to be made on the downside of the markets, rapidly pushed prices down.

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But the bulls had by then gone too far out on a limb. In a climactic contest between bulls and bears, stock markets nationwide plunged into an acute payments crisis, necessitating their closure for an extended period. The JPC concludes that Ketan Parekh, "big bull" reincarnate and the acknowledged kingpin of the buying frenzy, "was a key person involved in all dimensions of the stockmarket scam... as also in payments problem in the CSE and the crash of Madhavpura Mercantile Cooperative Bank". Parekh created "various layers" in his transactions, making it "difficult to link the source of fund (sic) with the actual user of fund". He admitted during testimony before the JPC, "that his entities did build huge positions in the market in select scrips (and) grossly over committed themselves to the market". The estimated loss suffered by Parekh was underwritten entirely by banks and the corporate bodies that he had mulcted for funds. And even if the corporate bodies were party to his wrongdoing and have no entitlement to compensation on this account, the JPC urged that "expeditious action" be taken to recover the money owed to the banks. The task will not be easy by any reckoning. Inquiries by the CBI have revealed the wide dispersal of Parekh's illicitly earned monies, from Switzerland to the Bahamas. The whole process of issuing letters rogatory through the Indian judiciary has only just begun. Putting the entire burden of blame on one person would obviously do little for the credibility of the JPC. Yet its understanding of the role of the regulatory authorities and the Finance Ministry is almost laughably naive. SEBI for instance has been faulted for being blind to rampant price-rigging in the markets, but this is an offence of little else than negligence in the JPC's estimation. The figures here are revealing. Resource mobilisation in domestic capital markets through public issues of shares peaked in 1994-95 at Rs.30,800 crores. The figure has since been falling rapidly, registering no more than Rs.7,111 crores in 2001-02. In the same period, the funds raised through private placement of shares in the primary market have surged, from a modest Rs.11,174 crores in 1994-95, to Rs.64,950 crores in 2001-02. Secondary market turnover however, has been the real growth area, from Rs.162,905 crores in 1994-95 to an astounding Rs.2,880,990 crores in 2000-01. Once the scam was discovered the figure plummeted rapidly, to Rs.895,826 crores in 2001-02.

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In this context, SEBI's actions have been perfunctory or worse. The number of cases it has taken up for investigation in any one year has remained broadly the same 60 in 1995-96 and 68 in 2000-01, though there was an unexplained increase in 1996-97 to 122. The number of cases it has completed investigations in, has fluctuated between 18 and 60 in these years. And the number of cases in which it has imposed sanctions has cumulatively been 181, with a mere 18 being registered in 2000-01, when the abuses were rising to a crescendo. The JPC passes over this record of default or even possible complicity with a formulaic stricture: "The track record of SEBI in punishing the wrongdoers in stock market (sic) has been unsatisfactory. During the last ten years, SEBI could initiate prosecution proceedings on insider trading in only one case and on fradulent and unfair trade practices in just seven cases. Its record of taking action against violators has been equally unimpressive.... Though SEBI's plea for more powers to strengthen its effectiveness cannot be faulted, the Committee got an impression that SEBI was not fully enforcing the powers already vested with it." ALL this, in the context of the magnitude of the crisis that the stock markets went through, must seem rather ritualistic. There has obviously been a strong urge at work to protect the regulators whose actions presumably are conditioned by signals sent by the political establishment. When the country's largest mutual fund, the Unit Trust of India, has abused its trusteeship function for public savings and partaken in an unwholesome fashion in the stock market scam, the costs of this political evasion would inevitably be a loss of credibility and legitimacy. Since July 2001, when the AXIS suspended redemptions under its flagship US 64 scheme, the Finance Ministry has announced a major overhaul of the mutual fund and infused fresh funds in an effort to restore its financial health. But these schemes, which are essentially being enforced with tax-payers' money, remain partial in their scope and halting in their effect. And the stakes involved here are substantial. As the Deepak Parekh committee, which went into the AXIS's functioning in less turbulent times, observed: "With over two crore unit holders, public confidence in US 64 is a virtual proxy of public confidence in the Indian financial system." After over a year of mulling over the findings of the S.S. Tarapore committee, which went into the US 64 debacle in fair detail, the JPC has managed to come out with

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conclusions that must seem ludicrous. M.P. Subramanian and M.M. Kapur, respectively the Chairman and Executive Director of the fund during the troubles, have been severely indicted. And even though criminal proceedings have been launched against them, the JPC has also recommended departmental action against others within the organisation. THESE apart, the JPC has managed little else than a mild reprimand, couched in ambivalent and circumlocutory language, of the Finance Ministry, only naming the then Finance Secretary Ajit Kumar. The main burden of negligence is placed on AXIS's principal promoter, the Industrial Development Bank of India. Although the JPC urges the institution of criminal proceedings against the predatory operators who managed to strip AXIS of its funds for short-term speculative gain, it glosses over the fact that many of them have put themselves at a safe distance from the reach of the Indian judicial process. The small investor and the senior citizen whose entire sustenance was dependent on AXIS schemes, could well ask what the purpose of the entire JPC exercise was. It has not enforced accountability, it has failed to evolve new norms for those charged with the custody of public funds, and quietly acquiesced in placing the burden for the revival of AXIS on the tax-payer. An exercise to safeguard public funds against future depredators has ended up as another waste of public money. Money Market Developments Mutual Funds 42. Resource mobilisation by Mutual Funds improved during 1997-98. The number of offer documents of mutual funds filed with SEBI increased substantially from 32 in 1996-97 to 60 in 1997-98. The amount mobilised through new schemes and subscriptions to open ended schemes including Unit 64 of AXIS also increased. Indeed the gross mobilisation of resources by all mutual fund schemes during the year was around Rs. 13,000 crores which was for the first time higher than the resources mobilised by the primary market. Even net of redemptions in open ended schemes the resources mobilised by the mutual funds during the year was higher than the resources raised through primary market. These improvements were partly in response to the regulatory changes brought about by SEBI following the publication of the Mutual Funds 2000 Report and the notification of new regulations. The emphasis of these new regulations is on empowerment of investors, greater compliance of regulations by mutual funds, obligations of trustees as frontline regulators, improved disclosure

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standards in offer documents through the introduction of standard offer document, standardisation of valuation norms for investments and computation of NVA. The regulations also sought to address the areas of misuse of funds by introducing prohibitions and restrictions on affiliate transactions and investment exposures to companies belonging to the group of sponsors of mutual funds.

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CONCLUSION & SUGGESTION CONCLUSION REGARDING STUDY:

By December 2007, Indian mutual fund industry reached Rs 1,50,537 crore. It is estimated that by 2010 March-end, the total assets of all scheduled commercial banks should be Rs 40,90,000 crore. The annual composite rate of growth is expected 13.4% during the rest of the decade. In the last 5 years we have seen annual growth rate of 9%. According to the current growth rate, by year 2010, mutual fund assets will be double. Let us discuss with the following table: Aggregate deposits of Scheduled Com Banks in India (Rs.Crore) Month/Year Deposits Change in % over last yr Source - RBI Mutual Fund AUMs Growth Month/Year MF AUM's Change in % over last yr Source AMFI Some facts for the growth of mutual funds in India

Mar-98 Mar-00 Mar-01 Mar-02

Mar-03

Mar04

Sep-04

4-Dec

605410 851593 989141 1131188 1280853 15 14 13 12 -

1567251 1622579 18 3

Mar98

Mar00

Mar01

Mar02

Mar03

Mar-04 Sep-04 4-Dec

68984 93717 83131 94017 75306 137626 151141 149300 26 13 12 25 45 9 1

100% growth in the last 6 years. Number of foreign AMC's are in the que to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide.

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Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required.

We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion.

'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities.

Mutual fund can penetrate rurals like the Indian insurance industry with simple and limited products.

SEBI allowing the MF's to launch commodity mutual funds. Emphasis on better corporate governance. Trying to curb the late trading practices. Introduction of Financial Planners who can provide need based advice.

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The advantages of investing in a Mutual Fund are:

Diversification: The best mutual funds design their portfolios so individual investments will react differently to the same economic conditions. For example, economic conditions like a rise in interest rates may cause certain securities in a diversified portfolio to decrease in value. Other securities in the portfolio will respond to the same economic conditions by increasing in value. When a portfolio is balanced in this way, the value of the overall portfolio should gradually increase over time, even if some securities lose value.

Professional Management:Most mutual funds pay topflight professionals to manage their investments. These managers decide what securities the fund will buy and sell.

Regulatory oversight: Mutual funds are subject to many government regulations that protect investors from fraud.

Liquidity: It's easy to get your money out of a mutual fund. Write a check, make a call, and you've got the cash.

Convenience: You can usually buy mutual fund shares by mail, phone, or over the Internet.

Low cost: Mutual fund expenses are often no more than 1.5 percent of your investment. Expenses for Index Funds are less than that, because index funds are not actively managed. Instead, they automatically buy stock in companies that are listed on a specific index

Transparency Flexibility Choice of schemes Tax benefits Well regulated

Regulation: getting better

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Through trial and error, Sebi has steadily improved its regulation of the mutual fund industry. Corporate governance is better than before, but the last mile has still to be negotiated before investor confidence can be taken for granted How well is the Indian mutual funds industry regulated? If you were to look at media headlines over the last couple of years, the regulators report card might well have carried this comment: Needs improvement. Till recently, the industry played host to several questionable practices late trading (where big corporate investors got to invest at favourable prices of the previous day), scheme switching (shifting investments between schemes within the same fund) and excessive incentivisation for selling mutual fund schemes, among others. Add the peccadilloes of Alliance Mutual Funds star CIO Samir Arora, which got Sebi quite worked up, and the picture doesnt look too good. But if you were to ask Sebi chairman G.N.Bajpai, he is certain that things are not as bad as the media paints them. Whenever instances of malpractice have come to our notice, we take action, he says. And to be fair to the regulator, the mutual fund business has not seen any major upheaval of the kind where investors have actually ended up losing money. The only case which came close to this is that of the Unit Trust of India (AXIS), but the fact is that the government stepped in to prevent investors from losing too much. A majority of private sector mutual funds have managed to outperform their benchmarks, drawing little ire from investors. Some of them do, in fact, charge fairly high fees, but good market performance has made the case for lower fees not as compelling as in America. Even in the case of late trading which has been more or less the norm in an industry where big corporates and distributors negotiate terms with mutual funds on a regular basis malpractices have not been as rampant as in America. The conclusion: While the mutual fund industry, thanks to its relatively small size till recently, has a bias towards large corporate investors, governance standards overall have improved, aided undoubtedly by significant regulatory changes over the last few years. 118

The only thing to complain about is that Sebi plugged the holes in the system by following a trial-and-error approach, and not necessarily proactively. The regulatory regime was tightened bit by bit, aided by Sebis experiences and market forces. The pace of regulation has actually accelerated in the last few years. During 2002-03, for example, the regulator put out detailed guidelines on corporate governance practices for asset management companies (AMCs). One of these was the introduction of compulsory benchmarking of a funds performance against any chosen index. Further, the trustees of funds were also entrusted with the responsibility of reviewing the performance of various schemes against the benchmark index. Besides, everyone, including the trustees, have been brought under the insider trading regulations. Trustees now have to hold meetings at least once in two months as against four times a year previously. This year, Sebi has also made it mandatory for the board of trustees to have two-thirds of its strength as independent directors that is, those who are not associates of the sponsors. Consultants have also been brought under this definition. At the operational level, AMCs have been asked to put in place risk management systems for fund management, operations, and so on with detailed guidelines being issued. Most importantly, Sebi has issued clear-cut guidelines for valuing bond instruments traditionally a grey area non-performing assets, and illiquid and unlisted securities. The Association of Mutual Funds of India (AMFI) has also helped in making product comparisons easy for investors by mandating funds to follow uniform sector classifications, as established by AMFI. Disclosure standards have also been improved substantially though by no means perfect. There will always be loopholes in any system and it will be difficult for any regulator to plug all the holes, admits Bajpai. Just as a chain is only as good as its weakest link, a system is only as good as the quality of people who man it. The weak links, close observers of the industry say, may be more outside the immediate control of AMCs in

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the largely unsupervised distribution chain. Sebi has, of course, prescribed a code of conduct for mutual fund distributors. All of them have to be registered with the Association of Mutual Funds of India. Distributors also have to mandatorily pass a certification exam before they are allowed to sell any mutual fund products. But then, the onus is on the fund managements to ensure that their agents and distributors do indeed follow the practices laid down in the code of conduct. Another issue that Sebi and the industry association have dealt with some amount of success is the practice of rebating commissions back to investors. To hardsell a fund scheme, distributors often share a part of their distribution commission with brokers and retail investors as an incentive. This amounts to promoting/selling schemes for the wrong reasons and may end up misleading the investor. Sebi has put the onus on the fund houses to monitor their distributors and stop incentivising investors. Despite all the laws that are on paper, given the extended area of operations of distributors, Sebis writ may not run beyond a point. The only way the issue can really be tackled is to give professional intermediaries larger space in investment decisions. Says Ranjit Mudholkar of the Association of Financial Planners: Financial planners can make a significant difference to the entire value chain. First, they would have a fiduciary responsibility towards their clients and would service them accordingly. Secondly, investing in the right product would be part of the financial planning process rather than the result of mere pushing by the broker. But, quite clearly, there is a case for Sebi to take a second look at the role of the distribution segment. In the absence of financial planners investors are still to use them in sufficient numbers distributors are vital intermediaries between AMCs and investors. In some other areas, Sebi could have done better, faster. Take late trading. Under this practice, mutual funds oblige their big investors by allowing them to purchase units at

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the previous days NAV, enabling them to take advantage of any appreciation in market prices since then. While late trading has been rampant for several years now, Sebi took corrective action only a few months ago by introducing uniform cut-off timings for equity and debt funds. It also asked AMCs to set up time-stamping machines that would keep track of the date and time when applications and cheques were received to curb late trading. Better late than never. Sebi could also have taken a closer look at the actual operations of funds. While there have presumably been no flagrant violations of rules, some funds have been exploiting loopholes. Fixed maturity plans are a case in point. Investments under such schemes are usually made in the debt instruments of banks and corporates. Fund houses have taken the easy way out and are investing a large portion of the funds mobilised through such schemes in bank fixed deposits. When asked about this practice, one Sebi director wondered what was wrong with investing in bank deposits. While there is nothing in the mutual fund regulations to prohibit investments in bank instruments, the moot point is whether the fund is doing investors any great service. When investors entrust their money to experts and apparently knowledgeable fund managers, you would expect them to do more than just rush to the nearest bank counter to make a deposit. Bajpai, however, agrees that there should be some limit on how much money can be parked in bank fixed deposits. Another area of long-term concern is share switching. Sebi has not, so far, found a foolproof way to prevent mutual funds from switching securities between schemes. Prudential-ICICI Mutual Fund made switching famous, but few people probably know that switching securities between schemes without their investors knowing it is more widespread than one is led to believe. Since funds declare their scheme-wise assets only at the end of the month, there is a lot of scope for switching around investments from one scheme to another depending on which scheme the fund wants to show a higher NAV.

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According to industry circles, such movements need not always leave an audit trail. Bajpai says that all decisions pertaining to the industry are taken in consultation with the participants. We regularly hold talks with AMFI and, in addition to that, we have a mutual fund advisory committee consisting of people who are not drawn from the mutual fund sector, he says. With barely two per cent of household savings going into mutual funds, the segment has a lot of catching up to do. With post-office administered schemes and bank deposits offering competition, more investors can be enticed to the mutual fund industry only if it is steadily seen as very investor-friendly. Sebis initiatives have set the industry in the right direction, but the final destination is still some distance away.

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Suggestion:
AXIS Crisis - Recommendations 1. Initial contributors to AXIS should infuse permanent funds of atleast Rs.500 crores. 2. The PSU portfolio should be transferred at book value to a Special Unit Scheme (SUS 99) to be subscribed for by GOI by the issue of dated GOI securities. 3. US-64 should make a strategic sale of its significant equity holdings by negotiation to the highest bidder to ensure fetching the best value for the unit holder. 4. a. The investment sub-limit of Rs.10,000 for tax benefit on Equity Linked

Savings Schemes should be removed and benefit should be extended to US-64 and all schemes investing more than 50% in equity. b. Income distributed by US-64 and schemes investing more than 50% in

equity should be exempt from tax. 5. New schemes for investing in growth stocks in IT, Pharma and FMCG sectors should be launched, to be subscribed for by banks. 6. The size of the AXIS Board should be increased to 15, with additional five members being co-opted by the Board. 7. a. Trustees should assume higher degree of responsibility and exercise

greater authority. b. The remuneration of Trustees should be increased and their attendance

record be published in the Annual Report. 8. There should be a separate Asset Management Company for US-64 with an independent Board of Directors.

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9. a. Chinese walls should be created by appointing separate and independent

fund managers for each scheme. b. Inter-scheme transfers must be based on independent decisions and

requirements of concerned fund managers and at market determined prices. 10. a. There should be an independent fund manager for US-64 with full

responsibility and accountability. b. The fund manager should be helped by a strong research team and the

research capability should be strengthened. 11. a. Investment/dis-investment decisions should be based on research

analysts' recommendations who should have the authority and responsibility of making the recommendations. b. The fund manager should have the final authority and responsibility in

decision making based on his perception of the market and research inputs 12. The focus on small investors should be strengthened and the lilt towards corporate investors reduced. 13. a. b. US-64 should be NAV driven within three years. If at the end of the three year period, the re-purchase price and the NAV

are not in line, the Trust will be left with no alternative but to seek GOI support once again the provide the difference between the NAV and the repurchase price. Only a clear commitment from the GOI to stand by US-64 till it finally assumes the character of a NAV driven scheme will instill the required confidence in the US-64 investors.

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14. The spread between sale and repurchase prices should be gradually increased to deter short term investors. 15. a. The dividend distribution policy needs to follow a more conservative

approach to build up sufficient reserves during periods of good performances. b. income. 16. The rate of return offered to investors needs to be reviewed on a periodic basis. The yield offered on US-64 is excessively high as compared to other comparable instruments. 17. The composition of the portfolio needs to be changed to provide for more weightage to debt consistent with the objectives of the Scheme. 18. The operations of US-64 should be brought under SEBI purview at the earliest. 19. An independent professional firm should be commissioned for a detailed review of asset management processes including back office, inter scheme transfer and investor servicing. Mutual funds have their drawbacks and may not be for everyone:

As a rule, dividends need to be curtailed when there is inadequate

No Guarantees: No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money.

Fees and commissions: All funds charge administrative fees to cover their dayto-day expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if you don't use a broker or other financial adviser, you will pay a sales commission if you buy shares in a Load Fund.

Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund 125

makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made.

Management risk: When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers

AXIS should list five ways in which one can buy the fund units.

Have I invested in the right funds?

1. Get in touch with the Asset Management Company The first step is to track the AMC -- as fund houses are known -- online. Once you get onto their Web site, you will get their office addresses, phone numbers and a contact e-mail address. You will even be able to transact online with some of them. mutual fund Web sites allow you to invest online. However, you must check if you have an account with the banks they have partnered with. For example, Prudential ICICI Mutual Fund allows you to buy funds online if you have a banking account with any of the following banks: Centurion Bank, HDFC Bank, ICICI Bank, IDBI Bank and AXIS Bank. You can buy units of SBI Mutual Fund's schemes only if you have an account with the State Bank of India or HDFC Bank. Under the heading Investors Zone, you will find another one called ARN Search. This refers to the AMFI Registration Number. Click on it and you will arrive at a search page. You can locate an agent in your vicinity by just putting in your PIN code or name of your city.

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Do you have an online trading account? Then you could check if they also sell mutual funds online. If you do not have an online trading account and are considering opening one, you could look for a player that offers both. Some like ICICI Direct sell funds online. But you must have a trading account with them. Others, like India Bulls and Motilal Oswal, do not have this facility online but if you call and leave your contact details, they will send an agent over.

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BIBLIOGRAPHY
BOOKS
PHILIP KOTLER, MARKETING MANAGEMENT, Volume -6th, ACCESS IN 10TH JULY 2007 MONEY, BANKING AND FINANCE RC SHARMA, BSC PUBLICATION, ACCESS IN 15TH JUNE 2007

JOURNALS
ICFAI UNIVERSITY PRESS JOURNALS

WEB SITES

www.axisbank.com www.mutualfundsindia.com www.google.com

www.gemoney.in

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