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Mutual Funds:Ready for the next leap

Mutual Funds: Ready for the next leap2

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Mutual Funds: Ready for the next leap 3

Contents1. Overview ............................................................................................................... 4

• India: a promising outlook• Key growth drivers for India’s mutual fund industry• Trend in growth and overview of current state of India’s mutual fund industry

2. Global best practices in asset management products ................................................ 10• Analysis of global assets under management across asset classes• Key trends:

• Rise of specialty products and investment solutions• Move to alternative products• Trend in global pension funds

3. Products: Indian Scenario ....................................................................................... 18• Overview of Indian mutual fund asset classes• Regulatory initiatives related to mutual funds• Fund houses focusing on new types of product offerings• Exchange Traded Funds (ETFs) in India• Pension fund sector in India

4. Digital .................................................................................................................... 24• Key global wealth and asset management trends in digital• Digital technologies transforming asset management space

5. Digital: Indian scenario ........................................................................................... 32

• Technological advances transforming India’s mutual fund sector• Digital helping enhance distribution

6. Regulations ............................................................................................................ 36• Global best practices• Key regulations affecting mutual fund industry across the globe• Key rules in global regulations that may impact the Indian mutual fund regulatory regime

7. Goods and Services Tax’s (GST) impact on the mutual fund sector ............................. 46


India:a promising outlook

1.


India is likely to emerge as one of the world’s top three growing economies by 2020. Investors also believe that India will be among the world’s top three destinations for manufacturing and develop into a regional as well as global hub for operations in the next few years.

According to EY’s 2015 India Attractiveness Survey, 32% of the respondents ranked India as the most attractive investment destination globally, while 60% placed the country among the top three investment destinations. The country’s vast domestic market and low-cost, skilled labor market continue to be its most attractive features.

2%

1%

6%

9%

9%

10%

11%

12%

17%

18%

21%

27%

38%

47%

60%

Can't say

Russia

Japan

Sub-Saharan Africa

Central Eastern Europe

Northern Africa

Western Europe

Middle East

Latin America

North America

Brazil

Southeast Asia

China

India 32%

15%

12%

5%

10%

3%

4%

4%3%

3%

3%

3%

1%

Rank the three most attractive markets for investment in the next three years (three possible answers)

Source: EY's 2015 India attractiveness survey (total respondents: 505).

First mentionTotal mentions

Commonwealth of Independent States (CIS)

Source: EY's 2015 India attractiveness survey (respondents: 250, asked to half of the sample).

20142015

Among the top three growing economies in the world

Among the world’s leading three destinations for manufacturing

A regional and global hub for operations

29%37%

24%35%

9%

21%

How do you see India in 2020?

A buoyant today and tomorrow

GDP growth: 2.5 times in the past 15 years

GDP per head growth: 3.3 times in the past 15 years

Foreign exchange reserves growth: 7 times in the past 15 years

Youngest country in the world by 2020,with median age of 29

100 million new manufacturing jobsthrough the Make in Indiaprogram by 2022

65 million new houses by 2022

Indian e-commerce market to reach US$43b in thenext five years

475 million middle-class Indians by 2030

TomorrowToday

29

43b10b

US$

20122014 20302019

475m

50mUS$

Third-largest economy in the worldby purchasing-power parity after the US and China

Sources: Oxford Economics Database; United Nations Conference on Trade and Development; World Bank; IMF; EY Rapid Growth Markets Forecast, EY, July 2014; Nomura’s India Internet Report.


Key growth drivers for India’s mutual fund industry

In 2015, India overtook China to become the fastest growing major economy globally, with a GDP growth rate of 7.3%. GDP growth is expected to increase further to 7.6% for 2016, driven by strong farm output and an improvement in electricity generation and mining.

1 In the past few years, the pace of wealth

creation has been much faster. According to World Bank data, after taking 60 years to become a US$1 trillion economy, India added the next trillion in only seven years and crossed the US$2 trillion landmark in 2014. The expected per capita gross national income growth over the next decade could propel India in to the “upper middle income country” category.

2 Strong

underlying economic expansion along with significant growth in per capita income will drive investments across financial products, including mutual funds. Strong macroeconomic fundamentals could also facilitate further development of capital markets and drive retail investor participation.

India benefits from favorable demographics. With more than 50% of the population under 25 years of age, India’s falling dependency ratio provides strong support for long-term growth. By 2021, 64% of India’s total population will be in the working age group.

3

Millennials are the largest and fastest-growing adult segment across the globe and represent the greatest opportunity for the asset management industry, as they are not only growing in number, but also accumulating assets at an impressive rate. Favorable demographics, rising income levels and a burgeoning affluent middle class will provide a strong customer base for the mutual fund sector.

Strong macro-economic fundamentals

Favorable demographics and rising income levels

In India, the mutual fund AUM/GDP ratio is significantly low at 7% (as of 2015), compared to 114% in Australia, 91% in the US and 51% in the UK. Mutual funds have not yet been able to gain a significant share of investors’ wallet mainly due to lack of financial awareness among a major portion of the population. Mutual fund investments accounted for only 3.4% of total investment in financial assets by individual investors in FY15.

4 This underlines the significant

untapped potential for growth in the Indian mutual fund industry. Moreover, there is lack of healthy participation from investors in beyond top-15 (b-15) locations. As of March 2016, 85.8% of the mutual fund industry AUM came from the top 15 cities, while the remaining 14.2% came from b-15 locations. Recently, with improved distribution and regulatory changes to fee structure, the mutual fund sector is witnessing rising activity from b-15 locations, especially in the equity segment.

5 SEBI is also keen on deepening

mutual fund penetration beyond tier I cities in India.

Current low penetration in terms of investor wallet share

The Government’s ongoing efforts to revitalize growth with various new initiatives — such as Make in India, Digital India and 100 Smart Cities — have been critical in driving India’s attractiveness among foreign investors. The Government aims to improve India’s rank in the World Bank’s Ease of Doing Business index (of 183 countries) from 142 to 50 within the next few years by cutting red tape and using technology to increase transparency.

6 It has also introduced a ranking

of Indian states based on their ease of doing business, fostering healthy competition to attract investments and create jobs. Foreign investment in India is also booming. India was the top destination for foreign direct investment (FDI), attracting 697 FDI projects worth US$63 billion in 2015. Make in India and the resultant boost has also resulted in a significant jump in FDI job creation from 1,16,000 jobs in 2013 to 2,25,000 jobs in 2015.

7

Government initiatives are driving investments from global investors

1 “Growth star India overtakes China as world’s fastest growing major economy”, The Telegraph, 8 February 2016; “GDP: At 7.6%, India’s growth points to fastest growing large economy”, The Indian Express, 1 June 2016

2 “India is now a $2-trillion economy,” The Hindu, 3 July 2015

3 “The rise of the millennials”, Livemint, 1 Dec 2015

4 EFMA, Oxford Economics, EY Analysis ; Karvy: India Wealth Report,

2015; “Factors that impacted the fund industry in 2015”, Morning Star, 29 December 2015

5 AMFI; EY Analysis; “Mutual fund assets: Smaller cities’ share on rise”, Business Standard, 27 April 2015; “MFs asset base from B15 cities jumps 19% to Rs. 2 lakh cr”, Business Line, 25 August 2016

6 “India: can the fastest-growing large economy sustain its pace?”, BNP Paribas, 14 June 2016

7 “India replaces China as top FDI destination in 2015: Report”, The Economic Times, 21 April 2016


Source: AMFI

Mutual fund AUM (INR billion)

0.3 45.6470.0

1,218.1

5,051.54,173.0

6,139.8 5,922.5 5,877.0

7,025.0

8,252.0

10,828.0

12,846.6

FY65 FY87 FY93 FY03 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

1964–87: UTI is the sole player

1987: Several public sector players, including PSBs, enter

1993: Private sector players enter; the first mutual fund regulations come into existence

1996: Formulation of SEBI (Mutual Fund) Regulations 1996 under which the industry currently

2014: The MF market scales new highs as it surpassed INR10trillion for the first

During 2006 -2008:Several foreign firms enter

2003: UTI bifurcates into two with a specified undertaking in charge of assured return schemes

2015: Robust equity inflows result in equity AUM crossing INR4 trillion in December

Record AUM growth since 1990sThe formation of Unit Trust of India in 1963 was a significant milestone in the evolution of India’s mutual fund industry. However, the MF sector gained significant traction after the entry of private players in 1993. The industry has seen rapid growth since 1990, both in terms of AUM size and number of players. Allowing the entry of private players brought in capital to fund growth, helped in product development and led to expansion in the reach of mutual funds. SEBI has introduced significant regulatory reforms over the last two decades to increase mutual fund penetration, adopt global best practices in governance and transparency, and also ensure investor protection. All these factors combined led to an increase in the mutual fund industry’s AUM from INR470 billion in March 1993 to INR12.85 trillion in March 2016. Particularly during the last year, strong participation from retail investors and robust inflows into equity mutual funds drove strong growth in AUM, with equity AUM crossing the INR4 trillion landmark for the first time in the history of the Indian mutual fund industry in December 2015.

8

Trend in growth and overview of the current state of India’s mutual fund industry

Competitive landscape dominated by large players The industry is currently dominated by large financial services firms, which also have interest in banking and insurance business. The market share of the top 10 players amounted to 79.5% in March 2016, while the top 5 players held a 55.6% market share.

9 Small and medium-sized

players have not been able to make significant inroads and are feeling the pressure of escalating costs and shrinking revenues. Foreign players have also found it difficult to gain a strong foothold. Foreign fund houses accounted for only 8% of assets, with their inability to grow beyond a certain size compelling them to exit. In the past six years, seven foreign players have exited.

10 This is leading to consolidation

in the industry, and the mutual fund business in India is becoming more concentrated.

8 “Mutual fund industry’s asset base surges 21% to Rs 13.4 lakh cr in 2015”, The Financial Express, 3 January 2016

9 AMFI

10 “Wall Street gives up on India mutual funds as JPMorgan joins exodus”, Mint, 13 April 2016


Lack of widespread financial literacy among investors has been one of the key impediments to further penetration of mutual fund products. SEBI has been at the forefront of taking initiatives to increase awareness. The relentless effort and significant time invested by SEBI and AMCs in spreading awareness have increased the familiarity of retail investors with investment jargons. Increased financial awareness will, in turn, be instrumental in driving higher retail demand for mutual fund products.

The robust AUM growth of the past decade is expected to continue going forward, driven by developments across the following areas:

Increased retail participation11

Investor class wise AUM (%)

21.3% 22.4%

22.0% 28.6%1.2% 0.9%

4.6% 1.2%50.9% 46.9%

Mar-09 Mar-16

Retail

Source: AMFI

HNIs FIIs Banks/FIs Corporates

The industry has been successful in improving the share of retail and high net worth individuals (HNIs) in total AUM from 43% in March 2009 to 51% in March 2016. According to AMFI, mutual funds added 5.9 million folios in FY16, of which 5.45 million were retail folios. As of March 2016, total mutual fund folios amounted to 47.7 million, of which 45.4 million were retail folios.

Global best-practices / key trends Indian scenario

Products • Globally, the mutual fund industry is well established; Europe has the largest number of funds, while the US dominates in terms of AUM; notably, the penetration of funds is low in Asian markets

• The global asset management industry is witnessing a shift in flows from traditional mutual funds to alternative products; passive investing and liquid alternative mutual funds are becoming popular in the western world

• Stellar growth of ETF products continues in western markets

• Pension assets have reached a new high (amounted to US$35 billion in 19 major markets); there is a shift towards defined contribution (DC) plans and increasing demand for investment solutions

• ► The Indian mutual fund industry has witnessed record AUM growth over the past two decades

• ► However, mutual fund penetration is still low and the industry has high potential for growth

• ► Debt funds dominate the AUM mix; however, equity funds have driven AUM growth recently

• ► SEBI needs to focus on rationalizing similar product offerings

• ► New types of product offerings such as REITs and AIFs are expected to drive growth

• ► ETFs are likely to gain popularity going forward with increasing maturity in financial markets

• ► There is a need for deepening pension coverage in India

Digital • ► The rise of direct-to-consumer (D2C) distribution is changing the rules of engagement for asset managers

• ► Technology is helping asset managers revamp their business models — standardize, centralize and outsource

• ► Tech giants are emerging as threats to traditional fund houses

• ► Mobile, social media, big data, analytics, cloud-computing, blockchain, FinTech and robo-advisors are shaping the future of asset management

• ► Technological advances are also transforming India’s mutual fund sector

• ► Processes are becoming paperless, efficient, easy and real-time

• ► Digital is helping fund houses enhance distribution reach; industry-wide digital platforms, such as platforms by stock exchanges and MF Utility, are facilitating easier distribution

• ► SEBI is also planning to allow e-commerce firms to sell MFs

• ► Robo-advisors will help in distribution

Regulations • ► A more stringent regulatory environment for the asset management industry is evolving after the global financial crisis

• ► Multitude of regulations in overlapping areas is leading to the emergence of a complex regulatory environment; there is increased cost of regulatory compliance and low tolerance for regulatory breaches

• ► Best-practices in key global regulations that may impact the mutual fund regulatory regime in India

• ► SEBI has introduced significant regulatory reforms for the mutual fund industry over the past two decades

• ► SEBI is pushing for a more transparent, investor-friendly and less risky mutual fund industry in India

• The regulator is also focused on increasing transparency vis-a-vis direct plans to drive higher retail penetration.

• GST is expected to have a significant impact on the mutual fund sector

11

AMFI data; “Despite volatility, retail investors continue to take Mutual Fund route”, The Financial Express, 27 April 2016


Global best practices in asset

management products

2.


Analysis of global AUM across traditional asset classesGlobally, mutual fund AUM has grown at a CAGR of 5.8% over the past five years, with the bulk of the increase driven by equity and mixed/balanced funds. In 2015, global mutual fund assets increased slightly by 0.5% to US$32.2 trillion.

12

In 2015, equity funds continued to dominate, with a 43% share in global AUM. However, in recent years, the share of balanced/mixed funds, which invest in both equities and fixed-income instruments, has increased slightly because of the slowdown in net flows into equity funds after 2013 caused by increased capital market volatility worldwide.

Source: Strategic Insight/Simfund Global Dash Database

Global AUM (US$ trillion) across traditional mutual fund asset classes

40.3% 37.8% 38.2% 43.0% 43.3% 43.0%

21.1% 22.9% 24.5% 22.1% 22.1% 21.1%

19.2% 19.3% 17.6% 15.8% 15.3% 16.2%

12.4% 12.6% 12.7% 13.0% 13.2% 13.7%7.1% 7.3% 6.9% 6.2% 6.0% 6.0%

2010 2011 2012 2013 2014 2015

24.3 23.6 27.0 30.3 32.0 32.2

Equity Bond Money market Mixed Others/guaranteed/real estate

Source: Strategic Insight/Simfund Global Dash Database

Global net flows (US$ billion) by fund type

-1,000

-800

-600

-400

-200

0

200

400

600

800

1,000

1,200

1,400

2009 2010 2011 2012 2013 2014 2015

All funds EquityBond Money marketMixed

Notably, in 2015, money market management funds witnessed the highest inflows among all asset classes mainly due to changes in the US market. Investors have shifted their assets toward safe-haven funds, especially government funds, in anticipation of the SEC’s new money market fund regulations.

12 Strategic Insight/Simfund Global Dash Database


During the past couple of decades, the mutual fund industry has witnessed strong growth the world over. However, the amount, type and growth experience of mutual fund assets has varied substantially across the four broad regions — Americas, Europe, Asia-Pacific and Africa. The Americas

and Europe are the largest contributors to global mutual fund AUM, with the Americas having the dominant share considering that the US is the largest open-fund market worldwide.

Source: ICI

AUM distribution by region (as of March 2016)

Allocation of AUM across regions by class (as of March 2016)

Americas51.4%

Europe35.8%

Asia and Pacific 12.4%

Africa0.3%

41.9%51.3%

27.8%43.9%

20.4%

22.0%

23.0%

24.8%

10.5%

2.3%

13.6%

10.2%

20.2%7.5%

42.9%

13.1%14.7%

9.5%17.0% 11.8%

9.4%0.8%

17.6% 21.1% 22.6%

World Americas Europe Asia and Pacific Africa

Equity Bond Balanced/mixedMoney market Others

Sources: EFAMA, Oxford Economics

Penetration of funds is much lower in AsiaAUM/GDP ratio (2015)

91%53% 38%

9%

70%51% 63% 49%

114%

30%11% 23% 7% 11%

The US Canada Brazil Mexico France The UK Switzerland Germany Australia Japan China Korea India Taiwan

AmericasEuropeAsia - Pacific

Product preferences also vary significantly across regions and countries within a region. For instance, bond and mixed-funds are more popular in European markets as sluggish growth, deflationary trends and geopolitical risks have led to risk aversion. Equity and money-market funds hold a higher

share in the Asia-Pacific region. Strong fund flows in money-market funds in Asia are driven mainly by China’s on account of the high retail demand for online funds managed by large domestic technology companies.

Penetration of funds is low in Asian marketsMutual fund penetration in most Asian economies hasn’t kept pace with the growth in financial assets of the Asian households and is relatively lower compared to American and European economies. As an investment option, mutual funds constitute only ~10% of the Asian investors’ financial holdings.

13

The mutual fund industry in emerging economies in Asia is characterized by low financial literacy levels, high churning of funds and inconsistent advisory levels, leading to low product adoption. In western countries, such as the US, mutual funds are seen as long-term savings tools and are also found in retirement options, while in Asia, investors view mutual funds mainly as trading tools.

13 “Cerulli: Ignorance about mutual funds widespread in Asia”, LifeHealthPro, 14 October 2014


International funds include global diversified funds, regional funds (focus on a specific geographical region), country funds (focus on a single country) and global sector funds (invest in a particular sector of the economy in various countries). However, such funds expose investors to currency and country-specific risks. For instance, funds that invest in Chinese equity markets lost ~22% in one week in August 2015 due to high market volatility. In spite of increased volatility in the markets, asset managers continue to focus on China on account of growth opportunities, and more than 830 China-focused mutual funds were launched in 2015.

The inability of small-ticket retail investors to directly deal in commodities has driven the emergence of commodity mutual funds, which invest mainly through stocks of commodity companies. These funds do not exactly replicate returns based on the underlying commodity’s prices, but are largely dependent on the underlying commodity. However, sector-specific risks are high — for instance, energy mutual funds, which were the most popular funds in recent years, witnessed harsh losses in 2015 as a result of a combination of sliding oil prices and rising interest rates. American investors had invested US$20 billion in energy funds in 2013 and 2014 and suffered losses of up to 35% in certain cases in 2015. Energy funds dominated the worst-performing US funds league table in 2015.

Key trendsRise of specialty products and investment solutions

Globally, the asset management industry is also witnessing a shift in net flows from traditional mutual funds to alternative products such as specialist products and investment solutions.

• Specialty funds: Specialty funds, which are commonly referred to as sector funds, invest a significant portion (at least 25%) of their portfolio in a specific sector of the economy, such as energy, financial services, technology and real estate funds. These funds charge higher expenses and loads compared to diversified funds. While these funds entail greater risks and volatility, they can

International funds Commodity funds

serve to hedge an investor’s portfolio as certain sectors move opposite to the economy. Moreover, investors often follow a sector-rotation strategy by switching from one sector to another. Timely sector rotation increases the value of investment accounts and portfolios and offers significant potential to grow wealth over time. However, to successfully employ a sector-rotation strategy, investors need to understand and follow the dynamics of each industry.

14

Other than sector funds, specialty funds may also include international, regional or country funds and commodity funds (such as oil funds, metal funds and funds based on agricultural commodities):

15

• Investment solutions: Prior to the financial crisis, asset managers mainly followed a product-push approach. However, over the last decade, the focus shifted from relative to absolute performance and now to investment solutions, which focus on achieving a bespoke investment return or income at some point in the future. Success in the institutional client segment will require a shift from selling products to creating solutions with clients. The marketplace has already started increasingly buying into customized solutions among which investors can selectively choose from an array of services designed around meeting their personalized goals.

14 “Specialty Funds vs. General Mutual Funds and Socially Responsible Investment (SRI) Funds: An Intriguing Risk/Return Paradigm”, Brian D. Fitzpatrick, Joshua Church and Christopher H. Hasse, Rockhurst University, Journal of Applied Business and Economics vol. 13(2) 2012

15 “Beginner’s Guide to International Mutual Funds”, 6 October 2014, http://mutualfunds.com/international-and-global-stock-funds/beginners-guide-to-international-mutual-funds/; “Record number of China-focused mutual funds launched”, Financial Times, 10 January 2016; “Mutual fund investors burnt by energy in 2015”, Financial Times, 27 December 2015


Move to alternative products• Shift from traditional active funds to passives

16

Most actively managed funds underperform benchmarks post fees and trading costs, which has resulted in investors looking at low-cost passive products as an alternative. According to S&P Dow Jones, 10 out of the 11 regions covered (for both equities and bonds) failed to beat their benchmark over the past 10 years.

Source: EY Analysis

Share of global asset management market

19%

11%

81%

89%

2015

2009

Passive Active

Dissatisfied with underperforming active funds, which are also perceived as overpriced, investors are increasingly switching to passive investment funds, which track the market and charge lower fees. As of December 2015, ~US$747 billion were moved into passively managed funds and US$312 billion of actively managed funds were pulled out by investors.

16 “Active asset managers knocked by shift to passive strategies”, Financial Times, 11 April 2016; “Hello passive, goodbye active: fund investors make the switch”, Financial Times, 23 June 2013; “Casey Quirk: Global AUM slumps in 2015; passive, ETFs take majority of flows”, Pensions & Investments, 20 January 2016.

10 year selected global fund performance data (as of December 2015)

Region and risky asset Active managers Benchmark Difference

France equity 4.0% 4.7% (0.8%)

Germany equity 6.6% 7.4% (0.8%)

Italy equity 0.0% (0.9%) 0.9%

Spain equity 2.6% 2.9% (0.3%)

Netherland equity 3.1% 7.2% (4.1%)

U.S. equity 5.8% 7.4% (1.6%)

U.S. real estate 5.4% 7.3% (1.9%)

U.S. long-term government bonds 3.8% 6.7% (2.9%)

U.S. short-term government bonds 2.2% 2.5% (0.3%)

U.S. MBS 3.9% 4.6% (0.7%)

Emerging markets bonds 4.4% 6.7% (2.3%)

Source: SPIVA/S&P Dow Jones Indices/zerohedge.com analysis


• Rise of liquid alternative mutual funds in the western world

17

During the past few years, a number of alternative investment funds have been introduced in the American and European mutual fund market because of industry shifts and regulatory changes. Hedged mutual funds (also known as alternative mutual funds) employ investment tactics traditionally found in hedge funds — such as use of leverage, derivatives, and short selling — vis-à-vis traditional mutual funds, which limit themselves to buying and holding assets — typically stocks or bonds. These funds provide retail investors access to a diverse range of asset classes and investment strategies that were generally not available to them through regulated vehicles earlier. They benefit investors by facilitating access to a range of exclusive hedge fund strategies such as merger arbitrage, convertible arbitrage, long/short equity and macro trading. In the US, these funds are covered by the 1940 Securities Act, while in Europe they are covered under UCTIS.

Assets in liquid alternative mutual funds in the US doubled between 2011 and 2014. However, after 2014, the asset management industry’s efforts of bringing hedge fund strategies to the mass market stalled because of poor returns and investor skepticism.

• Stellar growth of exchange traded funds continues18

Exchange traded funds (ETFs) are passively managed baskets of securities, which uniquely combine the benefits of stocks and mutual funds and are designed to closely track market indices. Their main advantages are low cost, tax efficiency, liquidity, risk management and transparency. ETFs continued to achieve market share gains and witnessed record growth of over five-fold over the past decade to US$2.9 trillion (as of December 2015), as investor concerns about overpriced and underperforming active funds fueled the demand for passive funds.

Source: Strategic Insight/MF and Global Dash Database

Global ETF AUM and their percentage to mutual funds’ AUM

0.6 0.8 0.71.1

1.4 1.51.9

2.32.7 2.9

3.0%3.5%

4.2%5.2%

6.1% 6.5%7.4%

8.1%9.0%

9.8%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

ETF AUM (US$ trillion) ETF AUM as a percentage of mutual fund AUM

ETFs have been gradually gaining popularity over actively managed mutual funds. Their widespread acceptance by the crucial Gen X and Gen Y market segment has emerged as a considerable threat to active asset managers in western economies.

Smart beta ETF strategies are one of the fastest growing trends in the ETF industry and have become increasingly popular for investors seeking to manage risk and factor diversification (i.e., low volatility, momentum, quality, value and size). According to BlackRock, smart beta ETF assets are expected to reach US$1 trillion globally by 2020 and US$2.4 trillion by 2025.

19 At the end of December 2015,

smart beta ETFs assets totaled US$260 billion, representing 10.1% of total ETF assets.

The US is the world’s most successful ETF market, distinguished by its size as well as liquidity and retail investor base. ETFs have also become extremely popular in Europe, where the average annual growth rate of ETFs exceeded 40% during the last decade.

20 ETFs — benefiting from low costs,

high liquidity and transparent pricing — became popular in the western economies against a backdrop of quantitative easing by leading central banks. However, the penetration of ETFs remains low in Asian markets vis-à-vis the US and Europe. The advisory business in Asia is still commission-based (as opposed to fee-based) and, therefore, advisors have less incentive to recommend ETFs.

21

17 “Alternative’ or ‘Hedged’ Mutual Funds: What Are They, How Do They Work, and Should You Invest?”, Forbes, 28 February 2014; “Liquid alternative mutual funds leave investors disappointed”, Financial Times, 23 May 2016

18 “Professionally managed Investment Solutions through Exchange Traded Funds, TOPS, 2013; “Exchange traded funds grow bigger than hedge funds”, Financial Times, 21 July 2015

19 “BlackRock Projects Smart Beta ETF Assets Will Reach $1 Trillion Globally by 2020, and $2.4 Trillion by 2025”, BusinessWire, 12 May 2016

20 European ETF Outlook, Lyxor ETF Research, February 2016

21 “Could ETF takeup surge in Asia?”, Fund Selector Asia, 31 August 2015


Trends in global pension funds• ► Overview of the global pension funds industry

According to a study by Tower Watson, pension assets in the 19 major markets increased at a CAGR of 5.3% over the last decade to US$35.3 trillion in 2015. The US, the UK and Japan account for ~78% of total pension assets, with the US being the largest market in terms of pension assets.

Asset diversification has gained momentum among pension funds globally. Pension funds asset allocation witnessed a shift from equities towards alternatives in order to escape market volatility and increase returns. This shift was also attributed to equities and bonds trading at high valuations compared to their historic averages.

Note: *Based on AUM of 19 major pension markets Source: “Global Pension Assets Study 2016,” Towers & Watson, February 2016

AUM* (in US$ trillion) Pension assets (US$ billion) in 2015 — top 5 markets and India

21

35

2005

CAGR (2005—2015): 5.3%

2015

21,779

3,2042,746

1,523 1,484

94

The US The UK Japan Canada Australia India

• Asset diversification from equity to alternatives

Source: “Global Pension Assets Study 2016,” Towers & Watson, February 2016

Pension funds: asset allocation

52% 50% 48% 44%

36% 38% 32%29%

7% 9% 19% 24%5% 3% 1% 3%

1996 2002 2008 2015

Equities Bonds Alternatives Cash

• Shift in the retirement market from DB to DC plans

During the past decade, defined contribution (DC) assets have grown at a CAGR of 7.1% while defined benefits (DB) assets have grown at a CAGR of 3.4% in the top seven pension markets: Australia, Canada, Japan, the Netherlands, Switzerland, the UK and the US. As a result, DC assets’ share in total pension assets increased from 38% in 2003 to ~48% in 2015. DC plans dominated the pension markets in US and Australia.

22

Source: “Global Pension Assets Study 2016,” Towers & Watson, Feb 2016

Pension fund assets by scheme type

60% 58% 52%

40% 42% 48%

2005 2010 2015

Defined benefit Defined contribution

22 “Global Pension Assets Study 2016,” Towers & Watson, February 2016; “Global pension fund assets hit record high in 2013”, TowerWatson, 5 February 2014


The increasing share of DC plans vis-à-vis DB plans places a significant retirement savings burden on employees. One of the main drawbacks of the shift away from DB pension plans for investors is that retirees will no longer have a guaranteed income stream — they will have to create one from their DC plan and other savings. This opens up opportunities for asset managers to create new products for the “decumulation” phase — i.e., the part of the pension life-cycle when individuals start to withdraw from their savings. As a result, there is a growing focus on the need for more innovative products that meet the needs of pension members. Fund managers have begun to release new investments products or are revamping existing products that focus on the needs of retirees.

One new major innovation within the pension landscape is the introduction of collective defined contribution (CDC) pension schemes, which are also known as “shared risk” or “defined ambition” schemes. Unlike DC savers, which build up their individual account, under defined ambition, everyone’s money is aggregated into a single pool, reducing investment uncertainty and providing economies of scale. Income is paid directly from the savings fund. CDCs are offered in the workplace, where both employers and employees make contributions. Under the collective model, all members share the ups and downs of investment performance, and market shocks are absorbed by the group fund, which reduces the impact on any individual member

23

Case study: CDC pension schemes proposed for the UK in 2014

24

CDCs, which involve members paying into a joint fund and sharing earnings, were proposed by the UK’s former pension minister in 2014. The Government considered CDCs to offer better pensions to people saving for their retirement. Most people in the UK are either members of a final pension scheme provided by employers or a defined contribution scheme, which may be employer-sponsored or private. The introduction of collective pension schemes, which are already operating in other countries such as the Netherlands and Canada, could facilitate more stable retirement income.

Pension plan sponsors are adopting liability-driven investing (LDI) strategies — which reduce the asset-liability mismatch — to reduce the volatility in their plans’ funded status. This generally means a shift out of equities and into fixed income investments that better track the value of a plan’s liabilities. LDI is a more methodical way for pension plans to stabilize their funding status throughout market cycles compared to traditional pension investing. It is more prevalent among pension funds in Europe than the US. According to estimates of consultancy firm Spence Johnson, a third of all UK-defined benefit assets are currently invested in LDI mandates, and it predicts that the demand for LDI will account for 40% of DB pension assets by 2024.

Target-date funds are the main default-option funds in most DC plans in the US. Target date funds have emerged as the investment of choice for 401(k) plan (DC) sponsors and participants. According to Cerulli Associates’ estimates, target-date funds will continue to grab more 401(k) assets, capturing 88% of new contributions to the plans, and will represent 34.6% of the total 401(k) assets by the end of 2019, reaching US$2 trillion in AUM. These funds are also likely to gain popularity in Europe as well. For instance, in the UK, the Trustee of the National Employment Savings Trust (NEST) pension scheme has set target-date funds as the default option for its members.

LDI

Target-date funds

23 “What are proposed collective pension plans?”, Financial Times, 4 June 2014

24 “What are proposed collective pension plans?”, Financial Times, 4 June 2014; “UK government criticized for shelving ‘group’ DC pensions”, The Actuary, 16 October 2015; “Retreat from CDC ‘strategic, tactical’, says UK’s Altmann”, Investment & Pensions Europe, 16 October 2015

25 “Pension survey shows fierce competition for assets”, Financial Times, 22 November 2015; “Cerulli: Target-date funds snagging larger share of 401(k) assets”, Pensions & Investments, 24 November 2014

• ► Increasing demand for investment solutions in pensions

The pensions markets is witnessing increasing demand for investment solutions in the growing usage of liability-driven investing (LDI) and target-date funds.

25


Indian ScenarioProducts:

3.


Debt funds constitute significant share of industry AUMUnlike global AUM mix where equity is the dominant asset class, in India debt (or income-oriented) schemes continue to dominate accounting for almost half of the industry’s AUM. However, post 2013, increased demand for equity and money-market funds has led to decline in the share of debt funds in overall AUM mix.

51.1% 49.3% 49.5%56.5% 55.9%

47.7% 46.0%

32.5% 33.1% 31.0%24.6% 23.2%

31.9% 31.3%

12.3% 12.5% 13.6% 13.3% 16.2% 15.0% 16.2%

2.6% 2.9% 2.8% 2.4% 2.0% 2.4% 3.2%

Mar'10

Source: AMFI

Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16

AUM across asset classes

Debt Equity Money Market Balanced ETFs Gilt Fund of Funds

Key drivers of recent surge in mutual fund AUM:Mutual fund AUM has witnessed a steady rise since Mar’12 and more than doubled to INR12.3t as of Mar’16 driven by improved market sentiment as well as initiatives to channelize household savings into MFs vis-à-vis traditional investment avenues such as gold.

Equity funds have witnessed significant inflows in recent years: In FY15 and FY16, equity funds witnessed a surge in AUM in line with the revival in Indian capital markets. In 2015, equity mutual fund assets crossed the INR4 trillion landmark for the first time in mutual fund history mainly driven by increased demand by retail investors, especially investors from small towns, as they took to investing in the mutual fund market with sluggish growth in the real estate space and decline in gold prices.

26 During FY16, MFs reported net inflows of more than INR750b in equity and equity-linked savings schemes with

investors from smaller towns contributing for 44% of these flows.27

Source: AMFI

Indian Mutual Fund Industry Assets Under Management (INR trillion)

6.1 6.0 5.9 7.0 8.310.8

12.3

Mar'10 Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16

26 “Mutual fund industry’s asset base surges 21% to Rs 13.4 lakh cr in 2015”, The Financial Express 3 January 2016

27 “Assets under management of mutual funds grow 14% in FY16”, International Business Times, 4 April 2016


Regulatory initiatives related to mutual fund productsSEBI to drive fund houses to rationalize product offerings

28

India has more than 2,100 mutual fund schemes in the two primary asset classes: debt and equity. Such a large number of products lead to confusion and misinterpretation. Hence, there is a need for fund houses to consolidate mutual fund schemes with similar objectives to facilitate better investor understanding. SEBI is pushing for fund houses to rationalize their product portfolios. This is reflected in the decline in the issuance of new fund offers (NFOs).

Trend in NFO issuance

Category FY13 FY14 FY15 1HFY16

Balanced 17 1 1

Debt 798 947 916 261

Dynamic/asset allocation 28 28 42 29

Equity 220 21 80 38

ETF 2 5 6 8

FoF 32 3 2 1

Gilt 36 2 3

Liquid 18 16

Specialty 17 2

Total 1,168 1,023 1,059 340

Source: “Indian Mutual Fund Industry: The Road Ahead”, Assocham Report, November 2015

Reduction in expense ratio toward global norms

India has one of the highest expense ratios for equity and allocation funds: averaging over 2% of asset-weighted expenses for allocation funds, compared to between 1% and 1.7% for most countries.

29 SEBI has issued many regulations

in the mutual fund sector regarding the launch of mutual fund schemes as well as advertisement codes to ensure investor protection. The regulator has also capped the TER of fund houses: the maximum TER that an equity scheme can charge is 2.5% (2.25% for debt schemes) for the first INR1 billion in weekly average net assets of a scheme, 2.25% for the next INR3 billion and 1.75% for anything beyond, with a relaxation of up to 30bps depending on the proportion of fund flow from beyond the top 15 cities. Lowering of TER by the regulator could prove to be a facilitator for drawing more small investors to the mutual fund market. SEBI has adopted a stringent approach toward new fund launches, as many small investors faced losses because they misunderstood the market risk involved in several mutual fund products.

• ► Fund houses are focusing on new types of product offerings

Recently, fund houses have started approaching SEBI with proposals for new fund offers in line with increased retail investor demand. As of June 2016, mutual fund houses had filed draft applications with SEBI for ~50 new fund offers, including hybrid, equity, debt, retirement, fixed maturity plans (FMPs), tax-free bonds and speciality funds.

30 Many fund houses are also moving away from

the traditional English names for plans and launching plans with vernacular names in order to facilitate better understanding of mutual funds in rural areas.

Other new types of investment products:

Real estate has traditionally been a highly preferred asset class among Indian investors. However, with the possession in a number of new property launches getting delayed in the past few years, investors have become vary of investing directly in real estate. The alternative used in developed market is Real-estate Investment Trusts (REITs). REITs originated in the US and have been successful in several countries such as Singapore, Australia and Hong Kong. REITs allow investors the opportunity to invest in income-generating real estate assets, which could range from offices to residential apartments and shopping centers. REITs are structured as trusts, which are listed on stock exchanges, and investors buy units in the trust. Typically, the trusts distribute 90% of their income among investors by issuing dividends, usually generated from rental income and capital gains from the profitable sale of real estate assets. In India, a minimum investment of INR200,000 is required in a REIT.

31 Recently, SEBI relaxed the norms

for REITs — allowing them to invest a larger portion of their funds (up to 20% from the current level of 10%) in assets under construction and also proposed changes to facilitate easier entry for offshore fund managers. Moreover, the Government has also decided to remove dividend distribution tax (DDT) on REITs.

32 With the recent

support from regulators and the Government, REITs may gain popularity going forward. According to Cushman and Wakefield, Indian commercial real estate offers investment opportunities for REITs worth INR2.8 trillion—INR3.6 trillion in the top cities. REITs provide retail investors a regulated and transparent mechanism to participate in the real estate sector, which has so far been dominated by HNI/institutional investors. Some of the advantages of REITs as an investment avenue vis-à-vis physical real estate are higher liquidity, lower brokerage, no long-term capital gains tax and no stamp duty. Moreover, REITs provide diversification benefits. However, they are subject to volatility and investment risk.

Real-estate Investment Trusts

28 “A to-do list for mutual funds in 2016”, Mint, 19 August 2016; “Indian Mutual Fund Industry: The Road Ahead”, Assocham Report, November 2015; “New equity mutual fund launches dip 70% in 2016”, Business Standard, 9 June 2016

29 “Sebi looking to lower expense charges for mutual fund”, Mint, 22 January 2016

30 “Mutual Funds approach Sebi with 50 new proposals in 2016”, The Financial Express, 26 June 2016

31 “Nuts and bolts of Real Estate Investment Trust”, The Hindu, 12 June 2016; “Six reasons why REITs will be a boon for real estate investors”, Moneycontrol

32 “Sebi relaxes norms for REITs, eases entry of offshore fund managers”, The Indian Express, 18 June 2016; “Exemption of dividend distribution tax: REITs now a step closer to reality”, The Indian Express, 5 March 2016


Alternative Investment Funds (AIFs) are investment vehicles established to pool in funds for investing in real estate, private equity and hedge funds with a pre-determined objective. AIFs are primarily aimed at high net worth individuals (HNIs) with minimum individual investment of INR10 million as per SEBI norms. There are three categories of AIFs — Category I: funds that get incentives from the Government or regulators and include venture funds, social venture funds and infrastructure funds; Category II: funds that do not get concessions and cannot raise debt for investment purposes (only day-to-day operations) and include private equity funds and debt funds; and Category III: funds that are traded to make short-term returns and include hedge funds.

Alternative Investment Funds (AIFs)

AIF category-wise commitments, fund raised and investments (INR billion)

Category ICategory IICategory III

Source: SEBI (Cumulative net figures as of 30 June 2016)

115.044.1 30.7

504.4

260.0206.7

327.0

167.3137.8

62.5

48.538.2

Commitments raised Funds raised Investments made

Funds collected for AIFs from HNIs are primarily invested in unlisted securities and start-ups to promote entrepreneurship. SEBI is also planning to create a new category of AIFs to encourage long-term funds to flow the AIF route. SEBI may reclassify Category III AIFs into one group of long-term funds such as pensions and another group of short-term arbitrage funds such as hedge funds.

33

ETFs, which are in high demand in developed markets, are yet to gain popularity with Indian investors. As of December 2015, there were 1,577 ETFs traded on the NYSE, 1,109 listed on Deutsche Börse and 2,315 on London SE, while only 54 traded on the National Stock Exchange. Globally ETFs’ share in mutual fund AUM is 9.8%, while in India it remains low at 1.8%.

►Muted investor response to popular global products, such as ETFsContribution of ETFs picking-up but still minimal

34

ETFs AUM (INR billion)

Source: AMFI

15.944.0

98.9116.5

86.866.5 63.59.6

25.2

16.114.8

45.3 80.6

160.6

0.4%

1.2%

2.0%1.9%

1.6%1.4%

1.8%

Mar'10 Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16

Gold ETF ETFs (other than Gold) ETFs share in total AUM

33 “Sebi registers over 200 Alternative Investment Funds”, DNA, 20 April 2016; “Foreign inflow boost for alternative investment funds”, Business Standard, 22 November 2015; “De-jargoned: Alternative investment funds”, Mint, 4 March 2015; “Alternative Investment Funds coming to India? Here’s what you need to know”, The Financial Express, 13 July 2016; “Sebi panel suggests reforms to grow alternative funds industry”, Mint, 21 January 2016

34 “Gold ETFs Lose Shine for Indian Investors”, The Wall Street Journal, 20 January 2014


The ETFs listed on Indian exchanges are typically based on equity indices (local or international), gold or debt. Awareness of ETFs in India is very low and restricted mainly to gold ETFs. Gold ETFs dominated the ETF market in India till 2014. However, since then, gold ETFs have lost favor with investors due to a fall in international gold prices.

Another reasons that ETFs have not gained popularity is that distributors have less incentive to market them given that they are low-margin passive products. In the US, ETFs grew in popularity once the commission on mutual fund distribution was removed and distributors moved to a fee-based model. The differential commission structure between mutual funds and ETFs is a crucial reason for the low penetration of ETFs in India.

ETFs may gain popularity going forward

ETFs are likely to be one of the products to drive significant growth in the Indian asset management industry. Recently, the Employee Provident Fund Organization (EPFO), which is India’s largest government-sponsored employee pension fund, decided to allocate 5%—15% of its corpus in equity investing in line with the Government’s drive to inculcate a long-term equity investing culture among domestic investors. EPFO’s initial choice for equity investing was ETFs based on Sensex and Nifty, and it invested INR32 billion between August 2015 and December 2015 in these ETFs. A push from the Government has started giving ETFs visibility with retail investors. Non-gold ETF AUM almost doubled from INR80.6 billion in March 2015 to INR160.6 billion in March 2016.

35 Currently, the Indian equity market

offers significant stock-picking opportunities for active fund managers. Certain mutual funds have recorded returns that are significantly higher than benchmarks.

36 With increasing

maturity in the Indian markets, it will become more difficult for fund managers to outperform indices, leading the way for passive investing or index tracking. In the US, in the last 20 years, approximately 65%—-80% of fund managers have under-performed the S&P 500. An increase in investor awareness regarding ETFs and higher liquidity and transparency in the ETF market are necessary to fuel the growth of the ETF industry in India.

Pillar oneFunded by

Government

India lacks a robust pillar one system, as there is no social security system; instead, there are a number of social assistance programs for economically backward classes.

This system is well-established mainly on account of legislation on gratuity and Provident Fund (PF); schemes include central civil service pension and employees PF.

Pillar three is still at a nascent stage. It includes insurance products, mutual funds, Public Provident Fund, National Pension System (NPS) and any other personal savings for retirement.

Pillar twoSponsored by

employers

Pillar threeSponsored by

employers

►Pension fund sector in India Current state of the pension fund sector in India

37

India’s pension business has immense potential to grow, as the current state of the pension fund sector in India is marked by insufficient pension coverage and a large unorganized sector workforce. Only 9%—10% of the population is covered by some type of pension benefits.

38

India’s pension system

The pension system in developed markets including India is based on a three-pillar structure:

Some of the most popular retirement benefit schemes in India include the Employee Provident Fund, Public Provident Fund and, most recently, the National Pension System. The Employee Provident Fund, which is a defined contribution plan managed by the EPFO, is the principal source of retirement planning for workforce in India’s organized sector. The Government of India launched the National Pension System (NPS), a defined contribution scheme, in January 2004 to provide retirement income to citizens. Initially, it was introduced for new government recruits but was later extended to all citizens, including unorganized-sector employees, on a voluntary basis. The Public Provident Fund is a defined contribution scheme with an administered rate of return, offered to individual investors without restrictions. The benefits include total accumulations that can be withdrawn after 15 years of service.

35 “Why 2016 looks so promising for the Indian equity market”, The Economic Times, 25 December 2015; AMFI

36 “Why India is not an ETF market”, MorningStar, 21 March 2016

37 “Pension business in India”, EY Report, November 2013; “Global Pension Assets Study 2016,” Tower Watson, February 2016

38 “Only 9 per cent covered under pension in India”, Indian Express, 20 July 2016


Pension coverage needs to improveAccording to the PFRDA, only 9%—10% of the total Indian population is covered under pension benefits, while a majority of the informal workforce remains devoid of retirement benefits. Only ~3%—4% of informal sector employees have pension coverage.

39 The benefits of

government schemes such as PPF and EPF, which are used to accumulate a retirement corpus, are not mandatorily in the form of a retirement income. Hence, there is a need for products specifically aimed at providing a steady stream of income after retirement.

40 Insurance companies and mutual

funds have recently started launching retirement plans. However, this is leading to product arbitrage on account of variation in charges levied on customers and incentives given to distributors.

The development of pension funds is critical to India’s economic growth as pension funds not only provide financial independence to the elderly population, but also

support the funding of long-term infrastructure projects. The Government is working toward bringing the informal sector workforce (88% of the total workforce) under a formal retirement fund through schemes such as NPS and Atal Pension Yojana. The Government is also directing banks to increase coverage under the Atal Pension Scheme, which is a defined benefit scheme targeted at the unorganized sector, by tapping channels such as business correspondents, aggregators and microfinance institutions.

41 Moreover, the pension’s regulator PFRA

has started implementing a standalone foreign direct investment policy for the sector in order to de-link pension from the insurance sector, chart out a separate roadmap for its growth and encourage foreign investments in the sector.

42 Recently, a number of domestic pension funds have

started investing in the stock market. In 2015, EPFO, which manages over INR8.5 trillion worth of funds for salaried employees, started investing in stocks (5% of its incremental inflows) for the first time in its 64-year history.

According to EY estimates, the estimated size of the retirement fund corpus in 2025 across different market segments is estimated to be as follows:

39 “Govt. working towards bringing informal sector under pension scheme, says Chairman, PFRDA”, FICCI, 9 December 2015

40 “Need for deeper pension coverage”, Mint, 2 January 2016

41 “Increase coverage under Atal pension scheme: Govt tells public sector banks”, DNA, 12 June 2016

42 “‘Dedicated’ FDI policy to chart new course for pension sector”, Business Line, 12 April 2016

Estimated market size of different segments (INR Billion)

Public Provident Fund 2,325

Life insurance/Annuity 28,193

EPFO 38,572

Private pension (BSE Top 100)* 12,428

National Pension Scheme 1,880

Total estimated size of corpus @ 2025 83,398Source: “Pension business in India”, EY Report, November 2013


Key global WAM trends in digital

Digital:

4.


• Increase sales through improved lead generation

• Reduce risk costs through granular risk evaluation

• Increase customer loyalty and sales conversion

• Migrate customers to low-cost channels

• Put in place IT architecture and infrastructure to enable digital front-end

• Put in place middleware, APIs, web services to enable agile front end development

• Develop digital talent acquisition plan

• Redesign organization structure to enable digitization

• Reduce costs through automation and avoidance of rework

• Improve customer experience through reduced lead times

and errors

• Increase customer loyalty through value-added services

• Increase revenue through digital-enabled products

• Increase sales through more granular marketingefforts (e.g., location ormicrosegment based)

Define the role of eachchannel by segment

• Develop road map of investments

• Rigorously control program execution

• Track investments and impact

• Manage conduct risk associated with digital

• Develop cyberattack management plan

Source: “It got so late so soon; Wealth and asset managers awake to new digital age”, EY, 2015

• Increase staff effectiveness and efficiency throughcollaboration platforms

• Increase sales through mobility tools, e.g., “sales apps on tablet”

Digi

tal usiness value rivers

Ena lers

Scope of

transformationDigital

strategy

Internal collaboration

Digital product and

serviceinnovation

Big data and

analytics

Digital operations and BPM

Digital sales and marketing

Customer experience

and channels

Technology and enabling capabilities

Digitalprogram

management

People andorganizational

changeDigital risk management

and cybersecurity

Successful digital transformation requires asset managers to transform all aspects of their business

Rise of direct to consumer (D2C) distributionThe use of digital touch points by financial services customers has greatly increased in the last few years, especially in evaluation and purchase. Investor expectations are shifting — customers now demand personalized services, and expect them through their channel of preference and at their choice of time and location. New digital access points are allowing customers to research and purchase across multiple channels, including online and mobile. The typical purchase cycle now involves touch points across many channels both digital and “analog.” The emergence of digital is forcing asset managers to invest in front-office digital capabilities.

Digital is empowering customers as well as changing the rules of engagement for asset managers

Technology is enabling platform convergence and creating opportunities for new client engagement.There is an increasing number of online trading, brokerage, investment, direct-to-consumer (D2C) and robo-advisors offering user friendly, low-cost, automated solutions for core functions such as investing, asset allocation, portfolio management and reporting. Technological developments are creating new playing fields throughout the fund-distribution value chain.


Financial institutions value chain models and evolution

Present: Disintermediation & multiplication of distributors

Financial services producer

Historical distributor

Clients New models of distribution�Network mediation

Customer experience provider (disintermediation)

Future: Roles are converging and interconnecting, creating new client engagement opportunities

Source: Digital disruption and the game-changing role of technology in global wealth management – IT in wealth management 2015 , February 2015; EY: The changing face of advice, July 2015; EY Analysis

Financial services producer

Clients

New customer roles

Data provider, customer

knowledge D2C

Customer experience

provider (disintermediation)

New models of distribution/network

mediation

Historical distributor

Disintermediation direct to consumer

Past: Linear relationship

Financial services producer Clients Distributor

A direct distribution strategy helps asset managers create closer relationships with and get a better understanding of the end consumer, which in turn helps in the product-development process. Asset managers can build an effective D2C distribution strategy by:

Steps for an asset manager to build an effective D2C distribution strategy

Branding: A prerequisite of this strategy is a strong consumer brand. A handful of large asset managers (particularly those headquartered in the US) are increasing their investment on their brand and marketing. There is a shift happening from marketing products towards building brand awareness and positioning.

Creating a consistent omni-channel client experience: Regardless of the number of products, services, touch points, customers need to feel like they are dealing with one firm across multiple channels that they now use to interact with firms.

Leveraging the power of social media: Information shared through social media often has an exceptionally quick impact on brand perceptions and purchasing decisions. Fund firms need to use social media to engage and interact with clients rather than simply disseminating content.

Reducing product proliferation which will not only remove some costs from the systems but also help to simplify the choice for the consumer and to reduce the ‘noise’ created by underperforming products.

Establishing robust controls and processes to deliver on the requirements of regulations such as KYC and AML, which they have previously been shielded from by the intermediaries. These requirements pose significant challenge to distribution given the jurisdictional variations in their application and often fragmented and inadequate sources of data for due diligence.


Asset managers can centralize core business functions, not only in the middle- and back-office (e.g., trade processing, corporate actions and reconciliations), but also further up the value chain in investment research and portfolio management, by creating centers of excellence in near-shore or off-shore locations. Notably, larger asset management firms are more likely to maximize near-shoring and off-shoring strategies.

Asset managers are driving growth by globalizing their businesses, enhancing distribution channels, offering new products and entering new markets. As a result, the number of locations, trading volume and product complexity continue to increase.

Fund houses need to effectively standardize and centralize operations and also outsource in order to improve consistency, reduce costs and enhance control. Digital technology is a key driver of standardization, centralization and effective outsourcing:

43

Digital technology is helping asset managers revamp their business models through standardization, centralization and outsourcing of operations

55%45% 42%

30%

15%10%

Improvingdistribution channels

Enabling new

products

Targettingnew

geographic/demographic

markets

Changingregulatory landscape

Increasingbrand

awareness

Differentiationthrough

increasedvalue/

lower cost

Primary drivers of changes in asset managers' operating model

Source: “Managing complexity and change in a new landscape”, EY Survey, 2014

55%20%

17%

8%

Maximize use of nearshore locations

Asset managers' target location strategy for in-house operations activities

Maximize use of offshore locationsLimited or no nearshoring or offshoringDon’t know /uncertain

Source: “Managing complexity and change in a new landscape”, EY Survey, 2014

While many asset managers currently prefer the proximity and time zone characteristics of near-shore locations, ultimately they may move to an off-shore model, leveraging lower cost centers and maximizing the use of the 24-hour clock (e.g., India and Malaysia).

A common technology platform and data architecture helps in standardizing the investment manufacturing and administration processes. Fund houses are rationalizing the number of applications and replacing legacy “patchwork” of applications with the best breeds of PM/OMS/EMS* platforms for each major asset class. They are shifting away from custom developed or customized third-party solutions to out-of-the-box vendor capabilities that offer integrated PM, OMS and EMS solutions. In the front-office, for instance, where large firms have historically supported two, three or more platforms based on asset type, the drive is to consolidate to a single core application for order management, execution, processing and investment record keeping (IBOR). According to Ovum forecasts, technology spend in asset management is expected to grow at a CAGR of 5.1% between 2014 and 2018.

Increased focus on core strengths will further drive outsourcing of all non-core activities to third-party service organizations. Firms will look to consolidate their outsourcing arrangements with one or two strategic partners, and as these strategic partnerships mature, asset managers will use them to provide more support in client-facing processes, including distribution and client reporting.

Standardization

Outsourcing

Centralization

43 “Ovum says increase in financial markets IT spending points to end of credit crunch”, Ovum, 19 March 2014, http://www.ovum.com/press_releases/ovum-says-increase-in-financial-markets-it-spending-points-to-end-of-credit-crunch/*PM/OMS/EMS – Project Management, Operations Management, Enterprise Management


Deploying and maintaining leading business applications are the top technology priorities for asset managersWith increasing focus on standardization and centralization using digital technology to support the scale and scope of global operations, asset managers are prioritizing the deployment and effective management of the right business applications, and the creation of the data management infrastructure needed to do so. Firms require flexible and scalable technology that supports a number of objectives across the enterprise, such as supporting a global footprint, new client onboarding, supporting new products, maintaining efficiency throughout the trade life cycle, meeting regulatory requirements, improving customer service through digital technologies or managing enterprise risk by providing a consolidated and granular view of the entire enterprise.

Asset Managers' top technology priorities

Source: Managing complexity and change in a new landscape — Global survey on asset management investment operations, EY, 2014

50%

45%

28%

18%

18%

15%

Establishing and maintaining infrastructurewith leading business apps

Quality/Timeliness/Reliabilityof data across enterprise

Reducing cost/Increasingefficiency of service

Enabling global footprintfor multi-region support

Integrating data to support newtools demanded by investors

Enabling new technology whilemaintaining information security standards


Digital technologies transforming and shaping the future of the asset management sector44

In the space of less than a decade, the financial services sector has started to emulate the technology-driven operations of digital bellwethers with new innovations spreading from transactional back-offices to web-based front-ends. Asset managers have traditionally been the financial industry’s late technology adopters. However, in the past couple of years, digital has started transforming the asset management space rapidly. New investments in digital technologies can help asset managers engage more effectively with clients at every touchpoint in the client experience life cycle.

Clients are increasingly demanding seamless, coordinated and easy digital access to their providers. The coming-of-age “millennial” generation expects everything to be possible on their smart devices, which provide ubiquitous access to a deep array of anywhere, anytime online and mobile transactions. They want the same level of technology sophistication from their financial advisors that they see from incumbent tech firms. Hence, “digital client experience” is expected to play a crucial role for asset managers and mobile devices will be key in facilitating this experience. Mobile devices act as digitally enhanced portable work stations and help asset managers build intimacy and develop closer relationships with clients. Advisors can also free up a significant portion of their time by leveraging online chats and video-enabled conferences to interact digitally.

Predictive analytics, which provides a statistical analysis of investor actions and the likelihood of future purchases, is expected to be a crucial driver of change in asset manager’s distribution strategies and product offerings. In a survey of 125 asset management professionals, 43% nominated big-data analytics — where large sets of information are analyzed to uncover market trends or other useful information — as the technology that will have the most impact on the fund industry.

45 Moreover, in a study conducted by the

Economist Intelligence Unit, 85% of the asset managers said their organizations captured value from data only “fairly” or “somewhat” well.

46 Hence, the majority of

asset managers are expected to invest more in data analytics in the next two to three years. Going forward, firms should invest in the visualization of data analytics to deliver virtual portfolios in a fluid, visual and intuitive way via secure online channels.

ocial media has become a crucial element in asset managers’ marketing strategies. Given its scalability and efficiency, tactical use of social media can reduce spending on advertising and promotion. Rather than flying across time zones for television interviews, for instance, executives can host a social media chat and reach a wider audience. In April 2013, the SEC ruled that social media is an acceptable venue for companies to disclose information to investors. Social media platforms enable exclusive, specialized access to peer groups to share investment information and other shared interests — either through proprietary tools or existing channels.

Mobile

Big data and analytics

Social media

Asset managers expect social media to have a significant influence on their product offerings and distribution strategies. It helps in not only developing brand and product awareness, but also increasing investor awareness and interacting more directly with customers.

Influence of Social Media on product offerings and distribution strategies within next five years

63%

20%

17%

InfluentialDependent on adoption by intermediariesNo influence

Source: EY Global regulated funds survey 2014

44 “It got so late so soon; Wealth and asset managers awake to new digital age”, EY, 2015

45 “Blockchain could be totally transformative for fund industry”, Financial Times, 22 May 2016

46 “Fund managers to increase spend on data analytics”, Bloomberg, 27 April 2016


Robo-advisors, an automated low cost alternative to traditional financial advice providers, have gained popularity recently.

Robo-advisors

According to a survey by the CFA Institute, 54% of the respondents around the world viewed asset management as the financial services sector most at risk from disruption by automated financial advice tools.

According to a survey by the CFA Institute, 54% of the respondents around the world viewed asset management as the financial services sector most at risk from disruption by automated financial advice tools.

Robo-advisors offer user-friendly digital platforms and conduct individualized risk profiling via algorithms to determine an optimal asset allocation for an investor’s portfolio. They use a combination of simplified client experience, lower fees and increased transparency to offer automated advice directly to consumers. The mass-affluent segment is expected to benefit the most from lower costs and increased access to investing guidance. According to a CFA Institute survey, 34% of the respondents believed that automated advice could entirely replace human advisors in the mass-affluent segment.

49 Notably, in the US, the D2C robo-advisor

market is increasingly becoming a fixture in the asset management space. According to research by Cerulli Associates, robo-advisors in the US will manage US$489 billion by 2020, fueled by a shift of assets from traditional advisors to automated investment.

50 Further evolution of

robo-advisors would require incorporating a broader set of investment options and products.

Sectors most affected by automated financial advice tools

54%

16%

12%

8%

7%

2%

Asset Management Banking SecuritiesInsurance Others None of the above

Source: “Robots Will Strike Asset Management Firms First”, Bloomberg, 3 May 2016

Cloud computing is revolutionizing the asset management business by facilitating unprecedented business agility, flexibility and scalability at a low total cost of ownership (TCO). Cloud technology is being rapidly adopted across front-, mid- and back-office as the preferred software delivery model. According to an industry report, more than 71% of asset management firms intend to adopt cloud or increase its usage by 2017.

47

The asset management industry, similar to other financial services sectors, has witnessed the rise of FinTech firms, i.e., start-up firms providing alternatives to traditional business models. These firms are looking to provide services at a fraction of the incumbent prices. They have captured the opportunity that smart devices have provided by lowering the barriers to entry, capitalized on consumers’ lack of trust for some incumbents, understood the appeal of flat-fee pricing and the unbundling of advice from management, and ridden a wave of powerful investment to arrive quickly on the scene. According to a report from International and CB Insights, global investment in FinTech companies reached US$19.1 billion in 2015.

48

Cloud-computing FinTech

47 “The Cloud makes some changes in the asset management industry”, //www.bisam.com/our-insights/cloud-makes-some-changes-asset-management-industry, 23 March 2014

48 “Fintech Will Change the Way You Invest”, US News, 25 April 2016

49 “Robots Will Strike Asset Management Firms First”, Bloomberg, 3 May 2016

50 “The rise and rise of robo-advisers”, Financial News, 30 March 2016


Asset managers believe that block chain can cause substantial disruption in their business models. Block chain, which is a giant online public ledger developed keep track of bitcoin transactions and recently, recently found use in the fund industry. Many asset managers believe that block chain could eradicate the need for clearing and settlement, which, in turn, will reduce the staff requirement for some roles and lower the fees for investors. In a survey of 125 asset managers, 42% listed block chain to be the biggest disruptive force within the fund industry.

51

Block chain

Case study: the UK’s largest fund houses are testing block chain to save trading costs52

Five of the UK’s largest mutual fund companies have teamed up to work on a project to test whether block chain technology can be used to rationalize trading costs. This is the first instance of asset managers testing block chain. These UK fund houses collectively manage more than £1 trillion in assets and are investigating several uses of block chain, such as trading illiquid securities directly and facilitating quick movement from one asset manager to another — a process that currently takes several days. If these uses are successfully implemented, asset managers can substantially rationalize costs by cutting out the need for intermediaries such as banks. Fund houses have lagged behind in exploring potential uses of block chain, mainly because any system failure could lead to huge reputational risks.

51 “Blockchain could be totally transformative for fund industry”, Financial Times, 22 May 2016.

52 “Five UK fund houses explore blockchain technology”, Financial Times, 6 February 2016; “Five UK Mutual Fund Companies Consider Using Blockchain for Trading Assets”, Coinspeaker.com, 10 February 2016


5.Indian scenario

Digital:


Technological advances are transforming India’s mutual fund industry

53

Technologies such as mobile, social media, big data and analytics, cloud and artificial intelligence are transforming the mutual fund industry and continue to be a key growth enabler by facilitating seamless customer acquisition and real-time efficient processes. Technology has become a crucial element across mutual fund operations spanning from transaction processing and fund management to distribution and customer service. Asset managers are not only using technology to drive efficiencies and cost reduction in the back-office, but also developing their front-office digital capabilities. Fund houses offer a range

The entire transaction chain from receiving money to investment to redemption can be easily completed on digital platforms without any physical or on-paper requirements. Moreover, the introduction of e-KYC using Aadhaar is expected to play a game-changing role in online investing. With e-KYC, the account-enablement process can be completed in a few minutes vis-à-vis the usual requirement of two to four weeks. This could prove highly beneficial for the financial services sector as it enables instant verification and substantial cost reduction by eliminating paper-based movement and storage. According to a survey by MicroSave, using Aadhaar enabled e-KYC process for customer acquisition by banks (for account opening) and by telecom operators (for pre-paid mobility) could result in approximately INR100 billion of savings over the next five years.

54 This figure could be even higher

with other financial services businesses also turning to e-KYC to make the account-opening process seamless and efficient. SEBI currently permits investments of INR50,000 each financial year per mutual fund for Aadhaar-based e-KYC using OTP verification.

55

Digital platforms have made investing in mutual funds seamless, efficient and instantaneous. A majority of new-age investors, especially tech-savvy millennials, have switched to online platforms for buying and selling MF schemes as well as systematically transferring money between funds. Such platforms help to tap a wider customer base by minimizing the paperwork and making the process instantaneous. Over the years, a number of online platforms have come up, including AMC websites, broker platforms and independent portals.

56

Paperless experience Efficient easy real-time process

of mobile and online apps for tracking and transacting portfolios, as well as for effective distribution and customer service. AMCs are using social media to reach out to customers, especially new-age customers, and employing big data and analytics in data-driven models for improving offerings and customer engagement while using cloud technologies to drive process efficiencies and rationalize costs. The advent of artificial intelligence is also causing significant disruptions in the asset management sector, with robo-advisors threatening the traditional advisor model. Additionally, the launch of differentiated banks — i.e., Payment Banks that will be allowed to sell third-party mutual funds — will help increase the market reach of the fund industry.

Fund houses are moving toward a paperless experience, and an efficient and easy transaction process Effect of digital technologies on the mutual fund investment transaction process:

53 “How Technology Is Shaping The Indian Mutual Fund Industry”, BusinessWorld, 3 May 2016; “Indian mutual fund industry: The road ahead”, ICRA-Assocham Report, November 2015; “Ease of doing business”, The Economic Times, 22 March 2015

54 “Aadhaar enabled e-KYC can save Rs 10,000 cr over next 5 yrs : Survey”, Business Standard, 18 March 2016

55 “How to do E-KYC for mutual fund investments”, The Economic Times, 29 February 2016

56 “The best ways to buy mutual funds online”, The Economic Times, 20 June 2011; “Investing in mutual funds? Here’s the cheapest, easiest way”, NDTVProfit, 7 October 2013


In order to allow mutual fund distributors to leverage the stock exchange infrastructure to expand their reach, in 2014 SEBI allowed distributors to use the stock exchange platform for non-demat transactions as well for sale or redemption. Stock-exchanges such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have set up digital platforms StAR Mutual Fund and MFSS, respectively. Collectively these platforms witnessed 1.9 million transactions in FY15. In May 2016, the BSE eased registration norms by removing minimum paid-up capital and net worth requirements to attract more participants on its MF trading platform via distributors. In July 2016, BSE also launched Paperless SIP (systematic investment plan), which allows mutual fund investors to make transactions through various payment modes. This is an additional feature on BSE’s mutual fund platform, StAR Mutual Fund, which would allow mutual fund distributors to register SIPs for their clients. StAR Mutual Fund has become the largest MF distributor platform in India with more than 400,000 SIPs per month. NSE-NMFII plans to link investors’ PAN to its backend database to pull out details of previous MF transactions outside of NSE in order to help the distributor provide the investor a holistic view of their portfolio.

57

Stock exchange platforms

Industry-wide digital platforms supporting mutual fund distribution in India:

Digital is helping enhance distribution reachDigital advances have not only ensured distribution efficiencies, but also helped create predictable revenue streams in the low-margin business. Earlier, distributors needed to put in significant effort in operational tasks, but digital platforms have helped them focus more on research and tracking markets rather than on individual client visits and extended paperwork. Tablet and mobile apps are helping mutual funds increase reach in B-15 locations. Moreover, there have been several industry-wide initiatives to help distributors build digital capabilities in order to serve investors better.

AMFI’s MF Utility (MFU) transaction platform lets investors invest online across 25 fund houses using a common account number (CAN).

58 MFU enables

investment in multiple schemes through a single window and also provides 24x7 access to composite portfolio information and portfolio holding as well as industry-level value-added services such as alerts and triggers to help investors effectively monitor and manage investments. The platform is a shared infrastructure of AMCs to improve efficiency in terms of time and cost by reducing duplication.

59

MF Utility

While some distributors rely on external digital platforms such as those provided by industry bodies, other have built their own platforms or rely on those provided by fund houses.

60

Case study: digital distribution platformsFund house DSP BlackRock’s IFAXpress platform for distributors

61

In 2015, DSP BlackRock (DSPBR) launched an online platform IFAXpress for independent financial advisers (IFAs). This digital platform provides distributors the option to automate across processes, including execution, portfolio monitoring and reporting, and portfolio rebalancing. It provides transaction capabilities and advanced analytical insights to its distributors — such as trends in AUM growth and client acquisition as well as in-depth analysis of AUM mix. A key feature of IFAXpress is that distributors can open a folio for a client, who has a verified KYC status, even if the client does not have an existing folio with DSPBR. The platform is linked to R&T CAMS, and once a distributor registers on the platform, it can access client data and assets under advisory. IFAXpress has resulted in a significant boost in the sale of DSPBR’s money market funds, which did not happen earlier from the advisor channel because of lack of economic viability.

57 “BSE eases norms for trading on its mutual fund platform”, The Economic Times, 13 May 2016; “BSE introduces Paperless SIP for mutual fund investors”, IndiaToday, 12 July 2016; “Mutual Fund orders via stock exchange platforms double to 19 lakh in FY15”, The Economic Times, 6 April 2015; “BSE introduces ‘Paperless SIP’ for mutual fund investors”, The Economic Times, 12 July 2016; “Why MF distributors go online”, Mint, 15 April 2015

58 “MF Utilities starts online platform”, Mint, 5 November 2015; “MF Utility extends online transaction facility in direct plans to investors from 1st Jan”, CafeMutual, 30 December 2015

59 “New mutual fund platform to make transactions easier”, BusinessToday, March 2015

60 “Why MF distributors go online”, Mint, 15 April 2015

61 “How Technology Is Shaping The Indian Mutual Fund Industry”, BusinessWorld, 3 May 2016; “DSP BlackRock IFAXpress a hit among distributors”, CafeMutual, 4 August 2015; “DSP Blackrock launches IFAXpress, biz platform for independent financial advisors”, The Economic Times, 10 June 2015; “DSP BlackRock bets on IFAXpress to drive growth”, Business Standard, 7 October 2015


Going forward, a number of robo-advisors are expected to enter the Indian fund management sector. While some will connect directly with investors (B2C model), others will provide algorithmic platforms to distributors (B2B model) to enable them to provide portfolio solutions to their clients. As the sector evolves, more innovation is expected in terms of lower costs, more complex financial planning etc. Online mutual fund distributors and robo-advisors are also witnessing interest from private equity players, which have already invested INR1.5 billion into such platforms.

69 While robo-advisors may not pose a threat to value-based

financial advisory services, they may pose challenges to pure transaction—based distributors who are mainly focused on offering convenience. Some industry experts also believe that going forward, all types of distributors — robots, fee-based advisors and transaction-only distributors — will co-exist as there is low penetration of distributors in the country, with only a small number of distributors catering to the large population base.

70

►SEBI intends to allow sale of mutual funds on e-commerce platformsSEBI is planning to give mutual funds an online push, mainly to make them more cost-effective and to eliminate the additional distributor layer between fund houses and investors. In December 2015, SEBI announced that it plans to allow the sale of mutual fund units on e-commerce platforms. E-commerce website have a wide reach and have gained acceptance among customers, and can help unlock the buying power of the vast majority of internet and mobile phone subscribers in the country. In May 2016, a SEBI panel on the digitization of financial services recommended the sale of mutual funds through established online marketplaces. The capital market regulator plans to assess online marketplaces in terms of certain criteria such as minimum net-worth, sales, after-sales track record, brand popularity and customer base to sell mutual fund products. The panel has also recommended removing additional KYC requirements on e-commerce sites as customers will be making payments through banks. The regulator may impose an investment limit of INR50,000 for non-KYC investors on such platforms in order to check money-laundering and other fraudulent activities.

62 Individual investors rely heavily

on distributors for purchase of mutual funds; hence, a crucial point to be observed would be the receptiveness of investors to making online investment without any guidance from financial advisors. Another point would be differential pricing for these units compared with existing share classes.

63

►The advent of robo-advisors in mutual fund distributionThe mutual fund distribution space is witnessing disruption, with automation redefining many fields and offering less expensive modes to reach a wider audience. Different models are emerging — while some offer direct plans with a fixed advisory fee, others offer regular plans with robo-advisory and financial planning as their core strength.

64

Robo-advisors — essentially automated platforms that provide advice on portfolio management and help investors buy financial products — have emerged as a global phenomenon. According to a research by Citi, robo-advisors are set to grow to ~US$5 trillion in terms of assets managed by 2025 from US$14 billion at the end of 2014.

65 Robo-

advisors are also gaining popularity in India. However, India is yet to witness a proliferation of pure robo-advisors (similar to those present in western economies) as there is a lack of a wide bouquet of index funds and ETFs that robo-advisors can offer at low costs.

66 Currently, most robo-advisors primarily

offer mutual funds as the solution for financial objectives. These platforms bring in more transparency, better services and lower costs. Most robo-advisors are free of cost and earn from trail commissions, while some firms charge an advisory fee. According to Tracxn, at present there are 39 robo-advisory firms in India.

67

• Goal-oriented investments: FundsIndia.com is an online platform that offers mutual funds. It has four portfolios (known as smart solutions) targeted toward four goals: child’s education, child’s marriage, retirement and first-time investment. Schemes are suggested based on the number of years till the goal and the monthly investment amount. The portfolio is reviewed regularly and rebalanced accordingly.

• ► Full-service advisors: ArthaYantra offers online end-to-end financial planning, from evaluation to management. Risk profiling is done online with the help of behavioral finance. Investors’ inputs are acquired on 60 model portfolios and an optimum one is designed. Once the report is generated, a financial planner explains it to the investor. The company provides mutual fund—related investment advice, as well as recommendations on

health and life insurance, and also gives tax planning guidance. The algorithm also analyses expenses and gives expense rationalization tips. Portfolios are reviewed and rebalanced half-yearly. Investors are charged an annual fee of INR1,000.

• ► Automated: Scripbox offers a ready basket of funds on the basis of an investor’s investment horizon. It offers three portfolios of mutual fund schemes — equity, debt and tax savings — which are curated using an in-house research process. An investor with a longer time frame is typically directed to a basket of four pre-selected equity funds, while an investor with a shorter time frame is directed to a portfolio of debt schemes. These baskets of funds are selected based on proprietary algorithms. Portfolios are reviewed annually. This platform’s main objective is to reach youngsters and first-time investors.

Case study: robo-advisor interfaces in India68

62 “Sebi set to allow e-commerce firms to sell mutual funds”, Mint, 27 June 2016

63 “Indian mutual fund industry: The road ahead”, ICRA-Assocham Report, November 2015; “SEBI using technology to push for growth of Mutual Fund industry”, IndiaInfoline website, 28 October 2015

64 “Online MF distributors, robo advisors catch fancy of private equity players”, The Economic Times, 1 April 2016

65 “Robo advisory could change distribution”, Mint, 22 September 2015

66 “Robo advisory could change distribution”, Mint, 22 September 2015

67 “Robo-advisory: which one is for you?”, Mint, 20 June 2016

68 “Robo advisory could change distribution”, Mint, 22 September 2015; “Robo-advisory: which one is for you?”, Mint, 20 June 2016; “Robo advisors best for small investors”, Business Standard, 18 October 2015; “The advent of robo-advisors”, ValueResearch, 1 September 2016

69 “Online MF distributors, robo advisors catch fancy of private equity players”, The Economic Times, 1 April 2016

70 “Robo advisory could change distribution”, Mint, 22 September 2015; “Robo-advisory: which one is for you?”, Mint, 20 June 2016; “The nuts and bolts of Robo Advisory”, Business Line, 29 May 2016


Global best practicesRegulations:

6.


Evolution of the regulatory environment for the asset management industryAfter the global financial crisis, regulators and governments across the world have moved to stringent compliance standards. They have increased their focus on tighter oversight of financial services sector and introduced new regulations at a rapid pace. These regulations focused mainly on containing risk and protecting investors. There has also been a very evident trend toward the globalization of financial regulatory policies.

North AmericaDodd-Frank Act, Basel III, AIFMD,FTT and IFRS Convergence arelikely to dominate the regulatoryagenda.

Latin AmericaImproved regulatory regimes withthe intention to come into linewith the G20 recommendations.For example, a higher percentageof adherence to Basel coreprinciples than the developingmarkets of Asia (Source: IMF).

Europe (and Eastern Europeemerging markets) UCITS,AIFMD, EMIR, extraterritorialDodd-Frank, FATCA, Basel III, plusMiFID II, PRIPs, MAD II, AMLDand especially FTT all contributeto a complex and concentratedperiod of regulatory reform in theregion over the next 3-5 yearsand beyond.

Asia-PacificA number of initiatives are being undertakenby regulators to reduce bureaucracy, speedup the process of bringing new products tomarket and stimulate market activity withintheir jurisdiction by attracting more participants.Investor protection, through stricter codes ofconduct for intermediaries, is also a high priority.The fi rst steps toward an integrated marketplacewill be implementation of the proposed Asiapassporting scheme.

Rest of the worldMany of the emerging markets such as Africa and the Middle East currently under extreme civil unrest, making the application of nationaland regional regulation extremely challenging.

Snapshot of key regulations affecting asset managers across the globe

Source: EY Global wealth and asset management industry outlook

Global regulators have imposed a multitude of regulations on the asset management sector. While banks have focused on shrinking their balance sheets after the financial crisis, the asset management sector has rapidly expanded, from US$50 trillion in 2004 to US$76 trillion in 2014, accounting for 40% of assets in the global financial system. Asset managers have also moved into the “shadow banking” space — for instance, lending of securities.

71

As a result, the Financial Stability Board (FSB) raised concerns regarding the ability of open-ended funds in case

of redemption to instantly give investors their money back, even in stressed markets under tight liquidity conditions. Hence, the FSB has proposed certain measures.

72

• National regulators to impose stricter reporting norms and gather more data, monitor leverage and ensure fund houses effectively utilize tools such as fees and gates to discourage redemptions in stressed markets

• Stress testing, which has become common in the banking sector, to be applied to funds as well

71 “G20 regulators aim to rein in asset managers with new rules,” Business Insider, 22 June 2016.

72 “G20 regulators aim to rein in asset managers with new rules,” Business Insider, 22 June 2016.


Key regulations affecting the mutual fund industry across the globe

Mutual fund houses are categorized as regulated investment companies (RICs) and subject to regulations of RICs. Registered funds and investment advisors in the US are regulated under the Investment Company Act (1940) and the Investment Advisers Act (1940) by the Securities and Exchange Commission (SEC). ETFs, REITs and unit investment trusts also classified as RICs. Foreign firms can enter the US market by establishing an RIC. US RICs managed US$18.1 trillion in assets at year-end 2015, with the mutual fund and ETF markets managing US$17.8 trillion in AUM — the largest market in the world.

73 US mutual funds are subject to a comprehensive

regulatory regime and need to abide by certain provisions, such as ensuring liquidity (invest at least 85% of the portfolio in liquid securities, which can be disposed of within seven days), leverage (maintain a maximum ratio of debt-to-assets of 1:3) and transparency (provide information about their operations, financial conditions, contractual relationships to regulators, investors etc.). Mutual funds also have to designate a chief compliance officer (fund CCO), who is responsible for administering the fund’s compliance policies and procedures.

74

In July 2014, the SEC adopted amendments to money market mutual fund (MMF) rules. The new rules require a floating net asset value (NAV) for institutional prime MMFs based on the market value of fund assets and provide non-government MMF new tools, such as liquidity fees and redemption gates, to address runs. The new rules, which are to be fully implemented by October 2016, are impacting the US$2.7 trillion of assets in MMFs — with more than US$200 billion shifted from prime funds (those that can invest in a wider variety of assets) to government funds (limited to government securities).

75

In December 2014, the SEC laid out a program for modernizing the regulation of US-registered mutual funds and investment advisers. The SEC is looking into the following areas of the US open-ended fund industry to modify regulations:

76

• Data reporting requirements: In June 2015, the SEC announced the Form ADV Proposal and the Fund Reporting Proposal. It requested for additional inputs to Form ADV (an annual form with details regarding business, AUM etc.), namely aggregated statistics about separate accounts, such as AUM, holdings breakdown by asset type, information about derivatives use, breakdown of AUM by client type and custodian information. The regulator introduced two new forms — N-PORT and N-CEN — for enhanced fund reporting and also included a provision for electronically providing reports to shareholders.

• Comprehensive ETF rule: The SEC is considering a separate framework of rules to govern the burgeoning exchange traded products (ETP) market covering trading, listing, product structure and focusing on risks specific to ETFs.

• Liquidity risk management: In October 2015, the US capital market regulator proposed that funds be required to predict the number of days taken to liquidate each position in the fund at a price close to the current value (days to liquidate bucketing of fund holdings) and determine a minimum percentage of the portfolio that must be held in assets that can be sold and settled in three days (three-day liquid asset minimum). It also prohibited funds from holding more than 15% of assets in securities that are deemed illiquid (15% illiquid asset limit).

• Derivatives risk management: In December 2015, the derivatives proposal was issued, which would introduce leverage limits based on gross notional exposure, and the only assets that would be permitted for asset segregation purposes would be cash and cash equivalents. Asset segregation is a requirement that funds hold liquid assets against derivatives exposure.

• Transition of client assets: The SEC also plans to put in place a rule to ensure that asset managers have a plan for transitioning the management of client assets if there is a material disruption to an asset manager’s business.

The US

73 “Global Management of Regulated Funds – A Comparison of UCITS and U.S. Mutual Funds”, K&L Gates, 2014; 2016 Investment Factbook, ICI, http://www.icifactbook.org/ch1/16_fb_ch1

74 “Comprehensive Regulatory Regime for U.S. Mutual Funds”, //www.ici.org/pdf/14_ici_usfunds_regulation.pdf

75 “US money market fund reform: an explainer”, Financial Times, 29 April 2016; “SEC Adopts Money Market Fund Reform Rules”, SEC website, 23 July 2014

76 “Modernization of US Asset Management Regulation,” BlackRock, March 2016


The EU is the world’s second largest fund market after the US. The following are some of the key regulations applicable for fund managers in the EU:

Undertakings for Collective Investment in Transferable Securities (UCITS): With the implementation of the UCITS legislation, the entire European continent has moved toward a single market in terms of the manufacturing and distribution of asset management products. This regime provides a single European regulatory framework for an investment vehicle, allowing a manager to market the vehicle across the EU irrespective of the country it is domiciled in. UCITS can also be sold to non-EU countries such as Switzerland, Hong Kong and Singapore. The original UCITS directive was published in 1985 and UCITS regulations are continuously evolving: UCITS IV was published in 2010 and UCITS V guidelines will be fully applicable from January 2017.

77

UCITS III 2001: Firms were given until February 2007 to ensure their funds were UCITS III compliant. UCITS III was divided intotwo distintive directives:Management directive: Creation of the European Passport whereby a UCITS fund authorized in its home state could be sold anywhere within the EU. Also required the use of a simplified prospectus detailing the key features of a fund. Product directive: Allowed for investments in a wider range of asset classes with a corresponding distinction between non-sophisticated and sophisticated funds.

UCITS II Abandoned: UCITS II was abandoned in 1998 after EU Member States failed to reach an agreement on its scope and purpose. Key provisions included much of the framework of UCITS III.

UCITS I 1985 - Original UCITS directive published.

UCITS IV 2009: UCITS IV was effective 1 July 2011. Key provisions included the following: Streamlined regulator to-regulator notification proceduresManagement company passport createdKey Investor Information (KII) document replaced the simplified prospectusMaster-feeder fund structures are introducedFramework for domestic and cross-border fund mergers is created

UCITS V Spring 2016 (estimated): UCITS V amendments were proposed by the EU Commission in July 2012 and approved by European Parliament in April 2014. Will align UCITS Directive with the AIFM Directive. Key provisions include the following:

Depositary regime updates, including their appointment and eligible entities, oversight duties, cash-monitoring duties,safe-keeping duties, delegation and overall liabilityEstablishment of remuneration policies and practices that promote sound and effective risk management and do not encourage risk-taking. Remuneration structures will need to include rules on variable and fixed compensation, including a requirement that at least 50% of variable remuneration be in the form of unitsCreation of a sanctions regime and whistle-blowing procedures for reporting incidents to authorities

UCITS VI To be determined: Potential areas covered include the following:Eligible assets, use of derivatives and efficient portfolio management techniquesLiquidity managementDepositary passportMoney market fundsLong-term investment fundsConsistency withAIFM Directive

The EU

Source: “European mutual funds: An introduction to UCITS for US asset managers”, EY Report, 2015

Alternative Investment Fund Managers Directive (AIFMD): This EU legislation aims at increasing investor protection and reducing systematic risk by creating a harmonized EU framework for managers of alternative investment funds (AIFs) — i.e., non-UCITS. An AIF covers a wide range of funds and structures and includes hedge funds, real estate funds, private equity funds and US 40 Act funds. AIFMD came into effect in July 2013.

78 It not only impacted the way

funds are marketed and distributed in EU, but also put forth provisions on increasing transparency on key issues such as remuneration — for instance, linking compensation with fund performance and payment in units of own funds.

Markets in Financial Instruments Directive (MIFID):79

MiFID has been the cornerstone of capital market regulation in Europe since its implementation in November 2007. MiFID II, the EU’s response to the financial crisis, is a top compliance priority for asset managers, global giants and niche specialists. The directive’s main objectives are to increase competition and consumer protection in investment services.

77 “European mutual funds: An introduction to UCITS for US asset managers”, EY Report, 2015; “Six Months and Counting – Key Dates Before UCITS V Goes Live”, Matheson, September 2015; “UCITS V: Remuneration”, Matheson, May 2016

78 AIFMD, http://www.investeurope.eu/policy/key-topics/manager-fund-regulation/aifmd/

79 “The world of financial instruments is more complex. Time to implement change. Capital markets reform: MiFID II”, EY Report, 2015


MiFID II objectives and core measures

Source: “The world of financial instruments is more complex. Time to implement change. Capital markets reform: MiFID II”, EY Report, 2015

Developments in the market, products and technology have outpaced provisions of the original directive, withactivities such as HFT

• Trading bans and position limits for commodity derivatives

• External circuit breakers for HFT trading (breaker at venue level)

• Testing of algos by participants

• Additional reporting requirements to regulators (trade and transaction reports, algo reporting, expanded asset class and data scope)

• National competent authorities to apply sanctions when in breach

• Regulatory oversight of product, including ban or limitations on marketing to retail investors

• Third-country access through national regimes until effective equivalence test by European Commission allowing passporting

• Revised suitability and appropriateness regime especially for “complex” products with embedded derivatives (including UCITS)

• Ban of inducements to independent advisers and discretionary managers and more stringent disclosure regime for payments paid and received

• Enhanced conduct rules when designing new products and tightened execution-only regime

Externalcontrols/reporting

Investorprotection

Insufficient levelsof investor protectiondue to the rapidinnovation and growing complexity in financial instruments resulting in mis-selling

Increased market transparencyfor market participants since

market fragmentation hasmade the trading environment

more complex and opaque

Market transparency

MiFID II


Increased market transparencyfor market participants since

market fragmentation hasmade the trading environment

more complex and opaque

• Enhanced governance with prescription around governing board and committee composition, fitness and propriety, and time commitment

• Implementing systems capable of record keeping for a minimum of five years

• Increased scope and role of compliance (semi-independence)

• “Tone from the top”

• Equity trading obligation on RM, MTF and SI only (no off-market trading)

• Mandatory trading obligation for OTC derivatives

• Introduction of organized trading facility (OTF) for non-equity instruments

• Limitation on trading on dark pools for equities and equity-like products

• Open access to trading venues, CCPs and benchmarks

• Increased regulatory and client reporting requirements for all asset classes on RM, MTF, OTF and SI

• All RMs, MTF and OTFs to publish bid/ask and depth of market (per product)

• Public firm price quoting requirements for SIs for liquid instruments

• European Consolidated Tape (ECT) approaches

• Synchronized business clocks for trading venues and members

Internalcontrols/governance

Marketstructure

Market transparency

Exposure of weaknessesin the regulation andtransparency of non-equityfinancial instruments, both at trading and retail investment advice levels

Creation of a level playingfield between market participants since the envisioned benefits of increased competition have not always been passed on to end investors, retail or wholesale clients

MiFID II


Case study: impact of the Retail Distribution Review in the UK80

The Retail Distribution Review (RDR), which was implemented on 31 December 2012, introduced new rules for investment advisers and platforms, such as higher minimum levels of adviser qualifications, amendment of disclosure rules in relation to adviser charging and services, and realignment of adviser and platform incentives with that of investors’ by abolishing commissions. According to the FCA’s post-RDR implementation review in December 2014, the removal of commissions led to a decline in product bias from advisor recommendation, significant reduction in direct-to-customer (D2C) platform charges, a decline in retail investment product prices and a level playing field for all providers (particularly those that sold low or no-commission products. Moreover, the majority of financial advisors are qualified to the new minimum standards, thus leading to increased professionalism in the advice market. However, the cost of advice has increased, but this had created opportunities for simplified and automated advice as customers are demanding increased value for money. Firms have also improved in clearly disclosing to clients the cost of their advice and the scope of their services.

Asia is the third-largest mutual funds market worldwide, after the US and Europe. The Asia fund passport initiatives could be seen as the first attempt toward the unification of the Asian funds markets. The objective of the passport is to provide collective investment scheme operators with a common framework that offers them regulatory consistency across multiple jurisdictions.

• ASEAN Collective Investment Scheme (CIS): ASEAN CIS was launched in August 2014 to provide a fund passport across Singapore, Malaysia and Thailand. In September 2015, regulators from the three jurisdictions jointly issued a handbook to implement the Streamlined Review Framework to facilitate operational guidance for industry practitioners and to ensure faster access to capital and shorter time to market.

• Asia Region Funds Passport (ARFP): In April 2016, Australia, Japan, Korea and New Zealand entered into a Memorandum of Cooperation. ARFP aims to facilitate cross-border distribution of managed fund products across the Asia region. The eligibility requirements to be a passport fund include US$500 million in AUM, at least US$1 million additional capital, minimum qualification requirements and years of experience for officers (for instance, the CEO must have at least 10 years of relevant experience), and compliance with investment diversification.

81

Asia-Pacific

80 “Post-implementation review of the Retail Distribution Review – Phase 1”, FCA, December 2014

81 “Asia Region Funds Passport: Fact sheet”, April 2016, //fma.govt.nz/assets/Fact-sheets/160428-ARFP-Fact-sheet.pdf ; “Asian rivals for Ucits funds look a bit limp”, Financial Times, 11 October 2015; “Asia Region Funds Passport – update”, McMahon Clarke, May 2015


Complex regulatory landscapeMultitude of regulations in overlapping areas

Regulatory changes are expected to reshape not only internal policies and procedures, but also the fund houses’ business models. Regulations need to be aligned both at a domestic as well as a global level. Asset managers are considering multiple related regulations — for instance, in Europe aligning Dodd Frank, Basel III/Capital Requirements Directive (CRD) IV, European Market Infrastructure Regulation (EMIR), Market Abuse Directive (MAD) II and MiFID II under one regulatory change program to provide a much more controlled, consistent and efficient implementation, avoiding duplication of work in overlapping areas.

82

Increased cost of regulatory compliance The cost of regulatory compliance is expected to significantly impact asset managers’ expenses base. Going forward, increased cost of regulatory compliance may come as a heavy burden for small players, which may not be able to make equivalent levels of investment and remain competitive. Larger firms are exploring ways of sharing the cost with clients and developing value-added services to complement the core compliance requirement.

Source: “MiFID II: Time to take action Wealth & Asset Management”, EY Report, 2014

AIFMD MiFID II CRD IV AMLEMIRUCITS PRIPs/ IMD II

Illustrative approach, will vary from organization to organization and may be subject to change as regulatory requirements evolve

0

FTT FATCA

Clearing and settlement

Business conduct/compliance

Risk management

Pricing and valuations

Legal entity/business model

Trade execution/client advisory

Regulatoryreporting

Capital

Reference data andidentifiers

Collateral and margin

Distribution

Product control and accounting

Tax

Organizations are having to deal with the challenge of multiple regulations with overlapping themes. Critical is a holistic approach covering all relevant regulations and building out projects on a topical basis.

Coordination of new regulatory implementation

►Low tolerance for regulatory breaches leading to large finesIncreased scrutiny by regulators and low tolerance for breaches have resulted in huge fines for asset managers. Systems and control weaknesses are one of the most common reasons for which asset management companies have been fined by regulators during the past year. For instance, the UK asset management sector has witnessed a number of large fines for these reasons.

82 “Capital markets reform: MiFID II”, EY Report, 2015


Key rules in global regulations that may impact the Indian mutual funds regulatory regime`

• ► MIFID II requires certain minimum knowledge and competency standards for staff providing relevant services by January 2018. Professional and examination bodies have recommended specific qualifications, such as CFA charter and Investment Advice Diploma for Investment Advisors.

• ► In the UK, after the RDR, financial advisers need to achieve a higher minimum standard of qualification before they are allowed to provide advice: from a benchmark of Financial Planning Certificate (level 3 qualification) to a Level 4 Diploma qualification, which is an FCA-approved program that meets the FCA’s RDR qualification requirement for independent retail financial services advice.

84

Moreover, every individual financial advisor needs to complete at least 35 hours of professional training each year to stay up to date with industry and regulations.

• ► Countries participating in the ASEAN Fund Passport System require fund managers to have certain years of experience to advise investors.

• ► MIFID II ban on inducements for independent financial advisers to ensure investor protection.86

• ► The RDR in the UK abolished commissions and paved the way for a fee-based advisory model. The Netherlands has also banned inducements.

• ► The Australian regulator was the first to ban commission in 2012 under its Future of Financial Advice (FOFA) legislation, which imposed a ban on conflicted remunerations.

87

• ► MIFID II requires portfolio managers to record telephone conversations that lead to or are likely to lead to portfolio transactions.

88

• ► MiFID II requires firms to disclose all costs and charges associated with a client’s investment. For example, costs that may not typically be disclosed to consumers, such as transaction costs, will need to be disclosed in the future.

• ► In UK, the Financial Services User Group (advisor to the EC) has proposed that financial advisors disclose the reason behind recommending an active fund in order to support retail uptake of passive products.

• ► The Netherlands has implemented a new voluntary code, which facilitates transparency on fund costs. Firms that adhere to the code provide investors with consolidated figures showing the firms’ own costs and charges related to investment products and transaction costs of their investments.

• ► MIFID II requires firms to keep a record of actual and potential conflicts of interests for the firm (including its managers, employees and tied agents).

• ► MiFID II imposed new requirements on firms and trading venues to produce public data about executed transactions. Firms must annually summarize and publish their top five execution venues by trading volume for each class of financial instrument, as well as information on the quality of execution obtained.

• ► The UCITS V remuneration guidelines require UCITS managers to balance fixed and variable pay and pay a substantial portion (at least 50%) of variable remuneration in non-cash components such as units of UCITS. Significant UCITS managers should also establish a remuneration committee.

85

• ► AIFMD has put forth provisions such as linking compensation with fund performance and paying in units of own funds.

• ► In the Netherlands, there is a cap of 20% of gross salary on the bonuses paid to finance professionals, including asset management staff.

• ► In Singapore, the Monetary Authority of Singapore (MAS) recommended that financial advisors adopt a balanced scorecard framework for remunerating representatives, using non-sales key performance indicators, such as the quality of advice and the suitability of recommendations. The MAS has banned product-specific incentives and sales bonuses.

Investment professionals’ minimum qualifications/experience requirements

Ban on commissions and move to advisory model

Transparency/reporting

Remuneration proposals`


• ► In Singapore, a customer knowledge assessment is required by the Monetary Authority of Singapore to assess a retail client’s investment knowledge and experience before they can be sold select investment products.

Investor awareness`

83 https://www.fitchlearning.com/sites/default/files/MiFID%20II%20summary%20sheet_final.pdf

84 http://institute.ifslearning.ac.uk/Qualifications/QualificationsinFinancialAdvice/DipFA.aspx; http://www.professionaladviser.com/professional-adviser/feature/2104173/rdr-qualifications-definitive

85 “UCITS V: Remuneration”, Matheson, //www.matheson.com/images/uploads/publications/UCITS_V_Factsheet_on_Remuneration.pdf

86 “The receipt of monetary and non-monetary benefits under Mifid ii”, CharlesRusselSpeechlys, 9 February 2016

87 “FOFA - ASIC guidance” and “FOFA - Background and implementation”, ASIC website; “Trailer fees are first to go”, Financial Post, 5 July 2010; “FoFA”, Financial Planning Association of Australia, /fpa.com.au/policy/policy-issues/fofa/

88 “MiFID II Expected to Have Significant Impact on Investment Managers”, Skadden, January 2016


Goods and Services Tax’s (GST) impact

on the mutual fund sector

7.


The Rajya Sabha has passed the GST Bill, paving the way for the most significant tax reform and probably the second-most significant economic reform since Independence. With the Bill’s passage, the advent of the GST is now only a matter of time.

The Finance Ministry, pursuant to the consensus from the Empowered Committee of State Finance Ministers, had already released the draft of the Model GST Law on 14 June 2016 to the public. The Model Law throws light on the framework of the GST statute and provides a model to the States to enact their own GST acts. While the Model Law adopts various existing concepts from the Central and States Acts, it also introduces new concepts necessitated by the very nature of the GST.

GST is expected to bring in more clarity, consistency, certainty and efficiency in the tax system. The law is at a draft stage, inviting suggestions and recommendations from all the stakeholders. In the services sector, including mutual funds, which did not have multiple taxes, GST will not subsume other taxes. On the contrary, there would be an additional hit for investors, depending on the finalized rate of GST.

Although GST is expected to make it easier to do business in India, the draft law has raked up some questions and also some uncertainty on various vital aspects of taxation, such as:

• Place-of-supply rules for non-account linked services to hinder certain services that are currently zero-rated, e.g., export

• Applicability of tax on distribution costs

• Marketing and activation spends across India

• Inter-branch transactions liable to tax

• Valuation of services, including domestic inter-branch transactions

• Multiple state-wise registrations

From a taxability point of view, there may not be any significant changes — i.e., fee-based incomes will continue to be liable to tax or GST. There are mutual funds that export advisory services to funds located outside India. Under the current service tax legislation, these services are treated as zero-rated and not liable to tax. It is important to note that the place of supply of banking and other financial services has been prescribed as the location of the recipient of such services. However, in cases where the service is not linked to the account of the recipient of services, the place of provision of service would be the location of the supplier of service. The term “account” has also not been defined under the draft law. However, the definition of “account” as contained in the present Place of Provision of Service Rule, 2012 is fairly narrow and covers only interest-bearing accounts. This implies that services in relation to qualifying accounts would be linked to where the service recipient is based; however, in all other cases, the location of the service provider would be considered.

This could result in the advisory services provided by mutual funds to service receivers outside India being liable to tax, thereby increasing the cost of such services to the overseas advisory entities or funds. This issue can be addressed by altering the place of supply rules or by bringing in some kind of special exemption for supplies collected in foreign exchange.

For distribution costs, service tax now applies on a forward charge basis. Given the industry practice of paying commissions inclusive of service tax, under GST if the rate increases (from 15% to say 18% or 20%), the net commission earned by distributors will reduce. On the other hand, GST regulations may have a threshold of INR50 lacs for paying a compounded tax of up to 1%. It is possible that distributors may elect for this option, thereby potentially increasing their net commissions. Smaller distributors acting through aggregators may prefer to work directly with AMCs to get better exemptions/lower rate of tax.

For marketing spends, AMCs will have to closely examine expenditure incurred in States where there are no operations (and, therefore, registration under GST). In such States, credits could become a cost.

Furthermore, AMCs/mutual funds may have a presence across India or they could operate through a marketing/sales partner model. Under the present service tax legislation, where AMCs have presence across India, they obtain centralized registration, and the centralized location is where they pay tax on revenue and avail input credits. Under the Model GST Law, AMCs will need to obtain registrations in every state and comply with the tax payment, input credit and tax filing obligations. This will mean a significant change in the manner in which revenue and expenses are captured and reported. Also, the input credits of the GST paid for supplies made at the branch level would have to be captured and reported separately.

This may result in accumulation of input credit at the branch level. This will also mean that transactions between two different registrations will be treated as taxable supplies and, therefore, need to be mapped, measured, offered for tax and reported.

A possible resolution to this issue could be granting a central tax registration to AMCs, with the ability to avail credits and pay taxes only in one of the States. This will involve extensive advocacy efforts by the industry to convince both Central Government and State Governments regarding the need and the workability of this proposal.

Organizations will have to work on assessing the impact of these changes on their business with regard to the following aspects: cash flow, profit and loss account, business process and technology. A work plan should be put in place. Given that the implementation timeline that the Government has proposed is 1 April 2017, the period available for businesses to get ready is limited, and immediate action may be required for larger setups to be ready in time.


Notes


ContactsAbizer Diwanji Partner & National Leader – Financial Services, EY [email protected]

Sameer Gupta Partner & National Tax Leader – Financial Services, EY [email protected]

Divyesh Lapsiwala Partner – Indirect Tax Services, EY [email protected]

AcknowledgementRahul Shah Assistant Director, EY Knowledge, [email protected]

Kirti Shenoi Manager - Brand, Marketing and Communication, EY [email protected]

Jaspal Singh Manager - Brand, Marketing and Communication, EY [email protected]

Tanmay Mathur Writing & Editorial, EY Knowledge [email protected]


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