Asset Management: New Trends in Products and Management Techniques in India

Asset Management: New Trends in Products and Management Techniques in India 15:30/16:45 - Panel 4

Asset Management: New Trends in Products and Management Techniques in India • Peter KURIAN ChairmanAssociation of Mutual Funds in India (AMFI) • Alain LECLAIRChairmanFrench Asset Management Association (AFG) 14:00/15:30 - Panel 4

The world growing role of French asset management Industry: The European Leader An attractive opportunity for cooperation with IndiaAlain LECLAIR Chairman French Asset Management Association Mumbai, May 16th 2007

1. The world growing role of asset management in financial industry and economy With total assetsequivalent to the world GDP the asset management industry :Plays a crucial role in the management of savings for individuals and institutionsContributes strongly to the structuring of the markets and the financing of national economiesIts total size reaches € 38 trillions (USD 50 trillions) world wide including € 13 trillions (USD 17 trillions) for EuropeIts European fund component reaches € 8 trillions (x 4 in ten years) equivalent to US$ 11 trillions for the USA (x 3 in ten years)

The world growing role of asset management in financial industry and economy Global market for investment funds: Europe is catching up with the USA (16 550 bn euros at end 2005 - Source : EFAMA / ICI) Others 1% Brazil 3% United States 45% Hong-Kong 2% Canada 3% Europe 40% Australia 4% Japan 2%

The world growing role of asset management in financial industry and economy xxxxxxx

The world growing role of asset management in financial industry and economy European and Asian/Indian asset management would benefit from prospects for strong growth :Large “reservoir“ of savings in contrast with the very low rate of the American households saving rate and the high level of their indebtednessSecuritisation of European and Asian/Indian households portfolios still substantially in liquid placements Need to supplement the pay as you go retirement system (Social Security) with defined contribution schemes Need to complement government financing (deficit problems)of infrastructure, energy, water, environment, education…developmentsIncreased cooperation of European/French with Asian/Indian actors (asset managers, banks, insurance companies, intermediaries) in the field of managing and distributing savings products

2. French asset Management : World leader of the investment fund and structured asset management France ranks 1st in the European investment funds management marketFrance ranks 2nd in the world investment funds market after the USA

French asset Management : World leader of the investment fund and structured asset management Assets managed by the French industry have multiplied 5 folds in ten years :

French asset Management : a world leader of the investment fund and structured asset management 5 leading actors rank among the 25 biggest in the world AXA IM BNP Paribas AM Crédit Agricole Asset Management CAAM IXIS AM Société Générale Asset Management SGAM…part of the 500 registered investmentmanagement companiesincluding an increasing number ofentrepreneurialspecialised entities (quantitative, absolute return, structured, hedged, indexed, credit, private equity, real estate, private banking…)

3. A leading role based on the right balance between financial innovation and protection of the savers The French innovation in finance is based on a long tradition in the fields of financial mathematics and engineering : Asset management and distribution technics Dynamic management of money market and fixed income funds Structuredand guaranteed funds (either in capital or in performance)Profiled funds (life-cycle funds)Unit-linked life insurance contractsMultimanagement, via the use of funds of fundsRegulated hedge funds and funds of hedge fundsUse of derivatives, futures and swaps in funds (including : CDO’s, credit derivative, commodities, climate, CO2…) Strong e-commerce development forfunds distribution…

A leading role based on the right balance between financial innovation and protection of the savers The French innovation in finance is based on a long tradition in the fields of financial mathematics and engineering : Investment purpose Employee retirement saving plans (PERCO and PERP) Institutional and retail private equity funds Open ended real estate fundsSustainable and socially responsible investments fund (SRIs)Charia compliant funds  …

A leading role based on the right balance between financial innovation and protection of the saversRegulation for investor protection and industrial efficiency: French actors have traditionally given a priority to the protection of investors in partnership with the regulators : Autorité des Marchés Financiers AMF, European Commission, Committee of European Securities Regulators CESR, IOSCO The fantastic success of the European UCITS directive : which has created a global brand exported from South America to Asia (Hong Kong, Singapore, Taiwan…) with + 70% market penetrationThe very deep co-operation with banks, insurance companies and other financial intermediaries, which contributed to the commercial efficiency of the industry The constitution of industrial processes and the creation of very innovative saving products often distributed at large scale (up to millions of investors)The integration of administrative and post-market activities, clearing and settlement, with high level of data processing technologies The creation of a vast “ecosystem” of highly specialised businesses : depositaries, custodians, auditors, specialists of valuation, measurement and attribution of performance, etc

4. Potential fields of co-operation between French and Indian financial industry in Asset management Similarities between Europe/France and Indian savings and financial fields :Increase of savings in a broad scale in the populationNeed to re-orientate efficiently these savings, to satisfy the needs of the savers as well as to consolidate the capital markets and to better contribute to the financing of the economyUrgency to mobilize households savings to contribute directly to the funding of their future retirements Need to reinforce the regulation tools to analyse their cost efficiency Improvement of the distribution channels of saving products thought the networks of banks, insurance companies and other financial intermediaries and need to developthe education of the investors

Potential fields of co-operation between French and Indian financial industry in Asset management Co-operation fields :development of the mutual knowledgein the area of finance and savings.  collaboration in researchin mathematical finance for product innovation joint venture to develop a FrancoEuropean-Indian Institute for regulatory research and training co-operation for mass distribution technology and information reporting on savings products joint access to the most sophisticatedfund management technics thanks to UCITS technology  development of joint-ventures between French and Indian asset managers and distributors with the support of their financial authorities…***As a conclusion, after presenting those ambitious goals, I would like, if I may, to quote Mahatma Gandhi : “What is faith worth if it is not translated into action?”

GROWTH AND DEVELOPMENT OF THE INDIAN MUTUAL FUND INDUSTRY1996 – 2007 A P KURIAN Chairman ASSOCIATION OF MUTUAL FUNDS IN INDIA

Evolution of the Indian MF Industry • Unit Trust Of India set up under an Act of Parliament in 1963. Launched its first scheme in 1964 • In 1987 the MF Industry was opened to other Public Sector Banks & Financial Institutions. 7 such Funds commenced • In 1993 SEBI MF Regulations notified • In 1993 Private Sector players were permitted to enter the MF Industry • In 2003 the UTI Act was repealed, it marked the end of Assured Returns Schemes, UTI Mutual Fund came into being

Growth of Assets Under Management (AUM)

Number of Asset Management Companies As on April 30, 2007 (US $ Mn)

TYPE OF FUNDS - ASSETS UNDER MANAGEMENT AS ON APRIL 30, 2007 (US $ Mn.)

STOCK EXCHANGES The Bombay Stock Exchange was established in 1875 One of the oldest Stock Exchanges in Asia World’s 5th Largest Stock Exchange National Stock Exchange commenced operations in Wholesale Debt Market & Equity Shares in 1994 & Derivatives in June 2000 World’s 3rd Largest Stock Exchange Paperless Screen based trading with the advent of Depositaries Real time quotes. More transparency in trades Took the Stock Markets to small towns Real time risk management systems and monitoring

FACTORS CONTRIBUTING TO THE GROWTH OF THE INDUSTRY Comprehensive Favourable Introduction of Role of Investor Performance Regulatory Tax Distrributors Education Record Framework Policies New Products Campaign

COMPREHENSIVE REGULATORY FRAMEWORK • First Regulation 1993, revised in 1996 • Over the years established world class standards in Accounting, Valuation, NAV computation and disclosure • Full disclosure of portfolio twice a year • Publication of Half Yearly unaudited results & Audited Annual Accounts • Standardised Offer Documents & Simplified Key Information Memoranda • Certification Test for Agent Distributors • Code of conduct for AMCs & Distributors • Uniform Cut-off Time for applicability of NAVs • Benchmark indices for comparing performance of Mutual funds • Comprehensive Risk Management System

FAVOURABLE TAX POLICIES • Mutual Fund as an entity is non-tax paying • Investors in Mutual Fund schemes enjoy certain tax benefits • Debt schemes – The fund pays upfront Dividend Distribution Tax (DDT) of 14.025% for Individuals and 22.44 % for others before distribution to investors.In case of Money Market / Liquid Funds DDT is increased to 28.325 %. Dividend so received by investors is Tax Free • Investment in Equity oriented Tax saver schemes upto Rs.1 Lac (US $ 2,300 approx.) with lock in period of 3 years is eligible for deduction from taxable income • On Equity oriented Mutual Fund Schemes - Short Term Capital Gains Tax is 10 % and for Long Term it is Nil

ROLE OF DISTRIBUTORS • Distributors play an active role in the growth of the Industry • Different classes of Distributors – Large Corporate Distribution Companies, Banks, Private & Partnership Companies, Post Offices & Individual Agent Distributors • Distribution Companies and Banks are emerging as major channels – together accounting for 70-75 % of total business • Distributors have to pass AMFI Certification Test and register with AMFI • AMFI Certification program creates a cadre of trained Agent Distributors across the country (around 57,000) • Distribution is becoming more and more professionalised • Financial Planning is becoming popular • Code of Conduct promotes discipline in distribution business

Introduction of New Products • Industry started with traditional products equity, debt and balanced • Launched Liquid / Money Market funds, Sector specific, Index funds, Gilt funds • Special Category funds, Children funds, Education Funds, Insurance linked funds, • Exchange traded funds • Gold ETFs introduced in 2007 • ..........and Real Estate Mutual Funds (REMFs) on the drawing board

Investor Education Campaign • Every Fund House carries out education campaigns through investor meets, seminars etc. • Nation wide Advertisement Campaign through Print & Electronic media carried out by Fund Houses • AMFI right from the beginning initiated investor awareness programmes. Funds specially set aside. • AMFI, both directly and in association with various bodies conducts, participates in awareness programmes • AMFI brought out a simple booklet on the concept and working of mutual funds • Various Trade bodies, Stock Exchanges regularly conduct Investor Awareness Programmes across the country

Performance Record • By and large most funds have provided market related returns • Many have out performed benchmark indices • Investors started appreciating the performance record of Mutual Funds

FACTORS INHIBITING GROWTH OF MUTUAL FUNDS • Lack of awareness and knowledge about Mutual Funds • Unwillingness to undertake even minimal risk • Inadequate reach of Funds / Distributors • Competition from assured return products from Government like Government Of India Bonds, Post Office Monthly Income Schemes, Senior Citizen Savings Schemes, National Savings Certificates etc.

THANK YOU ASSOCIATION OF MUTUAL FUNDS IN INDIA

Mumbai, Wednesday, May 16, 2007 1ST FRENCH-INDIAN FINANCIAL FORUM European Financial Markets: Opportunities for Growth and Value Creation

Asset Management: New Trends in Products and Management Techniques in India