A MATTER OF TRUST !

Skeptics have raised doubts over the trust’s management of its physical gold, with questions over how much is actually held. HSBC, the custodian, is very secretive regarding its vault. Earlier this year, CNBC’s Bob Pisani was allowed to see the vault only after surrendering his cell phone and taken in a van with blacked out windows to an undisclosed location. Once in the vault, Pisani held up a gold bar and explained they were all numbered and registered. Astutely, ZeroHedge noted the bar Pisani held up was missing from the current bar list, fueling further speculation and skepticism.

Toussaint defends GLD by noting they are regulated by the SEC. “We are filing 10-Qs [quarterly reports with the SEC], on a regular basis,” he said.

-       An article on SPDR Gold ETF, by Augustino Fontevecchia, in Forbes, in the year 2011

SPDR Gold Shares claims that they are the world’s largest gold ETF ( Exchange Traded Fund ) backed by physical gold. It is listed and traded on the premier stock exchanges around the world, including Singapore, Hongkong, Tokyo and New York, since 2004. Total stock of gold in this trust is more than 900 Tonnes according to its website, valued close to USD 40 billion – which is updated on a weekly basis, regularly! It does not end there. . .

Their website also provides the information on where this gold is stored: “The gold bullion is held by the Custodian, HSBC Bank USA, in its London vault or in the vaults of sub-custodians” says the website.

They infact, publish the actual stock of gold held on this account, by providing the detailed Gold Bar List, which – hold your breath -  runs into 1304 pages! The list contains the exact details of the original Bar Number, Name of the Refiner, Gross/Net weight of each Bar of gold along with the total stock held by them as on that date. This list is updated on a daily basis and displayed in their website. ( see above pic. )

  

They go one step further and get this stock held by the custodian certified on a periodical basis by a third party! “Inspectorate International Limited” verifies them and certifies the stock, quality and quantity, independently. A complete bar count is done once a year and a second round of random sample count is done in the same year.  A certificate to this effect is issued by them and displayed on the website of this Trust for the benefit of the investors. ( see pic. below ):

                        “Doubt ! Like faith, it can be a unifying force” is the popular dialogue of the character Father Flynn in the movie “Doubt”. The investing public is alike, world over. We all make same mistakes, again and again. We put our faith on the Regulators & Governments for things they may not be directly responsible, legally speaking.

For example, SEBI never values the shares of the Companies prior to IPO or certifies the IPO price in any way. SEBI has repeatedly clarified this in many forums and in media. But, go to any nook and corner of India – investors will invariably pounce on SEBI for allowing such IPOs at high premiums. In a way it makes one think that we all need scapegoats, not money! We simply want to pass the buck.  

The latest episode is NSEL; enough is spoken and written about it. Now it is finally upto the Exchange, Regulator and the Government to sort out the issue. E – Series is an excellent product and well designed to cater to the needs of the small investor in semi-urban and rural areas. My wish is , it should not be left to die. But the current issue is more to do with the other product traded in NSEL on paddy and other commodities.

Lets not forget for a moment that there was always an element of risk attached to the contracts traded by NSEL though it was projected as a risk free transaction which gives an assured return, by the market players. The regulator and regulations were always a grey area since beginning in this case. But, probably the “over-regulated” capital markets made many operators and financiers to take refuge in this product, which was very attractively packaged.

Brokers and investors are now asking the Government to redo the “Sathyam Act” again in order to gain the investor faith. Lets wait and see. Government is now taking corrective steps. Somehow, that reminds us of the  police men who arrive in the climax of the movie, after everything is over. But, better late than never, as it is a matter of trust!

                             Our main concern at this juncture, is on the other product which is traded on the Stock Exchange platform. Gold ETF! Now don’t press the panic button and call your broker to sell all the stock of gold ETFs you have in your demat account. It is just a word of caution, to have a proper balanced asset allocation while investing, so that any such failure will not affect your portfolio in a big way.

There are 14 gold ETFs trading in NSE/BSE. As per BSE website, total ETFs Assets Under Management is close to Rs. 14,000 Crores as of December 2012, out of which 88 % is in Gold ETFs! Majority of this AMCs are backed or promoted by private banks/corporates and PSUs like SBI & UTI account for less than 40 %.

 A glance at many of these AMCs” websites tells you a different story, totally in contrast to the website of SPDR Gold Shares ETF. None of these AMCs have uploaded the exact stock of gold bars they have as on date against the outstanding ETFs and/or the inspection certificate. Even if they claim they have done it, we need Sherlock Homes to find it out for us. May be it is not mandated to display it prominently, we do not know. But to an average investor who is scared of stock markets and put in his small savings into the Gold ETF, the disclosure could be much more transparent than it is now, if we want to instill confidence in his/her mind.

It is high time that the Exchanges and the Regulator mandate the AMCs of these ETFs to upload the Stock List on a daily basis and the third party Inspection Certificate done by an independent agency on a quarterly basis, prominently in the first page of their respective websites. Surprise inspection by the Exchanges and the Regulator at frequent intervals also will boost the confidence of the investors.

As of now everything seems to be alright with the Gold ETFs. But, let us not wake-up late every time, after the problem erupts. Let us take pro-active measures so that an excellent product is not misused and investors chased away from it!

How does Timeshare Investments fall under the 

SEBI"s CIS Regulation, 1999 ?

If we examine the provisions, it falls very much under the definition of  CIS Regulations, 1999. Let us see what the Regulation says and how it applies to Timeshare investments:

Under the Regulations, a Collective Investment Scheme is any scheme or arrangement, which satisfies the conditions, referred to in sub-section (2) of section 11AA of the SEBI Act.

Any scheme or arrangement made or offered by any company under which,—

(i) the contributions, or payments made by the investors, by whatever name called, are pooled and utilized for the purposes of the scheme or arrangement;

(ii) the contributions or payments are made to such scheme or arrangement by the investors with a view to receive profits, income, produce or property, whether movable or immovable, from such scheme or arrangement;

(iii) the property, contribution or investment forming part of scheme or arrangement, whether identifiable or not, is managed on behalf of the investors;

(iv) the investors do not have day-to-day control over the management and operation of the scheme or arrangement.

In case of timeshare, the payments made by the investors are pooled and utilised for the purpose of the scheme, with a view to receive a part of the property and the income & benefits arising out of it. 

The property / investment is managed on behalf of the investors by the timeshare company or its associate company formed for this specific purpose and the investors do not have day-today control over the management and operation of the scheme.

Therefore, timeshare is a Collective Investment Scheme under the SEBI Regulations and these companies fall under these Regulations.

 Moreover, Investment in Timeshare is not specifically excluded under the scheme; As per the CIS Regulation, The following do not constitute a CIS:

1. any scheme or arrangement made or offered by a co-operative society or a society being a society registered or deemed to be registered under any law relating to co-operative societies for the time being in force in any State;
2. any scheme or arrangement under which deposits are accepted by non-banking financial companies
3. any scheme or arrangement being a contract of insurance to which the Insurance Act, applies;
4. any scheme or arrangement providing for any Scheme, Pension Scheme or the Insurance Scheme framed under the Employees Provident Fund and Miscellaneous Provisions Act, 1952
5. any scheme or arrangement under which deposits are accepted under section 58A of the Companies Act, 1956 (1 of 1956);
6. any scheme or arrangement under which deposits are accepted by a company declared as a Nidhi or a mutual benefit society under section 620A of the Companies Act, 1956 (1 of 1956);
7. any scheme or arrangement falling within the meaning of Chit business as defined in clause (d) of section 2of the Chit Fund Act, 1982 (40 of 1982);
8. any scheme or arrangement under which contributions made are in the nature of subscription to a mutual fund;

Obviously timeshare investment is not a FD with a NBFC, Pension Scheme, Insurance Scheme, Nidhi or Mutual Fund, as mentioned above. It is not forming part of the list of specific exclusions. 

Therefore, it is clearly evident from the above definitions explanations that, these investments very much come under the SEBI’s CIS Regulations, 1999.

Since it ( is not specifically excluded from the Regulation and ) fits into every explanation / defenition of a CIS, it is high time these investments are regulated in order to save lakhs of investors !

Why should THE TIMESHARE INDUSTRY  

be brought under the 

 SEBI’s COLLECTIVE INVESTMENT SCHEME REGULATIONS, 1999 ?

(The website of a timeshare company claims repeatedly that "Invest once at today"s prices" & "get your holidays at today"s prices-your holidays are inflation-proof")

 WHY SHOULD THEY BE REGULATED ?

1.     Lakhs and lakhs of investors across the Country are investing.

2.    Huge money is collected from the middle class and lower middle class investors.

3.    Lots of promises are made at the time of investment but not kept later.

4.   More and more money is collected again and again every year for purposes ( for which corpus monies  have been collected already in the beginning ).

5.    Lacks transparency and accountability on various counts.There is no one to regulate.

6.  Investors” money is locked and possibly lost forever, as they do not have a structured exit option.

7.  Investors are lured by misleading advertisements offering expensive gifts for investing and for referring, leading to the likes of MLM – Multi Level Marketing.

The key issues:

1.    Steep hike in Annual Amenities Charges, year on year, without any basis, even where huge lump sum amounts had been collected at the time of Original Investment itself.

2.     Sudden introduction of or Levy of Guest Charges in an arbitrary manner, without any logic or purpose.

3.      Unilateral and unjustified increase in Utility Charges at frequent intervals.

4.    No proper accounting or display of accountability for the monies collected initially at the time of investments, for the said purposes including the above.

5.     Accumulation & carry forward of holidays – mis-interpretation of the clauses in the Agreements, to unduly benefit the Timeshare Companies.

6.   Possibility that while on the one hand the investor is not motivated to utilize his entitlement & discouraged by various charges, non-availability and lack of transparency, on the other hand, the Company may be selling the same to outsiders – who are not members – in order to make hefty profits out of such sales.

7.     More importantly, selling of the product to the innocent/gullible investors at a lump sum price, under the guise that it entitles them to  “inflation proof” holidays, has led to large scale dissatisfaction amongst the investors.Go to the websites of some of these companies and you can see how misleading it is!

8.    When a disgruntled investor approaches the companies for an exit option, he/she  is dis-incentivised by means of various deterrents. No proper guidance is given in a timely manner to them on the procedures to be followed to sell it.

9.    In respect of a class of Timeshare Ownership, called Property Timeshare, the initial collection is made to cover the duration of ownership, which is beyond the lives of the original Investors. This class comes squarely under SEBI’s Regulations as the Immovable Assets are managed on behalf of the Investors by the Timeshare Company.

There are many more such issues and the list is endless; the attitude of the Companies is unthinkable. They lack responsibility as the entire money is taken in advance from the investor in full and apparently, having already been unduly benefited, they are not bothered. 

The very fact that they are not regulated makes them more bold and brazen, to commit more such acts. They are selling without enough stocks on hand. Before more investors part with their money, it is pertinent that such Companies come under SEBI Regulations.

How they fall under these Regulations . . . more about it in the next installment !