Mutual fund industry seeks Sebi intervention in distributor commissions

While the Sebi has repeatedly asked AMCs to stick to the guidelines issued by industry body Amfi, industry participants said there are several cases where guidelines are being blatantly violated

The mutual fund (MF) industry is seeking the Securities and Exchange Board of India’s (Sebi’s) intervention in capping distributor commission. 

According to sources, certain players in the industry have recently written to Sebi, requesting a formal circular on the maximum commission to be paid to sellers of mutual fund products.

While the market regulator has repeatedly asked asset management companies (AMCs) to stick to the ‘best practices’ guidelines issued by industry body Association of Mutual Funds of India (Amfi), industry participants said there are several cases where these guidelines are being blatantly violated. According to Amfi guideline, the upfront commission to distributors has to be capped at 100 basis points (bps). In other words, an AMC can pay a maximum of Rs 1 for every Rs 100 sales made by a distributor.

“There are certain AMCs that pay quite steep distribution commissions to push their products. This puts pressure on other industry participants. A standard set by the regulator would help in curbing such practices,” said the CEO of a large-sized fund house, who is also a director at Amfi.

Another CEO of a mid-sized fund house, who is also on AMFI’s board, confirmed the development, adding that the industry has been in talks with Sebi to lay down a regulatory framework for distribution commissions.

As reported by Business Standard earlier, commissions paid for selling open-ended equity schemes were as high as 200 bps, while some closed-ended schemes have paid as much as 600 bps in 2017-18.

“Virtually, nobody is following the best practices guidelines and larger distributors with bargaining clout are pocketing higher commissions,” said a senior industry official.

High upfront commissions have been particularly instrumental in driving up sales of close-ended schemes. Launch of these funds had gained momentum in the past financial year after two years of lull. According to data from MF tracker Value Research, such schemes garnered investments to the tune of Rs 503 billion in 2017-18, an increase of 80 per cent over the previous financial year.

The Amfi guidelines also ask intermediaries to refrain from recommending inappropriate products solely for a higher commission. Intermediaries are also asked to avoid churning of portfolios or splitting of applications to earn higher commissions. At the end of May 2018, the total AUMof the industry was Rs 22.9 trillion.