MFs seek pound of flesh from brokers

Brokerages told to canvass for subscriptions as quid pro quo for business

Indian fund houses are demanding a quid pro quo deal from brokerages, requiring the latter to canvas for mutual fund subscriptions if they want the funds' business.

Some players in the Indian mutual fund industry have now made this a pre-requisite for empanellment of brokerages. In fact, the deal is that a broker will get 'increased' business if he manages to garner more funds for the fund house than agreed upon.

Fund industry sources said this is happening because brokers have good relations with retail, high net worth investors and corporates and hence it makes sense to tap this contact point for garnering business.

Brokers are more than happy doing this because it not only earns them commissions for distributing mutual fund products and more importantly it helps them get the fund houses' broking business.

Most brokerages leave no stone unturned to get business from mutual funds.

For this, they first have to get empanelled with the fund house, which requires the brokerage to fulfill certain 'norms' such as a minimum net worth, research capability and reputation in the market.

According to regulations, a fund house cannot give more than five per cent of its total business to one brokerage.

Brokers earn broking fees, which usually ranges from 0.15 per cent to 0.50 per cent of the amount transacted.

The foreign and joint venture mutual funds are said to be typically good pay masters.

Since a number of brokers are registered with a fund house, each one strives hard to get a 'bigger' portion of the business, say brokers.

In fact, players point out that most big brokers have been in the distribution business for a long time and it is the smaller ones who are now feeling the heat in their bid to get fund business.

Since the big and established brokerages are already well 'entrenched', the smaller ones are now seeking to increase their 'leveraging' power with the fund houses to solicit business.

To further this cause, some small brokers are forming unofficial syndicates wherein all distribution business is routed through one broker, who passes on all the commissions he receives.

He, in turn, leverages this new found 'distribution' strength to get fund business.

Industry watchers said that this works well for both, the brokers and mutual funds because each one stands to benefit but some question the overlap of the sales and investments functions in a fund house.