The Securities and Exchange Board of India (Sebi) has put in place an elaborate framework for regulating large distributors selling mutual funds (MFs). It has put in place strict guidelines for asset management companies (AMCs) employing these distributors.
MFs are to ensure distributors do not charge anything over the prescribed charges in ‘execution only’ transactions. In these, if the distributor feels the product is unsuitable for the buyer, a written communication has to be sent on this. Customer confirmation, that the transaction is ‘execution only’ and despite such advice, has to be had prior to implementation.
Further, fund houses need to ensure the distributor is not splitting the investments made by clients to increase the transaction charges.
Distributors said the rules would make the business unviable. “The execution business will have to shut shop or move online. Face to face transactions will not be viable at these charges,” said Rajiv Bajaj of Delhi-based Bajaj Capital Ltd.
“It is over-regulation,” said another senior industry official. “Investor protection should not be at the cost of business. At the end of the day, AMCs may not have the bandwidth to do such elaborate processes. Many people may not want to be a distributor now.”
The due diligence process shall be initially applicable for distributors satisfying criteria like multiple point presence (more than 20 locations), assets raised over Rs 100 crore, commission received of over Rs 1 crore yearly, etc. MFs/AMCs are required to ensure the distributor is ‘fit and proper’, based on several factors such as the business model, experience, record of regulatory/statutory levies, fines and penalties, legal suits, etc.
MFs are to also do a continuous review of the ‘fit and proper’ condition of the distributor. Besides ensuring the latter have clearly demarcated sales and advisory functions.
“The conditions will only increase the cost of compliance. With the cost of acquisition also increasing, we would rather sell other, more remunerative, products,” said K Venkitesh, national head, distribution, Geojit BNP Paribas Financial Services Ltd.
“We had tried to explain to Sebi that these rules increase compliance costs and (would) kill the business. But, they seem to have their concerns,” said a distributor who got to see the draft circular in advance. Last week, Business Standard had reported the concerns of distributors over not being allowed to collect fees in ‘execution only’ transactions.
“In the interest of investors, there is a need to regulate distributors through AMCs, by putting in place a due diligence process to be conducted by AMCs,” said today’s Sebi circular. It has also increased disclosure requirements for MFs, in terms of assets and commissions paid to distributors. Funds are to de-duplicate investor folios within six months.
