Just a week before the Securities and Exchange Board of India (Sebi) board is slated to meet, chairman U K Sinha made a strong case for incentivising mutual fund distributors.
Speaking at the CII Mutual Fund Summit here on Wednesday, Sinha said, “With the number of folios declining and small town sales reducing, there is a need to incentivise the distributor. Unless it is given to distributors, it is difficult to increase the penetration of the market. Sebi is looking at ways to incentivise distributors.” However, Sinha added the regulator would also focus on the “accountability” of distributors.
There has been a lot of speculation whether entry load, banned by former chairman C B Bhave, in August 2009, would be re-introduced under a different format. While clarifying the intention was not to bring back entry loads, Sinha said, “I don’t think bringing back entry load is a solution. The direction which Sebi is looking at is how to take MFs to the remote corners of the country.”
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But while the entry load may not come back directly, there are other models under consideration. Sinha set up a seven-member mutual fund panel to recommend steps for “organised and sustainable growth of the mutual fund industry”. The panel has already given its report, which is likely to be one of the key discussion points in the board meeting on June 30.
According to reports, the panel has suggested a load of around Rs 100-150 per transaction. Also, to ensure distributors do not encourage investors to move from one scheme to another in a hurry, one suggestion is to raise the trail commission by 20-25 bps.
That is, if the investor stays in a particular scheme for say, six months, the distributor could earn a higher commission. Similarly, there could be higher incentives for attracting new investors for long tenures.
Prior to the ban, asset management companies (AMCs) used to charge an upfront fee or entry load of 2.25 per cent on equity funds from retail investors. A couple of months back, H N Sinor, CEO of Association of Mutual Funds of India and a member of the seven-member panel, had sent an email to the industry, saying the panel would look into problems like ‘transaction costs’ and ‘dual cheque system’. The Sebi chief’s rationale for incentivising distributors stems from the continued slowdown in mutual fund sales in small towns. Since the implementation of the ban, sales through independent financial advisors (IFAs) have gone down by 7 per cent. Direct sales, on the other hand, grew 2 per cent.
While keen to incentivise, Sinha stressed the need to regulate distributors who have regularly been alleged to be responsible for mis-selling and churning of MF portfolios. “Sebi is seriously looking into distributor regulations, but it will not be in a disruptive manner,” he said, adding “it will be for a limited number of large distributors and will be a disclosure-based system”. “If we set the rules of the game and apply them uniformly, it will help the industry,” he added.
The Sebi chairman also asked fund houses to disclose the components of their assets under management (AUM) in terms of retail and institutional money. He also asked AMCs to disclose the record of fund managers while marketing new schemes, which would help investors take better decisions. Citing the example of the US fund industry, where a significant share of the investing community route their funds to pension funds managed by various AMCs , he asked the industry to offer more pension products to investors.
