Apprehensive that the step is likely to push commissions up, which may put further pressure on their pockets.
Securities and Exchange Board of India’s (Sebi) latest note on the usage of load balance has drawn criticism from smaller fund houses who allege the step does not ensure a level playing field in the industry as it is advantageous to bigger players.
Last week, the capital markets regulator brought clarity on the use of load balance by ruling that only one-third of the accumulated balance, as existing on July 31, 2009, can be used by fund houses for selling and marketing expenses, including distributors’ commissions, every financial year.
The note also talked about segregating the load balance into two accounts. The first account to reflect the balance which existed till July 31, 2009, and the other for accretions since entry load ban came into effect. However, no restrictions were placed on the use of funds lying in the second account.
Smaller and new fund players claim that Sebi’s move is aimed at benefitting large fund houses that would use these funds for capturing the market share.
“We have negligible balance in these two accounts. If older funds increase the commission they give to distributors (which is likely), it would further dent our pockets as distributors would ask for more,” said chief marketing officer of a small fund house, which was launched three years ago.
“There are no two thoughts on this issue that older and established players are sitting on a sizeable chunk of funds in the load balance account compared to what we have. Further, the sum collected in the second account would be meagre as it is only one per cent of the load. Moreover, redemptions made post entry load ban are primarily of investments made in 2007, which have not attracted exit load upon completion of 12 months,” said a chief executive officer of a smaller fund house.
Amid this criticism, Sebi’s Executive Director K N Vaidyanathan in a recently held conference said, “The rationale behind such a measure was standardisation in the industry. There was load balance prior to 2009. We wanted to make sure that across the industry everybody is using it in a similar way. Second, just to make sure there is some kind of balance between the newer and older players so that the older players are not over advantaged vis-a-vis the newer players, we put a cap of one-third in a particular year. "
Distributors, Business Standard spoke to are anticipating higher brokerages on sales of mutual fund products. “I believe the move will definitely help us as some portion of the funds so far unutilised will come to us as commission,” said a Mumbai-based large distributor.
Prior to August 2009, mutual funds charged both entry and exit loads from investors. However, after entry load ban came into existence fund houses could charge only exit load. These load balances are maintained as liabilities in the books of the scheme and are not included in the net asset value.
