The Securities and Exchange Board of India’s (SEBI) latest circular on mutual funds has helped rationalise the usage of accumulated and unspent entry load of the mutual funds. Whether this is a “UK Sinha effect” or just institutional rethink is not clear but mutual funds have begun reading the tea leaves and drawing some solace! It would be comforting for them to believe that the regulatory pendulum could now swing away from the Bhave era. This is a matter of management of rational expectation on the part of the regulator and the regulated. If the Indian mutual funds could have their way, the date 30 June, 2009 would not exist. It was the day on which the market regulator, in fulfilment of its responsibility of investor protection, abolished entry loads for all mutual fund schemes, and left it to the investors to pay directly the mutual fund distributors based on an investor’s assessment of their services.
Prior to August 2009, mutual funds charged both entry and exit loads on investors. The SEBI fiat allowed the mutual funds to charge only exit loads from the investors from August 2009, to be used by the asset management companies (AMCs) to pay commissions to the distributors and to take care of other marketing and selling expenses. The immediacy of the directive stumped the mutual funds and the distributors of the mutual fund schemes, who by that time were virtually calling the shots. Many viewed the SEBI proposal as impractical and quixotic. The distribution margins shrunk overnight. The new fund collections of mutual funds were impacted. It was apparent that the impact of the circular was not well thought through by those who frame SEBI’s mutual fund policy and by the SEBI Board. The 2009 directive had another implication, which affected the balance sheet of the asset management companies. Prior to August 2009, the mutual funds had already collected entry loads and not all of which were spent by the asset management companies (AMCs). In the absence of a SEBI directive, large amount of funds were sitting idle on the balance sheets of the AMCs. But idle funds helped none, least the investor whom SEBI protects. It would have, had SEBI directed that the funds be transferred to the Investor Protection Fund. SEBI may not have found this legally feasible.
The latest SEBI circular now allows the AMCs, among other things, to equally amortise in three years the funds accumulated till August 2009 to pay for the marketing and selling expenses and distributor’s and agent’s commissions. The accretions after 31 July, 2009 can be freely used without restrictions. This makes a lot of sense, at least it puts idle funds to useful use. Of course, the bigger funds would stand to benefit more from the circular. But by restricting the maximum use of the funds in a year, it has tried to ensure that the smaller funds are not left far behind. All this is welcome. But SEBI should ensure that its policy making remains long-term and consistent. Mutual funds in India have not grown the way they should have. Unhealthy practices had helped the growth of some players, but hamstrung the development of mutual funds. SEBI must keep a watchful eye that this does not happen again.
