Rebates or refunding the client a part of the entry load started since January 2008, when Sebi announced that there would be no-entry load of 2.25 per cent for direct investors.
"While the intention of Sebi was to make life easier for the investor, many distributors were using this as a tool to keep back their clients or add more," said a distributor.
In spite of no load on direct investment, industry sources have said there has been a small 5 per cent rise in numbers. Even the online mechanism has not done too well because of the lack of tie-ups with large public sector banks. And the tie-ups with the foreign and private players have not yielded great results because of problems with the payment gateways.
If rebates were to be legalised, it would mean that investors would still continue to use the distributors that are available to them locally and, still get the advantage of a lower entry load.
Said Govind Pathak, director, Acorn Wealth, "This is good news for investors and a very clever way to put a price on the value that the distributor is adding, in terms of advisory and servicing."
However, some distributors fear that instead of simply legalising the rebate, Sebi should also bring in more transparency in the process. Hemant Rustagi, director, WiseInvest said that investors may just start calling up a large number of distributors to find out who is the cheapest without evaluating the quality of services.
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According to him, a system should be set up where the distributor writes on the offer document the discount he is offering to the investor. The fund house can then allot additional units equivalent to the value of the discount. "This would eliminate the cash back system that many distributors follow now and bring a lot of transparency," he added.
That is, if the distributor is offering a 1.5 per cent discount and it gets converted to units this would imply that the investor will earn higher returns in the long run. This is especially true for investors taking the systematic investment plan (SIP) route because they pay 2.25 per cent entry load on each instalment.
