Don't ban upfront commission, AMCs ask Sebi

At meeting convened by Sebi for suggestions to curb unreasonably high payments and mis-selling, suggest a cap on payouts

Asset management companies (AMCs) have requested the market regulator not to abolish the upfront commissions they pay to distributors.

At a meeting on Tuesday between top fund officials and the Securities and Exchange Board of India (Sebi), they instead proposed a cap on the payouts, to quell concern over high commissions and mis-selling. The meeting was attended by about 15 chief executive officers (CEOs) of AMCs.

The fund officials conceded that commission payout in some recent cases were not reasonable. Earlier, the Association of Mutual Funds in India had proposed to shift from upfront payout to a completely trail-based commission structure.

Experts feel higher commissions can fuel mis-selling of products to end-investors and stoke churning of investor money from one scheme to another. Some fund houses were seen paying upfront commissions of as high as seven per cent to distributors for selling their closed-end schemes. This didn’t go down well with the regulator and Sebi chief U K Sinha has already shown his displeasure  over the issue.

At the meeting, he reportedly told fund houses to "be reasonable" with distributor commission. "Sebi wanted to have a solution for this (mis-selling) and asked fund houses to put their views. The majority of us opined to have a cap on upfront, rather than completely banning it," said a source.

The funds also put a suggestion to have upfront payment till an investment of Rs 5 lakh at around 150 basis points. According to sector officials, banning upfront payments will not help the growth of mutual funds to the desired level, it being a grossly under-penetrated sector. MF products continue to remain ones which have to be pushed and there has to be enough of incentives for distributors, mainly the independent financial advisor community, they added.

Sources said Sinha gave a patient hearing to the CEOs. "He was not judgmental about which is the right mode of commission structure," said a fund source.

Dhirendra Kumar, CEO of fund tracking entity Value Research, said: "Upfront commission is a problem and needs to be dealt with. But the question remains how to go ahead without the regulator getting into micro management of MF businesses." Sebi might, he felt, come up with a slab methodology.