MFs say tough to monitor institutional distributors

The Association of Mutual Funds in India (Amfi) has conveyed to the Securities and Exchange Board of India (Sebi) that fund houses are not well equipped to do due diligence of institutional distributors and the regulator is in a better position to carry out the exercise.

The mutual fund industry body has made a representation to Sebi on this issue, according to persons familiar with the matter.

A few weeks back, the capital markets regulator had written to the fund houses, asking them to carry out the necessary checks at the time of empanelling institutional distributors to sell their products. “Sebi had asked us to do due diligence of institutional distributors during their selection process and to see that they fulfilled certain criteria,” said the chief executive officer of a foreign-sponsored mutual fund house on the condition of anonymity. “However, we have conveyed through Amfi that we are not in a position to do this and the regulator should perform this task,” he added.

Sebi’s suggestion to fund houses to carry out due diligence for agents was for non-individual distributors, which include banks and companies that sell mutual fund products.

“We can’t act as a regulator for institutional distributors,” said the chief executive of another fund house. “There is a conflict of interest. We do business with them and pay commission to sell our products,” he added.

Expressing reservations at Sebi’s recommendations, the chief marketing officer of a large fund house said, “It is practically not possible. In the absence of any regulatory framework for the distribution system, it is not our cup of tea. Moreover, banks (which are our national distributors) are reluctant about this move.”

Following Sebi’s advice to review the registration procedure for both individual and non-individual mutual fund distributors, Amfi has introduced a Know Your Distributor (KYD) process for them with effect from September 1, 2010. The deadline for completing the KYD process with the existing ARN (Amfi Registration Number) holders ended on March 31, 2011.

The KYD procedure consists of a document verification and bio-metric process. The distributor is required to apply for KYD simultaneously with the application for the registration of ARN. Amfi has hired Computer Age Management Services Ltd (CAMS) to carry out the KYD process.

Last month, Sebi executive director K N Vaidyanathan had said at a conference that the regulator had advised asset managers to start implementing additional due diligence measures for institutional distribution.

The domestic fund market has over 40 players with average assets under management of Rs 6.58 lakh crore. With the entry load ban effective from August 1, 2009, fund houses are still struggling to come to terms with the new regulation that proved a game changer for the industry.