MFs to Sebi : Don't ban upfront commission, instead cap it

The industry said abolishment will not help the industry grow, which is still a grossly under-penetrated sector

The Indian mutual fund industry is not in a mood to do away with up front commission anytime soon. According to them, if upfront commission is abolished it will not help the industry grow, which is still a grossly under-penetrated sector.

In a meeting with the capital market regulator the Securities and Exchange Board of India (Sebi) on Tuesday, industry's chief honchos were suggestive of continuation of up front as well as trail commissions. The meeting was attended by around 15 chief executive officers (CEOs) from large and small fund houses.

Sources privy to the meeting told Business Standard that Sebi's chief U K Sinha had shown his displeasure to prevailing high commission structure and wanted industry to provide its views on the subject. Majority of the fund houses opined for a cap on upfront commission instead of banning it.

The industry agreed with Sebi's concerns on high commission payout. However, for the next level of growth they said upfront commission is necessary to expand presence.

Sources said that Sinha, throughout the meeting, gave a patient hearing to what CEOs had to say. "He was not judgmental about which is the right mode of commission structure," said an industry source.

However, despite the meeting there is no clarity whether Sebi would intervene in the matter directly and ask fund houses to follow the norms.

"We were asked to present our thoughts on several issues including up front vs trail commission, which we did. Now, it's up to the regulator what step it takes," said another source.

A section of the industry feels that Sebi has hinted on several occasions in recent past that "industry should behave well" when it comes to high distributors' commission. Since things have not improved as per Sebi's expectations, the industry is keeping its fingers crossed and has not ruled out the possibility of regulator's intervention with tighter norms.

The close-ended schemes, recent flavour of the season products, have raised many eyebrows as commission paid to distributors reached as high as 6-7 per cent.