MFs warn distributors against misuse of small town-linked incentive

Move comes days after Sebi suspended practice citing misuse

The mutual fund (MF) industry has warned distributors against misuse of the extra incentive structure which rewards for mobilising assets from smaller centres-- beyond the top 30 cities (known as beyond-30 or B30).

The Association of Mutual Funds in India (Amfi) has written to the MF distributors (MFDs) saying that malpractices -- such as splitting of MF transactions and regular churning of investments -- could lead to a suspension or cancellation of their licence.

These were the issues raised by the Securities and Exchange Board of India (Sebi) while temporarily suspending the incentive framework from March 1.

The markets regulator has provided Amfi time till March 24, 2023 to put necessary mechanisms in place to prevent mis-selling and other malpractices and inform Sebi about the steps taken. Investments brought by distributors before March 1 remain eligible for the extra incentive.

Splitting of transactions is a practice that sees MFDs invest clients’ money in tranches rather than in one go to earn incentives even if the transactions exceed the Rs 2 lakh limit.

Churning, which means frequent shifting of money from one scheme to another, is used by certain MFDs to continue receiving B-30 incentives on the same money even after the stipulated one-year period ends.

"All MF distributors are strictly advised to ensure that they do not collude or undertake any malpractices such as splitting of applications, churning of mutual fund investments or any other activities to circumvent the guidelines to earn higher transaction charges and/or to earn higher B-30 incentive commissions. Any violation in this regard shall be viewed seriously, and shall be liable for strict disciplinary action, which may include suspension of ARN (Amfi registration number) or permanent debarment and cancellation of ARN," Amfi wrote in a communication sent to distributors.

The regulator has also called for changes in some of the practices within fund houses with respect to the B-30 incentive. One of the complaints being the selective use of the incentive.

"It was observed that B-30 incentives were made applicable by AMCs at their discretion for specific schemes and not for other schemes, despite B-30 inflows in such schemes.... This practice is arbitrary in nature and may lead to anti-competitive practices," the regulator had noted.

While putting the framework under suspension, the watchdog had said that it was exploring two options: either to bring the B-30 incentive back with safeguards or introduce a mechanism which incentivises distributors for bringing new investors irrespective of their location.

ISSUES FLAGGED BY REGULATOR
 

> MF distributors splitting transactions for extra incentives even when amount is over the ~2 lakh-limit

>Shifting of investments by MFDs from one scheme to another every year in order to continue receiving incentives

>AMCs calculate B-30 expenses on a daily basis and pay distributors on a monthly basis

> While calculating B-30 incentives, AMCs include switch transactions

> AMCs paying incentives in select schemes and for particular periods of time