Sebi considers new mutual fund commission rules

As part of effort to curb mis-selling, upfront commission might have to be lower than trail commission

The Securities and Exchange Board of India (Sebi) might introduce a new framework on commission payouts to distributors by asset management companies (AMCs).

Sources said Sebi could introduce "principle-based" regulation for paying commission upfront to distributors or agents. The regulator might also put a cap on the upfront commissions fund houses pay to distributors.

A host of new measures for India's Rs 11-lakh-crore mutual fund sector were debated at a meeting of the markets regulator's mutual fund (MF) advisory committee on Monday. To curb mis-selling and unnecessary churning, it was proposed the difference between upfront commission and trail commission didn't exceed 50 basis points, said a source.

While upfront commission is paid by AMCs to agents on the sale of a product, trail commission is paid through the life of a product. It was also proposed the total expense ratio (TER) be reduced by up to 100 basis points for close-ended schemes, after the first year.

Sebi, however, isn't considering any change to the TER charged in the first year. For equity schemes, the TER, which includes management fees and commission, is up to 2.5 per cent, while for debt schemes, is up to two per cent.

The meeting of the MF committee followed reports of AMCs paying commission of more than six per cent on certain closed-end schemes.

"Sebi acknowledged upfront brokerage was important for distributors and vital for penetration of MF products. But too much of the brokerage has become a problem and needs to be dealt with," said a source.

The product-labelling framework might also be tweaked to include two more colour codes to the existing five colours. The colours would represent very low, low, medium, high and very high risks associated with various products, said a source.

He added Sebi might allow fund houses to invest unclaimed redemption and dividend amounts in liquid schemes. The proposals discussed at the meeting included a new framework for promoting direct plans, through which investors invest directly with the fund house, circumventing distributors.

The regulator has also allowed the setting up an expert group to recommend MF penetration through the digital route. It is expected Sebi will issue guidelines on the various issues discussed at Monday's meeting, the source said.