Sebi cracks the whip on errant MFs

Securities and Exchange Board of India (Sebi) on Wednesday sent an email to mutual fund houses seeking information on the commissions paid to distributors.

The market regulator has asked fund houses to give details about their commission payout by 3 pm on Thursday. "We hear informally from Amfi (Association of Mutual Funds in India) that certain asset management companies are not following the said guidelines (best practices guidelines for rationalisation of distributor commissions). You are advised to provide the status with respect to the same. Your reply shall reach us by 3 pm tomorrow (Thursday)," said Sebi's email.

The industry body of the mutual fund industry, Amfi, had issued guidelines under its best practices guidelines on March 26 and another lot on June 26, asking fund houses to rationalise fees that are being paid by them to distributors.

In the guidelines issued on March 26, fund houses were asked to limit the payment of commission to 100 basis points in the first year. It had also asked fund houses not to advance the trail commission - a popular move when closed-ended schemes were being launched in the past year and distributors were being paid four to six per cent as commission. The circular had also said that that the trail commission in the subsequent years should not be higher than the first year.

After the circular, there was a lot of debate within the sector with the smaller players saying that they were being short-changed and that larger players would benefit from the move. They argued that they needed to pay higher commission to incentivise distributors to push their products. Some fund houses even wrote to Amfi expressing their angst with the circular.

On June 26, Amfi issued another circular. In this, the industry association made a minor relaxation, allowing fund houses to pay upfront commission of 1% on the systematic investment plans and systematic transfer plans in which retail investors participate.

According to industry sources, the Amfi board meeting in October and November had serious discussions in which members expressed their unhappiness that a number of players – both large and small – were not following the guidelines. Instead they were finding other ways to incentivise the distributors. 

“After the October meeting, members of the Amfi board had approached Sebi for its support in implementing the guidelines. However, Sebi had told the members that it was an industry issue. However, Sebi seems to have decided to step in after things went out of hand,” said an industry player.  

Industry players said that after the Sebi letter, the next step would be to get the trustees to be involved in this process of payment of commission. Once trustees get involved, many of these practices will be resolved, said the CEO of a fund house. 

Between 2013-14 and 2014-15, aggregate distributor commissions for the industry have almost doubled from Rs 2,603 crore to Rs 4,729 crore. The number of distributors who earned more than a crore rose from 45 to 87.