Sebi scheme to jog MFs hits block

The incentive scheme announced last month by the Securities and Exchange Board of India (Sebi) to develop the mutual funds’ sector has hit an unexpected block—the very distributors the scheme was intended to motivate.

Distributors across the country, especially independent financial advisors (IFAs), have revolted against the Sebi move to pay them a flat Rs 100 transaction charge. This has delayed implementation of the move, even after three weeks of the announcement. MFs, which had lobbied for the incentive, are now caught between the regulator and a hard place. Fund houses have called for a meeting next week, tentatively on August 25, to discuss how to take this issue forward. Milind Barve, chairman of the Association of Mutual Funds in India, declined comment, saying he was unwell. Fund managers said “operational issues are being sorted”.

IFAs have written to both MF companies and Sebi, enumerating their reservations. The distributors want a system of variable loads, wherein they can charge a percentage fee on higher-ticket transactions.

“Most IFAs are against the new fee structure. They are afraid they cannot charge the fees they were charging on big-ticket transactions, as investors will limit payment to the Rs 100 charge,” said Chennai-based K Ramesh Bhat, CEO, Aniram (wealth managers). Adds Bhat, who also heads the IFA forum, IFA Galaxy: “Almost all IFAs and associations have made their representations to either Sebi or the AMCs. One of the key proposals is the introduction of a variable load structure.”

PROPOSED, REASONS
Under a variable load structure, distributors who do higher-ticket transactions would be able to charge a percentage fee if the client agrees. To address the concerns on overcharging, distributors are proposing a cap of one per cent on such transactions. Under the proposed new rules, for all transactions above Rs 10,000, distributors will get a flat fee of Rs 100. Distributors say the charge has to go up with the transaction size.

“A high net worth client who invests a bigger sum takes a lot of time and seeks more advice. Charging him just Rs 100 on par with a small-ticket client who does not take much time is not justified,” said Sudeep Moitra, chief distribution officer, Edelweiss Stock Broking Ltd. If the proposals are accepted, distributors can charge up to Rs 1,000 for an investment of Rs 100,000 and so on. In May, Sebi formed a panel headed by its wholetime member, Prashant Saran, and constituted largely of people from the sector to propose changes to rejuvenate the industry after it had been hit due to the earlier entry load ban.

The panel suggested the charges under discussion and Sebi approved last month.

Distributors say the scheme was announced unilaterally by the regulator without going through the usual process of subjecting proposals to public comment before making these law. V Kasinathan, a Salem-based IFA, says the scheme shames his community. “A Rs 100 is demeaning. We either have to go back to the old system of entry loads or we are happy charging fees. This(transaction charge) is not a good solution.” Kolkata-based Kanak Jain, president of Mutual Fund Round Table, a forum of IFAs, said: “Nobody is happy. It does not make sense. Flexibility should be given to both client and distributor to fix the charges based on cost of service and quality. If this variable load is accepted, then it would be a win-win for everyone.”