AMCs get commission headache

Distributors unwilling to refund clawback money, despite threat of action

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A number of distributors have come under the radar of the Association of Mutual Funds in India (Amfi) for failing to pay back ‘clawback commission’ to asset management companies (AMCs).

This involves recovering a part of the upfront commission paid to distributors if clients exit a scheme within a year of entering it. Amfi is mulling action against distributors which do not pay back the commissions in the next two to three months. The defaulters include brokers, wealth management firms, independent financial advisers and a few banks. The amount involved is about Rs 5 crore.

Assume a distributor is paid an upfront commission of one per cent. If the investor exits the scheme after six months, the fund house is entitled to claw back 50 per cent of the commission paid to the distributor. This means the distributor's commission will reduce to half a per cent and the extra amount will have to be returned to the AMC. The clawback practice was started in early 2013; earlier, distributors were not penalised if investors exited within a year.

In a December note to fund houses, Amfi has reiterated that some distributors had not refunded the commission despite repeated reminders, and were not responding to communication from AMCs.

Amfi had sent a communication in August to 153 distributors that owed more than Rs 50,000 in dues for more than three months. This covered roughly 85 per cent of the total amount as of June. An Amfi committee had recommended AMCs send a reminder. Amfi was going to follow-up with another letter, giving distributors another two months to refund. The body said it could take appropriate disciplinary action against the defaulting holders after this period. However, it didn't say what this would entail and an email to Amfi did not elicit a response.

“AMCs have an option of adjusting overdue clawback amount against future commissions but distributors are resisting this,” said a senior fund official, on condition of anonymity.

Market watchers believe the clawback problem could be more acute in tier-2 and tier-3 cities, where some AMCs have paid high upfront commissions to push products. Repaying of commissions can be difficult for distributors, as these are used to pay employee salaries, meet overhead costs and other daily expenses. Big distributors such as banks could face accounting problems if they have already shown the commission as income in their balance sheets.

The top 329 distributors earned about Rs 2,500 crore as commission from selling MF schemes in FY14, according to Amfi data.