SEBI’s short shrift to investors and distributors
 
The recent moves of the Securities Exchange Board of India (SEBI) have left a sour taste in the mouth of mutual fund distributors and investors. Hopes were pinned on the resumption of some sort of entry-load, plus some more incentives for distributors, in the quest to expand the market of the mutual fund industry. And, within the industry, the big ones have more reasons to smile as SEBI has given them added ammunition to keep small fund houses out of the inner circle of profitability.
 
For investors, there is not much. With so many fund houses vying for their wallet-share, they have to succumb somewhere. SEBI has just honoured the investor, in passing, by saying that fund houses should give the benefit of lower charges to those who invest directly, without spelling these out.
 
SEBI has tried to level the playing field by permitting the mutual fund industry to accept up to Rs20,000 of investment per client, in cash. I hope this is an annual ceiling and not a cumulative one. For investments up to Rs20,000, KYC (know your customer) norms have been relaxed. This is a good way to bring more people into the fold of mutual funds. The Reserve Bank of India (RBI) may not have anything to say about cash collections, since it does not seem to mind insurance premiums being paid in cash. However, I do not recall any mention about the redemption of these amounts that get invested in the form of cash. Hopefully, the mutual fund industry will not look like chit funds by paying out redemptions in cash. That will surely open the floodgates.
 
One terrible development is that investors have to shell out an extra 30 basis points to enable fund houses to distribute products. This has been cleverly engineered by the Association of Mutual Funds in India (AMFI). Ideally, the extra charge should not be borne by investors from 15 cities. This can be easily done by carving out a separate plan within a scheme. Given SEBI’s bias against investors, this is unlikely to happen and large asset management companies (AMCs) will pocket a significant sum this way.
 
For the distributor, this means having to find new ways to keep his cash-flow going. Of course, some of the big ticket distributors will squeeze out part of the extra moolah that AMCs will collect from the investor thus putting enormous pressure on smaller fund houses to pass on the full gains to the distributor. Independent financial advisors (IFAs) are the ones going to find no relief, if SEBI continues to keep the interests of only fund house owners in mind. The sad thing is that they are forcing distributors to form a self regulatory organisation (SRO) which would mean that there will be ego clashes and a lot of jockeying between different agencies.
 
SEBI’s move clearly establishes the fact that AMFI is just an owners’ association; none of AMFI’s guidelines will hold water for distributors. If distributors quickly form their SRO, the first thing they can do is to cut their links with AMFI and do away with paying AMFI’s exorbitant exam fees. AMFI itself is a trade body and its guidelines will now have to be restricted to fund houses alone. I only hope that AMFI gets restructured to ensure some fair representation for small fund houses. The probability is quite low, given that they still do not have any internal guidelines on how long a fund house can have its nominee on AMFI’s board and there is no rotation policy that I know of. Hopefully, SEBI can persuade AMFI to part with some of its riches to the distribution SRO.
 
The net result of all these changes is a lower return to the investor, who has become the ‘protector’ of the mutual fund industry. One wonders why SEBI has engineered these changes, since the balance sheets of large well-performing AMCs funds do not show any signs of sickness or cause for alarm.