The players are wary that there could be a potential conflict of interest if the Amfi-promoted IMFI takes charge as SRO and may ask the market regulator for clarification in this regard as well as details about the way IMFI will function.
Amfi is an industry body put together by the manufacturers. How can they regulate the distributors said Deepak Chatterjee, former CEO of SBI MF. The very term 'self-regulation' suggests that someone from the distributor community should take up the responsibility of being an SRO. That's an internationally accepted practice as well.
Earlier this month, Sebi has reportedly given an in-principle approval to IMFI to set up the SRO for distributors. Apart from IMFI, Organisation of Financial Distributors (OFD) and Financial Planning Standards Board India (FPSB) had also applied.
The SRO selection process could have been a lot more transparent and industry players have the right to question the legality of the process, said an industry person.
According to a lawyer, Sebi's decision can be legally challenged, but it wouldn't make for the strongest of cases as IMFI would be a separate legal entity, notwithstanding the conflict of interest. What needs to be looked at, however, is that both IMFI and FIAI were not legal entities at the time of application, as they were not registered under Section 25 of the Companies Act, 1956, he said.
Sebi's SRO Regulations required that any entity desirous of being recognised as an SRO must be a company registered under Section 25 of the Companies Act, 1956, and must have a minimum net worth of R1 crore.
Notably, Sebi had indicated that the SRO would be selected after following a fair and transparent procedure, but had not elaborated on the criteria for the final selection.
It will be a completely independent entity and Amfi will keep an arms length from the new company. So, there is no question of conflict of interest, said V Ramesh, deputy CEO, Amfi. The SRO board will have five independent directors appointed by Sebi, two from AMCs and two from the distributor community. Sebi has given Amfi six months to get IMFI up and running.
Distributors have locked horns with fund houses and Amfi in the past few months over several issues. For instance, quite a few distributors have been demanding that asset management companies shift to an all-trail model of paying out commission in the wake of the clawback clause requiring distributors to pay back commissions if the investor exits before a specified exit period. Many fund houses, however, have persisted with paying both upfront and trail commissions. Distributors have also been upset with Amfi's note sent last month asking AMCs not to share data feeds of direct plans to mutual fund advisors.
A few fund officials that FE spoke to in August last year had said AMCs were supporting Amfis candidature for SRO as the body had been around for more than a decade and had worked closely with the MF industry, including fund houses and distributors.