The Securities and Exchange Board of India (Sebi) will meet CEOs of top fund houses on Tuesday to discuss the issue of upfront commissions paid by them for closed-ended schemes and equity-liked savings schemes (ELSS). To attract investors, fund houses are understood to be paying commissions between 5-7% on such products to distributors. During the annual general meeting of the Association of Mutual Funds in India (Amfi) in September, the Sebi chief had expressed his discomfort on this issue.
The regulator is concerned that high upfront commissions might lead to mis-selling and impact the profitability of the smaller fund houses. Of the 42 fund houses in the country, 20 have registered losses in 2013-14. The big fund houses that have deeper pockets are able to offer upfront commissions to distributors, industry watchers said.
One CEO of a top fund house said, on condition of anonymity, that high commissions would only lead to mis-selling. “There should be a stop to this practice or else it would be difficult to generate profits. I think Sebi can certainly bring in some regulation,” he said.
Amfi board members had met in November to discuss the issue, but were unable to arrive at a consensus. Of 55 equity schemes launched in the current calender year, 38 were closed-ended in nature and collected approximately R7,000 crore. Such schemes have a closed-ended tenure of 3-5 years and many of these were aggressively pushed through higher upfront commissions.
Sebi had banned entry loads in August 2009. Prior to that, fund houses charged investors 2.25-2.5% as entry loads and, later, paid it to distributors. Many players believe that huge upfront commissions paid from the pocket of fund houses would also lead to huge churning of portfolio.
By Chirag Madia