First, the distributors would now be allowed to charge R100 as a transaction charge per subscription for investments of R10,000 and above (R150 for the first time investor). There would be no charges on transactions which do not relate to fresh inflows and for direct transactions with mutual funds. As the existing regulations prohibit making upfront commissions to the distributors, these small charges would be allowed to incentivise the distributors to widen the mutual fund industrys reach to small towns and villages. This would not impact large investors, but for small investors it may be like bringing back the entry load regime, though in a small way. For instance, for each fresh investment of R10,000 and above, a small investor would have to pay R100, which is like a 1% upfront entry load regime. Compare this with an investor who invests a larger sum of R1,00,000 at one go, for whom the upfront cost would be 0.1%. The more the investments, the lower are the percentage costs. In a way, small investors would have to pay out more in real percentage terms. Its not very clear, unless the amendments are notified, as to whether investors investing through SIPs would be charged on every fresh instalment of R10,000 and above or would it be a one time charge. The move would impact the small investors, though it may not be very significant for distributors and large investors.
Second, big distributors are to be regulated through asset management companies (AMCs) of mutual funds by mandating the AMCs to conduct diligence on them. Several criteria have been prescribed, any of which, if met by a distributor, would bring it within the purview of diligence. For example, a commission over R1 crore per annum received across the industry or a commission over R50 lakh received from a single mutual fund. An onus has been cast on AMCs to conduct diligence only on large distributors to start with. Interestingly, however, chances of mis-selling are greater with small distributors and less with those select large distributors who may already have systems in place and are more visible faces. In any event, the mutual fund body, AMFI, has already put in place the Know Your Distributor (KYD) norms (requiring the distributors to mandatorily submit identity proof, address proof, PAN, bank account information and other details), which in a way cater to diligence requirements.
Third, AMCs under the current mutual fund regulations are already entitled to render management/advisory services to offshore funds, pension funds and several other entities subject to satisfying Sebi that any of these activities are not in conflict with mutual fund activities. Its now proposed that even without seeking prior Sebi consent, and by utilising existing mutual funds research team strength, the mutual funds would be able to render such advisory/managerial services to broad-based offshore funds provided that there is no conflict due to differential fee structures. Hence, care would have to be taken that such activities do not adversely affect the services rendered by the fund team/managers to domestic schemes because of the high fee they can charge from offshore/ pension funds.
Fourth, it has been prescribed that all the operations of a mutual fund have to be located in India. Many mutual funds have overseas subsidiaries rendering advisory/management services to offshore funds making investments in Indian mutual fund schemes, also registered as FII/sub-accounts and making investments in India. Several mutual funds have been appointing overseas distributors to reach out to offshore investors and would be more in view of the new proposed investment window of $10 billion available to eligible non FIIs/NRIs for directly investing in Indian mutual funds. More clarity may be required as to what Sebi means by asking for closure of overseas operations and what the purpose of such an action is.
Fifth, the proposal for induction of a new chapter on infrastructure debt funds (IDFs) is unlikely to serve much purpose as even currently, mutual funds have debt schemes and a new framework may not be required. This is also in view of the fact that there are more onerous obligations (in terms of minimum investment, lock-in, investment restrictions etc.) to comply with under the IDF regime without any corresponding benefits.
Clearly a lot more needs to be done to make mutual funds a popular investment destination. This is a reasonably good start, but there is still a long way to go.
The authors are with Finsec Law Advisors