Sebi chairman UK Sinha has expressed concerns over high commissions being paid out to distributors by fund houses. There has to be some kind of rationality in paying out commissions to distributors, the Sebi chief told CEOs of fund houses at Amfi’s annual general body meeting held on Tuesday. However, Sinha said the market regulator would not directly intervene in the matter and it was up to individual fund houses to exercise restraint and act responsibly at a time when Indian equities are hovering near all-time highs.

Upfront commissions paid to distributors for selling open-ended equity schemes have risen to 2-3% in the last 2-3 months from 1-1.5% paid earlier, said industry observers. High commissions are also being paid for closed-ended schemes, which have gained popularity since September last year. Upfront commission for closed-ended equity schemes vary between 5% and 7%. What’s more, it is believed that distributors are taking advantage of the situation and actively churning assets more than a year old to rake in higher commissions.

?Fund houses should not pay commissions out of their own pocket and must taken into account likely expenses that they have to incur before deciding on the quantum of commission to be paid. High commissions generate unhealthy competition and are suicidal in the long run,? said the CEO of a fund house. Expenses included audit fees, filing fees, listing fees, R&T fees and other administrative charges. The CEO further added that Sebi should collate data on commissions paid from each of the fund houses and pull up those who are paying exorbitant commissions.

Experts warn that the higher commission strategy could backfire in the long run as it could impact profitability of AMCs. ?High commissions may impact profitability since AMCs have to pay the money out of their own pocket, unless the assets remain with them for at least 3-4 years,? said Niranjan Risbood, director, fund research, Morningstar India.

According to industry observers, fund houses have become desperate to garner assets, particularly after the change in taxation rules on the debt side after the Budget. The changes in rules are widely expected to result in a decline in overall debt AUM.