Amid brewing discontent in the mutual funds industry, capital market regulator Sebi is looking at concerns raised over the proposed one per cent cap on upfront commission paid to agents for selling mutual fund schemes.
Mutual fund industry’s apex body AMFI’s decision to implement the cap on upfront commission from April has created a rift among large mutual fund (MF) houses and small players.
Many smaller players believe that the decision of Association of Mutual Fund Industry in India (AMFI) would hurt their interest and also restrict their ability to compete with larger rivals.
Sources said that Sebi has received complaints from some entities in the mutual funds industry and those are being closely looked into.
Mutual funds come under the regulatory ambit of the Securities and Exchange Board of India (Sebi).
Reflecting the discontent over AMFI’s decision, Financial Intermediaries Association of India (FIAI) has said that pricing issues should be decided between individual fund houses and distributors.
The association represents intermediaries, including distributors, in the industry.
“We are in principle not in favour of… AMFI fixing prices or mandating pricing formulas and/or getting into jointly deciding pricing matters for the distribution of mutual funds, as such initiatives are generally considered to be against free trade practices,” FIAI said in a statement.
At present, there is no limit on upfront commission and some fund houses pay upfront commissions of up to eight per cent to their distributors for selling a MF scheme.
Aashish P Somaiyaa, CEO, Motilal Oswal Asset Mgmt. Co. Ltd. says that the AMFI decision is bound to make one set of distributors unhappy.
“As a MF we do not pay any upfront commission and have shifted to a full trail model, but AMFI could have come up with a decision that looks after all the distributors. This one-size-fit-all approach will make some unhappy,” Somaiyaa said.
Srikanth Meenakshi, Founder and Director, FundsIndia.com feels that distributors at this point in time have little to do than absorb the impact of lower commissions.
“AMFI is not addressing the root of the problem. This move to cap upfront fee for all is distributor unfriendly. As a business, we have no other option but to absorb this impact,” said Meenakshi.
Reportedly, Sundaram MF has said written to AMFI that to restrict commission to one per cent is harsh on distributors and they would not comply with rule.
However, providing an alternative view Quantum MF CEO Jimmy Patel said that introduction of cap on commissions would help ensure a level playing field and curb instances of exorbitant payments.
In a circular issued last week, AMFI said upfront commission should not exceed 100 basis points (one per cent) for the first year.
“Further, upfront commission shall not exceed distributable TER (Total Expense Ratio) of the scheme if the same is below 100 basis points,” it added.
However, additional incentives provided for distributors in smaller towns would be exempt from the cap. In mutual fund industry, small towns are generally referred to as B15 (or beyond top 15 cities).
The new rules would be implemented from April 1, with a review after three months. The Amfi’s decision come after capital markets regulator Sebi expressed concern over the practice of paying high commissions.
In 2013-14, income earned by distributors from selling MF schemes stood at Rs 2,572 crore, higher than Rs 2,367 earned in the preceding year.
There are a total of 45 mutual funds in the country and their total Average Asset Under Management currently stands at over Rs 12 lakh crore.