MF distributors flag liquidity, conflict concerns over Sebi’s commission proposal

The proposal aims to encourage distributors to save and invest for the long term. While the regulator has sought industry feedback on the potential conflict of interest arising from AMCs paying commissions through units of their own schemes, industry experts highlighted several operational and structural challenges.

Aditya Agarwal, co-founder of Wealthy.in, said the proposal could create liquidity and working-capital pressures for smaller mutual fund distributors (MFDs) if the allocation of units is made mandatory. He also flagged concerns over disproportionate exposure to schemes of specific fund houses and the possibility of widening the gap between large national distributors and independent MFDs.

“If AMCs introduce varying structures, tiered perks, or distinct wealth-accumulation benefits within their unit-payout models, it could create an aggressive commercial battleground for distributor mindshare,” he said

Also, independent retail MFDs may find it difficult to maintain strict neutrality, as the financial incentive to optimise their own long-term, unit-linked net worth could subtly compromise objective, client-first product recommendations.

While acknowledging that the proposal could help distributors build long-term wealth, Agarwal suggested that receiving commissions in the form of units should remain optional.

Chokkalingam Palaniappan, a Chennai-based distributor, added that the proposal could help many small independent distributors save for their long-term financial goals.

He added that it may also discourage distributors from projecting wealth accumulated through other financial products as mutual fund returns on social media platforms.

Palaniappan suggested that distributors should be allowed to choose the scheme in which their trail commission is invested, based on their risk appetite and investment objectives.

Agarwal also sought clear joint guidance from tax authorities on issues such as taxation timing, tax deducted at source (TDS), valuation methodology, capital gains treatment and accounting standards to prevent confusion and disputes.

In addition, tracking commissions received as mutual fund units, redemption values, capital gains and accounting treatment could become cumbersome for smaller distributors lacking sophisticated systems, he said.

A senior mutual fund distributor, who did not wish to be identified, said the proposal could improve savings among distributors and align their investments with the products they recommend to clients.

However, he cautioned that complications could arise if distributors become locked into schemes during periods of market volatility or if the scheme does not match their personal investment goals and risk profile.

“While the intent is positive, flexibility for distributors will be critical to ensure that the proposal does not create unintended consequences,” he said.