Large-scale changes in mutual fund distribution system on the cards

A slew of changes in the way funds are created and sold, would come about in the next 12-18 months, asserted KN Vaidyanathan, an Executive Director of SEBI, while speaking to Moneylife in an exclusive interview. This is the first story of a series

The Securities and Exchange Board of India (SEBI) is pushing for a series of reforms over the next 12-18 months to streamline further the process of how mutual funds are created and sold. This would mean further changes in the roles of distributors—both national distributors and Independent Financial Advisors (IFAs) who are currently not regulated.

In an exclusive interview to Moneylife editor Debashis Basu, KN Vaidyanathan, an Executive Director of SEBI said, “We will first deal with the banks and national distributors and then handle the IFAs. We have already started doing certain things. We have taken the exam away from the Association of Mutual Funds in India (AMFI). It will be handled by National Institute of Securities Markets. The test will be more current. There will be a demarcation between passing the test and getting the certificate.”

When it was pointed out that with the smaller IFAs pushed to the background, banks have emerged as powerful national distributors leading to a lot of mis-selling, Mr Vaidyanathan replied: “It’s true that banks alone enjoy the trust of investors and some of them have been abusing that trust. Maybe the fund distribution will be done by a different set of banks, provided the fund companies get their product right. Instead of feeding investors 10 different funds, nothing stops a fund company from offering one fund that does asset allocation and ensures low volatility.” Indeed, as Moneylife has pointed out many times, mis-selling often starts with product design itself.

Mr Vaidyanathan is currently talking to the asset management companies as to whether mis-selling can be rooted out through an institutional process. “The key issue on the distribution side is how do you institutionalise the due diligence process. I told the funds, you can take the view that mis-selling is not mis-selling unless I am caught. That to me is low-grade. The issue is how do I build systems in an organisation which makes it institutionally difficult to mis-sell. Banks have such systems in place. When you open a new account, there are calls from the quality control departments asking questions about various service parameters—there is a verification of the on-boarding process in place. Does the mutual fund industry have this? Why not? After all, many of them have been set up by banks. This upsets me because they are making a distinction between banking and mutual funds, depending on what is on (the) balance (sheet) and what is off balance sheet.”

Based on Mr Vaidyanathan’s suggestions, funds are working on creating appropriate internal systems. SEBI is also pushing the fund industry to develop a code of ethics and stick to it.




6 years ago

Why IFA ,ARN required for MF Selling (Mis-selling of Fund) ?


7 years ago

Can Mr Vaidhyanathan define mis-selling?is mis-selling means suggesting a debt fund today looking to market scenario and after 2 yrs debt fund are in no attraction bcos equities are in favoured flavour-will SEBI catch the IFA for mis-selling of debt fund?
or today suppose reliance diversified power sector fund is doing very well and after one year some govt policy changes and the fund looses lusture-will be IFA responsible?will he be sentenced for allegation of misselling?

It clearly looks SEBI is trying to abolish IFA's by providing newer and lethal weapons to clients in name of investor protection-
these tools are same like women protection law against DOWRY or domestic violence-which is used now to dominate MALE community?it is so much mis-used by many smart women that even courts have admitted its mis-use.
i am sure there can not be any defination of mis-selling which intelligent guys of SEBI are trying to define-
have they ever defined or took action against TIPS for penny or bluechip stocks?all brokerage firms give tips in early morning trade-do all those tips work out fully?
has SEBI any ears to listen to invetors who loose money in those tips?
then why only MF brokers to be paralysed by all hook or crook?
SEBI should come forward to answer all these clarifications in open forum before any implementaion of such unjustifiable FATWAS-


7 years ago

Most of misselling is done by National Distibutors and Banks.We have formed an association for IFA which will adhere to code of conduct as per regulators circulars and guidelines.


7 years ago

It seems that so much of criticism of SEBI has forced mr Vaidhyanathan to appear in moneylife office-may be he trying to give explainations to their wrong deeds-
Has mr vaidhyanathan called up any retail investors meet to discuss theri issues?has he ever talked to IFA's to understand the ground reality?it seems SEBI has found a soft target to whom they can put up all their frustrations-
subah biwi se jaghda hua to mutual fund ko koi naya fatwa dedo-gussa shat ho jayega-
it looks they are alwasys dreaming to kill MF industry with all posible ways and tools-if they are really serious-
THEY should call up a retail investors open dialogue form along with IFA's-
and they should face and answer all querries-
if they can really face this situation-then only they should call themselves as HONEST APPROACH

Mukesh Chothani

7 years ago

Mr. Vaidyanathn point wel taken but who think about small IFA who live in small city.At present out of total brokrage paid by AMC how much to the big broker and how much in percentage to small IFA ? How we encourage new genration to make careear in MF industry. there is no material on vernacular language about MF.Hope regulator think on that.


7 years ago

Please appoint regulators for all types of distributors why only Mutualfund industry every other industries be it realestate,consumerproducts,hospitals,govt.bodies,travel agents,rto agents,bmc,police,electricity,water management,railways and many more as they are all money related products and services.We are just paying our taxes blindly without even knowing how and why its been spent in this manner.Lets help ourselves to be regulators in all these fields there is no accountability for corruption,mismanagement etc,labour department,facilities depart.Laws and bills passed in the parliment, NGO's.When we all will learn to be a responsible citizen of this country state etc.Everthing is been taken for granted whether your are educated or not.A problem is problem for all


7 years ago

Mr. vaidyanthan is in ivory tower. What did he do when SEBI came out with a circular that broker code can be changed without permission of earlier broker? many Institutional Investors kept seperate work force only to do this job . NJ Investment was one of them ( Mr. Vaiyanathan ha d given them clean chit as reported by money life). I think Vaidyanathn should do his homework properly before he does anything . or else he will close down the industry(Already he has killed it.)

K. sriram

7 years ago

I hope Mr. Vaidyanathan sticks to the deadline which seems too long. It needs to be done on a fast track with thorough discussions with each & every stackholder involved so that NO FURTHER evolution of ideas are necessiated thereafter. He must cover ALL financial products & NOT just the mutual funds
sivasri premier
ARN 19262


7 years ago

The process of institutionalising Mtutual Fund distribution is the final agenda of all the concerned agencies. I think this is not a healthy trend which will kill the industry altogether. Mis-selling is bad at any point of time. There are other ways and means to handle the same. Investor Education and Distributor Education are the most important ways of tackling the problem. But no one seems to be interested in it.


7 years ago

.SEBI has issued guidelines for demat of mutual funds which is really beneficial to retail investors to have a single statement of accounts in respect of their holdings. But no one seems to be serious about this benefit. Both the Registrars do not "demat" the certificates sent by a distributor even after 2 months simply because the regulation does not fix any time limit.


7 years ago

Please define mis-selling ( Mr Vaidyanathan's point of view) particularly for Mutual funds.& even money life view - support with an e.g.

too much talk on regulation in the name of small investor.

Steps should be taken to include retail investor and not scare away with horror stories and generalzing all intermediries without any study/ statistics.

Mutual funds give very good returns - enough statistics available - every one knows that returns are market linked. no one talks about the the returns and the service intermediaries have done.

banks allowed to distribute is another story.


Sushil Kumar

7 years ago

SEBI is doing lot of good work for investors but what are they doing for the distributors?. Sure their are bad distributors and also bad clients. How does SEBI intend to regulate investor? There are many incidents were after awailing services investor refuses to pay. What is solution for that. Surely it is high time SEBI introduces variable load system so that !) system is fair to both investor and distributor. 2) It will also help IFAs to save on cost of collection and business would be viable. SEBI has to under stand no industry can work without distributor so survival of distributor is essential. Already lot of small investors are facing heat as they have no service provider as providing service to small investor is not viable for IFA's

Narendra Doshi

7 years ago

I hope Mr. Vaidyanathan sticks to the deadline which seems too long. It needs to be done on a fast track with thorough discussions with each & every stackholder involved so that NO FURTHER evolution of ideas are necessiated thereafter. He must cover ALL financial products & NOT just the mutual funds.


7 years ago

i dont know what is going on.sebi is over reacting and going to no good to industry.sebi s action is like that to giving cancer drug to a child for mere india mf industry was trying walk on his own feet but sebis overdoses of action will making it sebi who are making rules they dont know ground realities.they are sitting in ac rooms and read some foolish news and hear some so called experts and take is nothing but going to destroy industry

Hemant Beniwal

7 years ago

Power to Investors

Environment ministry cracks the green whip again, this time on Sesa Goa’s mining project in north Goa

After suspension orders against various projects in the past, the environment ministry has suspended clearance for Sesa Goa’s iron ore project

The ministry of environment and forests (MoEF) has come down heavily on projects across sectors for violating environment regulations in the recent past.

In its latest move, the ministry has pulled up Sesa Goa, a Vedanta-owned company, for one of its proposed iron ore mines in Goa. In an order sent to Sesa Goa on Monday, the ministry stated that the environment clearance granted to the company in June 2009 had been suspended with immediate effect. The project in consideration is an iron ore mine in north Goa.

The ministry has suspended the clearance order in line with the National Environment Appellate Authority’s order in a hearing between Pirna Naroda Nagrik Kruti Samiti, a local group, and another case filed against the project.

This action is among the many suspension orders released by the ministry over the past few days. Last week, the ministry had ordered construction work at the Maheshwar Hydel power project to be suspended

On 11 May 2010, the ministry had put the construction work of Vedanta’s university on hold. The university was being planned at Puri in Orissa. Earlier, the ministry had also rejected a uranium mining proposal in Meghalaya. The proposal was put forward by the Department of Atomic Energy.

The standing committee under the chairmanship of Jairam Ramesh, minister of environment and forests, has also decided to press the Maharashtra government for the implementation of a report prepared by the Bombay Natural History Society (BNHS) which also includes an immediate ban on illegal mining & construction of roads.


Brokers linked to banks thumb their noses at SEBI and make their own rules

When top brokerage firms were approached for opening a trading account, we found that there were differences between the views of official spokespersons and what customer service executives tell would-be clients

Market regulator Securities and Exchange Board of India (SEBI) has firm rules regarding the procedure for opening trading accounts for retail investors.

One of the rules is that a customer can have his demat, trading and savings accounts in different banks or financial institutions, and is not bound to have them all with the same bank.

Yet, brokers linked to banks continue to offer such 3-in-1 accounts not as a choice, but as a compulsion. While this is clearly against SEBI regulations, and official spokespersons of these brokerages state that such accounts are optional, their sales and customer service staff tell a different story.

Moneylife decided to do a survey of four brokerage firms associated with banks, all of whom offered online accounts, to see if this was true. The brokerages surveyed were ICICI Direct, Kotak Securities, HDFC Securities and HSBC InvestDirect.

As individuals, we cannot trade shares on a stock exchange, but must do so through brokers. While some old time brokers still follow traditional methods of trading on behalf of customers where you personally tell your broker what shares to buy and sell at what price, many firms, foremost among them banks and online portals, employ high-tech facilities where you trade from online accounts and can observe prices in real time, get access to reports and recommendations, have automatic withdrawals and deposits from bank accounts and much more. While some argue that high-tech brokerage houses are less flexible and lack the all-important human factor, no one can deny that they are faster, more convenient and more easily accessible.

The first few steps for opening a new trading account were common across all the firms, with the customer service executive informing us that we would be called back by a sales representative. While most customer service executives assured us that we would be called back within a few hours, some were more candid and told us to expect the call within a day or two. Upon asking we were also informed that on giving our details to the sales representative, we would be visited at home by a sales executive.

We were then told that we had to provide certain documents such as proof of identity, proof of address, a PAN card and photographs, standard documents outlined in the SEBI guidelines.

When it came to opening the account, whether it was ICICI, HSBC, HDFC or Kotak, all extolled the virtues of opening a 3-in-1 account, essentially involving opening a savings account, demat account and trading account, all within the same bank. The banks claim that as these accounts are with the same bank, trading would be simplified and hassle free.

When we informed them that we already had savings and demat accounts, and just wanted to open a trading account, we were told that opening a 3-in-1 account was mandatory, though their official spokespersons had a different opinion.

While a Kotak customer service executive told us that the bank had a tie-up with certain other banks (all private and foreign banks) when we informed her that we had a savings account with SBI, India’s largest bank, she politely told us that they couldn’t link it.
The others just refused outright.

When contacted, a spokesperson from ICICI Direct said, “We have designed our products within the regulatory framework as well as keeping in mind our customers’ needs. Hence we offer both 3-in-1 accounts as well as trading accounts through an Active Trader Service account.”

This is a complete contradiction to what their customer service executives told Moneylife.

At the time of writing this article, officials of the other companies were not immediately available for comments.

The most disturbing thing about this whole process is that opening a 3-in-1 account means you have to pay opening and annual maintenance fees for the savings and demat accounts in addition to the fees you pay for the trading account. To top this, you have to maintain an Average Quarterly Balance (AQB) amounting to Rs5,000 for Kotak and ICICI Bank, and Rs10,000 for HDFC Bank. This means that they are forcing you to avail of a service that you neither want nor need, and pay for it too!

While all these banks maintain an official stance that such 3-in-1 accounts are optional, the ground reality is that their call centre executives do not communicate the same to potential customers. The average customer will never contact the official spokespersons, assuming that the companies’ own employees are aware of their respective organisation’s policies.

This is a clear case of large companies thinking that they can blatantly disregard regulations and make their own rules, all the while dictating terms to customers.



Vaidya D V

7 years ago

Recently I was told by Sharekhan representative that if I want to open a Demat & Trading Account in my wife's name, she must have an account where her name appears first. Since marriage I have only joint accounts, all in both the names, but the first name is mine. He said there is a circular by SEBI, but failed to send one. Is there any such rule. And then what happens to her other demat & trading accounts where the registered bank account where my name appears first and her's at second position.
There are other issues too. I never get a copy of the agreement that I have signed, even though it is mandatory and a matter of natural justice. Whom do I approach


7 years ago

Good that you touched this area. Such restrictive practices are going on for years. These practices increases the cost of participation in the capital market for retail investors. I hope that you will followup the storey. Another thing you may do would be see the kind of agreement etc. one has to sign to avail these services.

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