“Upfront commissions were making everybody think short-term. They will think long-term now”

KN Vaidyanathan, an executive director of SEBI, sees mutual fund companies evolving into a changed business model, based on simple products, ethical distribution and technology to reduce costs. This is the third and final story of a series

The Securities and Exchange Board of India is confident that the mutual fund industry will emerge stronger and more investor-oriented following the slew of recent fundamental regulatory changes made that affected the fund industry badly so far. “The changes will force everyone to think hard on how to develop a robust long-term business model,” says KN Vaidyanathan, an executive director of SEBI, in an exclusive interview to Moneylife.

Following the regulatory changes over the last 12 months the business model of mutual funds has been profoundly affected. Fund companies have been losing assets while well-established selling and distribution strategies of fund houses have gone haywire since upfront commissions and the various ways in which intermediaries were being compensated, have been plugged. How does the regulator view these changes, especially since we are witnessing a continuous decline in equity assets over the last few months, since SEBI has a development role to play as well? “The industry will adjust. Maybe the asset size will shrink but that may be good for all, especially the serious players,” says Mr Vaidyanathan. “The industry is full of bright people. I am sure they will put their heads down and work out a better business model. That would be good for all—including the investors.”

SEBI is pushing fund companies to face the new reality which Mr Vaidyanathan goes on to articulate as follows: “The challenge for the fund industry thereafter is to find out where the scale will come from. According to me it will come from simplicity, distribution and technology.” According to him, fund companies must offer simple products with low volatility based on asset allocation, distribute the products through large distributors and ensure that their operations are backed by the best technology, which reduces cost. “That may also mean that those who were not serious would exit.”

Ever since SEBI has changed the business model of the fund companies by changing the way mutual funds are sold, equity funds are losing money. This has led to market speculation that SEBI may partially relax the regulations, allowing for some upfront commissions. “A large number of people (mainly the sponsors) keep checking whether SEBI will revisit the policy of scrapping entry loads because they argue ‘it has not worked’.”

However, when asked, Mr Vaidyanathan asserted with a simple: “No. That is a closed chapter.”

Having changed how the funds are being distributed, SEBI is changing how the funds would be created. In the first couple of decades of growth of mutual funds, fund companies have launched almost similar products, which confuse investors. SEBI is already making some changes in the fund-approval process which will change this. “It is their business, but I guess funds will have to change. One of the things we are asking funds to do is to explain clearly how fund A is different from fund B. This has to be done for all the funds that are being sold today no matter when they were launched. They have to redo their Key Information Memorandum (KIM).”

One of the key issues for the fund industry is that while SEBI has banned upfront commissions for mutual funds, insurance companies were pushing their products, especially Unit-linked Insurance Products (ULIPs) with hefty upfront commissions. The fund industry has been quietly complaining that this has tilted the playing field against them. Since banks and financial institutions make easier money selling other products, why would they sell mutual funds, goes their argument. Mr Vaidyanathan counters this as a myth. “People confuse between upfront and trail. Business models based on upfront will die. Irrespective of how the dispute between ULIPs vs mutual funds works out, the writing on the wall is clear. Upfront commissions and entry loads will become zero. It is a matter of time. Therefore what it leaves us with is trail commissions. There is nothing to match the attractiveness of trail commission of mutual funds because the trail is on the total kitty, not like the upfront commission on a single product. But that means everybody has to think long term, especially after upfront commissions are gone. Until now nobody was thinking long term.”

User

COMMENTS

Dilip Davda

7 years ago

Well, this was largely happening for private sector insurance companies and that took the toll on their NAVs. As far as LIC Of India is concerned, this was not the case. LIC never gave any extra ordinary commission to their agents and hence gained faith of investors.

VIJAY AGRAWAL

7 years ago

The good article. But every rule should be frame with confidence of advisors also. All advisors doesn't know how to do the work and what will happen tomorrow.

Roopsingh

7 years ago

If SEBI cant act in favour of brokers-then atleast it should think otherway-that our MF indutry does not get paralysed-
the only institution is LIC right now which has capability to support the free fall-but it is not its only responsibility to act always-there has to be others who should shoulder it-
SEBI people please wake up and act wisely-atleast for the benifit of this country-dont let our markets play to the mercy of FII-

Roopsingh

7 years ago

See the free fall of our markets since last week-all fundamentally strong cos are getting heavy beating-our fundamentals are best in the world-but the reason for beating is that FII(godfather of indian markets) are in selling mood-is there some one to stop this panic selling?
how can be there because our regulator has well tried to curtail their growth-
all our institutional investors are paralysed due to redemption pressure-how they can stop this free fall?
i guess its necessary for SEBI to act wisely in the interest of the of this country and its people-
which may not hamper the investment objectives of coommon man-
SEBI should stop practicing of 'paralying MF industry'so that they have nails and tools to act in such panic situation

Ghanashyam Adhalkar

7 years ago

Why sebi not making clear picture about charge of fees? There should be some research to be done & some implications to be made about fees. SEBI should aware customers through mass media to give fees to the brokers.

Ranjan D Gupta

7 years ago

Mr.Vaidyanathan has only concentrated his idea to give more benefit to the investors.It is true that Investors are getting benefit of zero entry load but SEBI could not able to perceive that in India investors mindset are tuned towards putting money in Banks and Post Offices.It requires great effort to convince them to put money into mutual Fund.
Who will do it? Intermediaries or SEBI.SEBI is only the regulator,the responsibility of development of MF industry does not come upon SEBI.Who will think about it. Poor response in NPS launched by Govt is an eye opener.It is suffering because there is no intermediary to canvass for NPS which in the first year of operation generated very good return.

Thanks,

Kamal Singhi

7 years ago

I would like to draw the attention of SEBI to the following facts. SEBI wants MF to think long term. It is right but something more to be done to have this happen.
There are two main players in the stock market Speculators and Investors. Investing is by nature long term and MF industry is an investor's destination. But the problem is that everybody is confused and no one knows what they are doing. Look at the followings.
When the stock market cheap it is described as KHARAB or BAHUT KHARAB by the market players. When a cheap thing is described in this way, can any retail investor invest. Thus cheap market is avoided for buying.
Similarly when the market is most expensive it is described as Achha or Bahut Achha. When an expensive market is described as such then can any body sell and come out of the market. Thus expensive market is avoided for selling.
Buying in a cheap market and selling in an expensive market, the basic rule of wealth creation and also the fundamental investment rule is gossely violated.
Investment and speculation are so mixed that it has become difficult to distinguish one from another.
Once investor's destination like mutual funds houses start describing the stock market from the investment perespective i.e. when it is cheap, it should be proclaimed cheap and when expensive it should be proclaimed as expensive and such proclmation should happen widely through various media. Rather investment houses should also refran from bringing any schemes during most expensive times of the market. This coupled with training to IFA on 2nd level asset allocation can really bring desired changes at thinking level not only among fund houses but also among investing public.

gerard barros

7 years ago

trail commission is a good idea, if it can be done on a monthly bases, rather then quaterly currently, are expenses are monthly and that need to be addressed.

Ishwar Bhatewara

7 years ago

Because of this regulatory changes, Mutual Fund will be only restricted to 8 cities. Death of Mutual Fund penetration. Instead of that if SEBI had put a uniform cap of 1% for all big or small distributors, it would have not hurted. SEBI is very good at theorotical implications but has miserably failed in practical application and the numbers reflect the same.

sandeep kumar upadhyay

7 years ago

With due respect, i would like to ask a very small and single question to mr vaidyanathan that " Is all your these regulatory frameworks regarding commissions and payouts for mutual funds is really feasible in the country like india where awareness level for mutual funds and stock market is really upto the mark or you people are just replicating U.S. model where awareness level is near to 80% when such framework was introduced or really boged down by seening the growth of 8% nearly in metro cities only, is really india means this 8to9% in metros?What about rest of india? my dear sir , my simple view is that be comprehensive in your thought and patriotic also. And also do not creat Huge unemployment.

with best regards,
sandeep kumar upadhyay
09810847967.

Anup Agarwal

7 years ago

It is a nice thought by the writer. Now may i request the writer to please quit his job & salary for 6 months & then think about all the logistics. While we r on job & our salary package is not tampered with, we think of many things. But the brunt is borne by the lady who gives the birth to the child.

I m not opposing the concern sebi has for the investors bcoz it is investor market and we r here bcoz of him. Sincerely, i have never favoured churning, or upfront comm as the income making tool. But as you have put it, "people are doing it", all those advisors who were not involved in churning have unnecessary fallen pray.

Instead why don't sebi conduct atleast 20-50 checks in various parts of the country & terminate license of people who are churning instead of demotivating mf.

When your genuine earnings are hampered Sir, it pinches you deep in your heart.

Thanx & Regards,
Anup Agarwal


Mansabdar

7 years ago

The upfront incentive is necessary for proliferation of financial literacy in to masses,More and more people were coming in for investing to make the industry stronger.What is the percentage of population is investing in equities through MF.This will help FIIs to rule Indian Markets.That will further damage the returns and the stock market well.Our mf industry and stock markets are not that mature enough so that the investor himself will come directly to the markets.

R Balakrishnan

7 years ago

The present ed of SEBI seems to be hell bent of practically shutting down the mutual fund industry. The first thing SEBI should have done is to level the playing field. It could have taken IRDA long back ago. If SEBI is so keen on improving the markets, the most important thing SEBI should do is to enable institutional investors to trade in stocks without going through brokers. Why do they need brokers at all? SEBI should focus on this. In the debt markets, RBI has enabled trade to happen directly between institutions. With technology in place, there is no need for stock brokers also.

PK Sachdeva

7 years ago

Hi,

In India we do not believe in long term planning, even at grass root level. We always try to find out short cuts - for degrees (Copy Cat) financial gains (unethical deals) and so on.

Most of the people do not know where they want to be after 5 yrs.

Daily Market View: Bottoming out?

As we had predicted yesterday, support for the Sensex came in between 16,100-16,300 at 16,187

The market started the day with a deep fall, made a gradual recovery as the session progressed but ended in negative terrain. The Sensex ended at 16,445, lower by 74 points (0.4%) while the Nifty settled at 4,931, lower by 16 points (0.3%). The indices started the day with a low (the Sensex touched an intraday low of 16,187), taking cues from the weak Asian markets. However, they pared their losses soon and traded in a narrow range till the mid-morning session. The market slumped once again, tracking weak European equities. It rebounded in the afternoon session. Volatility was high as traders rolled over positions in the derivatives segment from the May 2010 series to the June 2010 series, ahead of the expiry of the near-month May 2010 contracts next Thursday.

Asian stocks were down on concerns over the eurozone debt crisis and its negative impact on global economies. Key benchmark indices in Indonesia, Singapore, Japan, and Taiwan fell by 2.08% to 2.93%. China’s Shanghai Composite pared initial losses and was up 1.08%. Markets in Hong Kong and South Korea were closed for a public holiday. Markets in Thailand were also closed due to the political unrest.

US stocks were down on Thursday on negative economic data and concerns over the eurozone’s debt crisis. Selling was intense late in the day after the US Senate voted to end the debate on the sweeping overhaul of the financial system, allowing a final vote on the bill. The Dow was down 376 points (3.6%) to 10,068. The S&P 500 was down 43.4 points (3.9%) to 1,071.6. The Nasdaq was down 94.3 points (4.1%) to 2,204. Jobless claims rose again in the US for the first time since early April. Initial claims for state jobless benefits increased by 25,000 last week to 471,000, the highest level in five weeks, the Labor Department said. The index of leading economic indicators slipped last month for the first time since March 2009, while factory activity in the US mid-Atlantic region accelerated less-than-expected in May.

Greece said that the banning of some speculative trading in eurozone debt indicates the determination of eurozone leaders to defend the single currency and protect the economy. 

Back home, the Reserve Bank of India (RBI) said that the US dollar will remain a major component of India's foreign exchange reserves as most of the country's overseas trade is denominated in that currency. Foreign Institutional Investors (FIIs) were net sellers of Rs657 crore. Domestic Institutional Investors (DIIs) were net buyers of Rs721 crore.

NIIT Technologies (down 0.1%) has announced a partnership with Adecco SA, a Fortune 500 company and a leader in human resources services. The existing joint venture agreement has been replaced with a comprehensive collaboration agreement whereby NIIT Technologies is designated as a preferred vendor for its IT outsourcing program.  Shree Ganesh Jewellery House (down 3%) has taken over Sumit Jewels Pvt Ltd, Kolkata as its wholly-owned subsidiary. Sumit Jewels has an integrated diamond jewellery factory located at Manikanchan SEZ, Kolkata. Punjab National Bank (down 1.2%) will be raising Upper Tier II Bonds as ‘PNB Upper Tier II Bonds Issue Series XII’ through an issue size of Rs500 crore. The proposed date of opening and closing is 24th May. Indraprastha Gas (down 3.4%) is likely to increase gas prices by a record 20%, or close to Rs4.40 per kilogram.

IRB Infrastructure Developers (up 0.8%) has received an official communication from the National Highways Authority of India (NHAI) in which it has been declared as the "selected bidder" for the six-laning of the Tumkur-Chitradurga section in Karnataka. State Bank of India (SBI) (up 0.3%) has decided to curtail its branch expansion plan and is expected to open around 500 branches during the current financial year, as against nearly 1,000 proposed earlier

User

COMMENTS

lowkeyfan

7 years ago

Nifty will rebound ahead of seeing the number 4780 on or before Wednesday the 26th may 2010. A 2 week rally at most going to no more than 5320, more likely 5240 wherefrom it would crash to 4100 by 1st week of July

Mutual fund industry dealt another blow, AMFI hikes ARN fees

The industry body has drastically increased the registration and renewal fees for mutual fund distributors across the board

With the mutual fund (MF) industry bogged down by a number of problems, the decision of the Association of Mutual Funds in India (AMFI) to hike AMFI registration number (ARN) renewal fee is likely to prevent new independent financial advisors (IFAs) from entering the market. However, the move is also expected to curb unscrupulous players from obtaining multiple ARN numbers to dodge income-tax (I-T) authorities. AMFI clearly states that no individual should hold more than one ARN card or certificate of registration.

AMFI, in its circular issued on 19 May 2010, has hiked the ARN registration and renewal fees across the board with effect from 1 June 2010.

The ARN number for corporate bodies will be valid for three years. For individuals and corporate employees, the validity period will be computed from the date of receipt of the application till the date of validity of AMFI/NISM certificate.

Obviously, this move has not gone down well with the distributors who feel that the hike is unjustified.

Some IFAs have already approached AMFI and the market regulator Securities and Exchange Board of India (SEBI) opposing the new fee structure.

According to industry sources, the move is likely to prevent firms from getting multiple ARN numbers. Sources indicate that a leading national distributor has received numerous ARN numbers under the same address.

“If a person has four firms he will apply for multiple ARN numbers under different names. Then he divides the business and to get away from I-T liability. Now it will not be viable for such players,” said a distributor who did not wish to be named.
Currently, individuals and corporate employees are required to pay Rs250 as renewal fees. AMFI has drastically increased it to Rs2,500, which is a hike of 900%. However, an individual seeking a new ARN number will now have to shell out Rs5,000 as registration fees.

For banks, non-banking financial companies (NBFCs), public limited companies and institutional distributors, the renewal fee has been raised from Rs7,500 to Rs2,50,000, a jump of a massive 3,233%. Any new player entering the market belonging to this category will have to cough up Rs5,00,000.

The renewal fees for private limited companies has now been increased from Rs3,750 to Rs25,000 while partnership firms and societies and trusts/HUFs will have to shell out Rs12,500 from the earlier Rs2,500. 

 “AMFI does not have any other source of revenue. IFAs will be hit by this fee hike. Some AMCs may reimburse the fee to IFAs. Earlier they (AMFI) earned money from examination fees but now it has been taken over by the National Institute of Securities Markets (NISM). So AMFI has to find new revenue sources,” said a top official from a leading fund house.

Individuals who pass the AMFI examination are required to register with the entity in order to garner business.

“I don’t understand the rationale behind it.The cost of doing business is going up,” said Vivek Rege, CFP, VR Wealth Advisors Pvt Ltd.

User

COMMENTS

Sanjay

5 years ago

Dear Sir,


Recently, I have received e-mail & letters from fund houses stating that if ARN is renewed after 6 months then all the upfront / trail commission accrued upto 31.12.11 shall be forfeited.

The clarification has come on 31.12.11 and has been made effective from 01.01.12 i.e immediate next date. This is a bit harsh, the intermediaries whose ARN have expired should have been given time after this clarification of the consequences of non-renewal. The time is required as even if some one has given renewal exams in December first week, he would receive his exam passing certificate (mandatory for ARN renewal form processing) be end of December. After giving documents to CAMS for ARN renewal they take 20 days.

So, considering the time taken for different agencies, I request you to kindly take up the matter with SEBI and grant time till 31.03.12 for ARN holders to get the exam passed and apply for Renewal.

In this descending business, this would surely provide lifeline to small ARN holders like us.

RAO

7 years ago

ARE YAAR BEWKOOF BANANA CHOD DO.... PAISE KAM PAD RAHE HAI KYA... COMMISSION KHA GAYE AB FEES BHI KHAOGE ????

RAJ

7 years ago

If AMFI does not have any source of revenue, then let the AMCs DONATE some money every year for its survival ON BEHALF OF AMCs AND DISTRIBUTORS. It is absolute injustice to the IFAs to increase the fees ITS A ILLOGICAL REASON...
THIS IS INDIA AND WE ARE FADE OF TO HEAR THIS KIND OF STUPID REASON

Randheer Kumar Jha

7 years ago

I do agree with the point you've mentioned, as it is further tougher as no good commission on MF now.

Gupta

7 years ago

AMFI should think other alternative for individuals who are appling twice for ARN code instead of increasing the fees. Its disappointed a person like me who wants to apply first time.

SASANAPURI RAVI KUMAR

7 years ago

ALREADY THERE ARE MANY IFA'S AND THEY ARE IN TROUBLE BECAUSE OF REDUCTION IN REVENUE.SO INCREASE IN ARN FEE FOR NEW ENTRANTS WILL HELP THE OLD ARN'S TO INCREASE REVENUE.FURTHER MAKING NISM 5 EXAM FOR MUTUAL FUND DISTRIBUTORS WILL BRING PROFFESSIONALS IN THE FIELD.

SASANAPURI RAVI KUMAR

7 years ago

nothing to worry for already who have ARN NO.applicable only to those who take a NEW ARN.

X

7 years ago

Test

Prof. Bajaj

7 years ago

If AMFI does not have any source of revenue, then let the AMCs contribute some money every year for its survival. It is absolute injustice to the IFAs to increase the fees.

I appeal to the IFAs to contact to their respective AMCs that we would rather stop selling any more mutual funds if we are continued being strangled like this. Why would an IFA not surrender his ARN and start selling ULIPs and Insurance products where the fees is much lower and commission is much higher.

On one hand the IFAs are expected to keep client's interest in mind and on the other, his income is being squeezed everyday. If the industry has to grow, then this step has to be taken back by all means.

SEBI, are you listening ??

dhananjay singh

7 years ago

AMFI does not have any other source of revenue. What about other person you increse your fees near about 900% it is not fair i think amfi not for revenue making it is regulatry body and got help from central gov., amfi sebi directly reduce brokerage on mutul fund to attract investor, we are doing selling in mutul fund what about us, we are not attracting new customer for investment in mutual fund and we got less commision high examination fees renewal hike 900% without notice, every thig is one sided what you think you done none of that person who is selling this product,

saurabh

7 years ago

what can a IFA says about the irrationale hike in fees. it is just another blow to the industry which is still in infancy stage.one thing i would like to suggest to the amfi that declare Mutual fund industry as SOCIAL SERVICE INDUSTRY

R Balakrishnan

7 years ago

AMFI has no right to collect fees for ARN. AMFI has been stripped of the right to even give test to agents. How can AMFI have the right to empanel distributors?
Mr. Vaidyanathan, please tell AMFI to bugger off from this domain. They can wind down peacefully.

Devendra

7 years ago

It is a good initiative taken by Amfi to discourage a person like me who has just cleared his certification....

Minesh Mehta - M2M

7 years ago

I don't understand the regulation, by one hand you are withdrawing income from the IFA and ristricted expenses of AMC's and other hand AMFI incresing it's expences and bag the same from the IFA's. When you are not ready to give you don't have right to take.

I would like to request to the AMFI to visit the and check the Reg. fees of Advocate, C.A. , Doctor, Architect, Engineer, Real Estate Agent and other such professionals and then ask for the fees.

All the IFA's should come under one roof and needs to be shout before other wise one day they will throw us on the road. Friends, for waht are you waiting!!!!!!!!

ARVIND THAKUR

7 years ago

Please hike the fee for ARN registration to spoil the IFA categories and keep strong hand of official of bankers. it will definatly spoil the employment.
This is the main priority and motive of goverment destroy the MF industry and financial sectors.
ARVIND THAKUR
ARN-49611
9817040604
SUNDER NAGAR, H. P.

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