SEBI asks mutual funds not to pay upfront commission from load accounts

The SEBI directive means that AMCs will have to pay upfront commissions out of their recurring expenses accounts or from their own pockets

In a move to bring protect investors’ interests, market watchdog Securities and Exchange Board of India (SEBI) has mandated all asset management companies (AMCs) not to pay upfront commission to distributors from the load account. They can now pay upfront commission only from the recurring expenses account or from their own pockets. AMCs will have to comply with this new rule from 1 April 2010.

It may be recalled that Moneylife had earlier reported on how fund houses were paying upfront commissions for ELSS and other schemes to garner assets. (Read here).

After the ban on entry load by SEBI, fund houses were paying upfront commission from the load account. If an investor exits from the fund before the lock-in period, the exit load was transferred to this account. The commissions were as high as 2.5%-3%. Money held in a load account is supposed to be invested for the schemes and investors but AMCs were using this fund to pay upfront commission and for marketing purposes.

The new rule spells good news for investors but Independent Financial Advisors (IFAs) are up in arms. They feel cornered and discriminated against especially since insurance companies are able to offer lavish incentives to their agents.
According to sources, AMCs may now increase the trail commission or decrease the exit load in order to stop churning. AMCs were paying upfront commission which included trail of either one to three years or after negotiating the terms with the distributor. Distributors will now have to depend on the trail commission which is around 0.25% to 0.50%. If an investor holds Rs1 lakh investment in a mutual fund for six months, then the distributor gets Rs125 (0.25%) as trail commission.
“People expect to get money from the advisor rather than giving money to the advisor. The IFA does not get any money for selling Rs10,000 in a mutual fund. He may get it only if the investor holds on to it for six months or one year. The day-to-day survival of small IFAs will become difficult after the new SEBI rule, “said Ramesh Bhatt, CEO, Aniram, a Chennai-based IFA.

“Most of our customers give cheques of Rs10,000-Rs15,000. IFAs have to do 10 times more business now. Most of them will move out from the fund industry,” added Mr Bhatt. According to sources, AMCs will now only be able to pay 25 to 30 basis points of upfront commission. “It will mainly affect the smaller IFAs. The market will not expand,” said an IFA. “Sundaram Entertainment Fund had paid 1.50% upfront commission for one week. They had announced a dividend and wanted to capture maximum money by paying an upfront commission. Earlier when 2.25% commission was paid, we paid 25 paise as service tax and were left with 2% out of which we paid cash back of 1.75% to the investor,” said a distributor.

SEBI had earlier mandated AMCs not to pay dividend out of the unit premium reserve. The hefty dividend payout was merely a marketing tool by fund houses to attract more investors. The AMCs contacted by us did not wish to react to the new SEBI directive.

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COMMENTS

gautom

6 years ago

is sebi chairman is a full nonsense ?
what he think, mf business are increase in north east ? we are going to protest against mutual fund industry . they have not selling/mobilize mutual fund in north east.

ANIL SHARMA

7 years ago

Rakesh Kumar

7 years ago

this way only unemployement is increasing, as there are lacs of IFA have only source of income from MF industry, so what we think this way at the end you are also increasing unemployement, Mr bhave says "IFA should ask profesional fees from investor, what does he think, for investing in sip of rs 500 who will give extra to IFA, i am not an IFA but i am investor, but still i know my IFA has stopped coming to me and for all work related to mf i need to go to AMC office or its registrar. if he think this way he gonna make the people of india like foreign country, so stop dreaming without making our fundamental economy strong and sound and investor more knowledgble.

pankaj

7 years ago

it is a part of financial politics....sebi is under the effect of trial and error mathods of investments policies....

arjun rajput

7 years ago

For ur knowledge shri suresh subramanian in ur first investment u must had taken the help of mf distributor, & in case of LIC POLICY there is no harm to any policyholder because LIC gives fixed bonus from the first year onwards on the sum-assured which is even 50% plus than the premium of first year so donot amuse urself on ur smartness.

subbarao

7 years ago

I am invest so many funds. Suggest the newfunds

ChAITANYA

7 years ago

I wants to say something to Mr. Suresh Ramasubramanian, that in India all the investor don,t know how to do the trading online for MF. For you its fine, but what about other investors.

Pravin

7 years ago

Ask Mr Bhave leave the job, to sell mutual fund & survive on mutual fund commission. Commission is very high other than any industry.

Benzi Thomas

7 years ago

Dear Bhave,
Have you ever seen the people in rural India? MF Industry is becoming rich man's apple. What are the measures you have taken to educate the poor citizens of India? Is it enough to convey the message of MF industry? Participation in the development of India is isolating the common man, thereby boosting the FIIs and causing greater volatility. If any problem occurs, they will take their flight again. All these rules have to be implemented periodically as the Invesors in india are capable to stand their own unless it will be a great failure. Don't kill this fraternity

Suresh Ramasubramanian

7 years ago

It is amusing to see the various IFAs / agents come up with one excuse or the other.

Only slightly valid point I saw was from Manoj who asked whether paying out of their own corpus rather than premium means the bonus declared wont be decreased.

In my perspective .. the bonus is quite variable anyway according to the market situation, fund performance etc. And I tend to invest in growth plans that dont have anything to do with dividend at all so that is not much of my concern.

Right now I can, and do, make all my investments directly using online trading sites provided by the various mutual funds that I invest in *** (http://investor.hdfcfund.com for hdfc, for example).

I dont need to pay a single paisa in commission to any agent. So that's good. Only problem is LIC insurance policies where there is no way to buy the policy except through an agent as far as I can see. And if you use an agent there, his commissions + the management fees etc charged are far fatter than those for mutual funds so that about 40..50% of your first 2..3 years premium just gets gobbled up..

I only invest in 3 funds by the way .. buy in dips and stay invested during peaks .. All growth plan growth option. Reliance Regular Savings Fund Equity, HDFC Equity Fund and SBI Magnum Sector Funds Umbrella Contra Growth. And I track those funds very closely indeed.

rv

7 years ago

bhave should be bitten by all distributors,as he is changing the rules day by day

NIRMAL KUMAR JAIN

7 years ago

Goverment of india wants from public of india that invest much to grow the economy of india but how it can possible without the working hands life mutual fund advisior without commission how a mutual fund advisior can work in market.

P. Ravi Krishnan

7 years ago

Only way for AMCs is to reduce their administrative expenses for the sake of IFAs from whom former is getting business. It is observed that AMCs are spending heavily on Agents/Investors conferences with lunch/dinner. Moreover, they are enoying luxurious life by staying in five star hotels, enjoying holidays in various resorts & tourist places, travelling in air conditioned taxis, trains, & flights. While IFAs are doing business with their sweat & blood.

ARUN

7 years ago

MR. BHAVE WANTS TO KILL THE MUTUAL FUND INDUSTRY. THE DECESION OF NOT PAYING COMMISSION WILL PROVE THE DEATH NAIL FOR MUTUAL FUNDS AND WILL AFFECT THE FUND FLOW TO THE INDUSTRY WHICH WILL PROVE TO BE SLOW POISION FOR THE INDUSTRY.

Ram Krishna Chauhan

7 years ago

If really SEBI wants to benefit the investors than its officers must study the ULIP Plans of private insurance companies & see the heavy charges deducted whichare 7% to 50% in first year & 3% to 9% from second year onwards in all ulip plans. These plans are made to give benefit firstly to insurance companies ,secondly to agents & lastly policyholders are merely fetching any returns because most of the investors get loss in regular premium plans even after the period of 3 years+. One more important fact is that these insurance companies gives policy to 60 years plus persons also without any risk coverage on their life but charging same heavy charges from these innocent citizens. Sebi must perform its duty by stopping insurance co's to sell such products & ban all charges, which SEBI has done against the mutual fund entry load case. Jai hind.

Exports surge by 34.8% in February

Due to the slowdown last year, cumulative shipments during the April-February period declined by 11% to $153 billion

Expanding for the fourth straight month, exports surged by 34.8% in February to $16.09 billion against $11.94 billion in the year-ago period on the back of revival in Western economies.

Due to dismal performance up to November 2009, the cumulative shipments during the April-February period, however, declined by 11% to $153 billion from $172 billion in the same period last fiscal, said RS Gujral, Director General of Foreign Trade.

Indicative of a revival in the economy, imports rose 66.1% to $25.06 billion in February against $15.08 billion in the corresponding month last fiscal. “It shows that the economy is picking up,” said commerce and industry minister Anand Sharma.

As in the case of exports, for the cumulative April- February period, imports showed a decline of 13.5% to $248 billion compared to $287 billion in the first 11 months of the last fiscal.

Sectors like engineering goods, textiles, jute, carpets, handicrafts and leather continued to display poor performance.

After falling for 13 months in a row since October 2008, exports re-entered the positive zone in November 2009.
 

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COMMENTS

Shadi Katyal

7 years ago

Why mislead the readers .One month rise doenot become a story. Look at the total figures and shows decline so why such misleading head lines.

“We should grow at 20%-25% in the next two-three years”

Shriram Transport Finance Company’s (STFC) managing director, R Sridhar speaks with Moneylife’s Sanket Dhanorkar about the company’s funding, expansion and diversification plans. This is the second part of a two-part series

Sanket Dhanorkar (ML): What are your expectations regarding funding costs and margins in the coming period?
R Sridhar (RS):
Others perceive this business to be risky. When you find something risky, you have two options. Either avoid it altogether or price it appropriately. We have taken the second route. Yes, it is risky, but we have understood, measured and managed the risk. For us, every customer is priced differently depending upon the risk. We have built an organisation which can effectively manage this risk throughout the organisation. We have a net interest margin of around 7%-8%. If interest rates go down, it is passed on the customer.

The same happens if interest rates go up. So we will not operate at 6% or 10%. We will operate between 7%-8%, with some leeway on either side. So the cost of funds or yield is not our problem. Our problem is net interest margin (NIM). Depending upon the cost of funds, yield will change. So yield is the resultant factor of this process. If I borrow at 10%, I’ll lend at 18%. If I borrow at 9%, I will lend at 17%. But if I can do it at 17.25%, NIM will go up.

So we are not worried much about yields. We would rather maintain that NIM because this business requires it. We have measured the risk, so we have to manage within that. Still, we need to give a cushion if it exceeds a certain limit.

Even if the business is not doing well in bad times, we must have the capability to take care of the shock. So depending upon the cost of funds, yield will change.

ML: You have just raised Rs583 crore through QIP issue. Are you also looking to raise funds from an NCD issue? Are there any further plans to raise more funds?
RS:
The two are different. As an NBFC we require capital adequacy. Capital is required to grow. We are maintaining a reasonably good capital adequacy. That’s why we have raised money—to allow us to grow. Again, to grow, we need debt.

So we are going for the public issue of NCDs. We have already done it once; now we are looking for one more issue. There will be many more issues in the future. We have not finalised the issue size yet, but we are looking at somewhere between Rs500 crore-Rs1,000 crore. In this way, we are raising money from retail lenders, banks and securitisation. All three are major resources for us.
Why we are suddenly raising funds is because of our size. After internal accrual, we need at least another Rs1,500 crore to lend. So we will go and borrow this extra money.

ML: What are your expansion & diversification plans, going forward?
RS:
Our basic business, CV financing, is doing well. We will continue to grow in that area. This industry is growing and has come out of its cyclical downturn. So for another two-three years we expect a good pickup in volumes. We are also into second-hand vehicle finance. This segment will also see good demand. I feel that we should be able to grow 20%-25% in the next two-three years in terms of assets.

We are floating an exclusive subsidiary in equipment finance, which is 100% owned by Shriram Transport to focus on (the) equipment-financing business. All these days, we have been carrying this business under one vertical in STFC of mostly small contractors and sub-contractors. But beyond our customer base, there are so many contractors who are in different geographies who require equipment, both new and old. They are not able to access credit. Many finance companies have even exited this space after the global meltdown. So that is another opportunity for us. The government is also giving great thrust on infrastructure. Infrastructure growth requires both CVs and construction equipment. So we feel that this is a proper fit. One would argue as to why are we are going into a separate subsidiary. But the subsidiary is to bring in new management which has better product knowledge, better risk management and better underwriting capabilities. This management will use our existing network and customer base to access and provide different products. In this manner, we feel we will be able to scale up and do better. We believe the next five years will be excellent for this space.{break}

The tie-ups with private financiers is another innovation of STFC. We are the only financiers in the second-hand space. Beyond us, there are only private financiers. There is no organised player. So we go and keep on acquiring market share. This business is relationship-based. We have a limitation to which we can develop a relation. If we have more partners, like private financiers who already have relationships with people, instead of recruiting 5,000 people, it is better to tie up with 500 private financiers. These private financiers have been doing the same business for generations—but at an individual level. They lack resources and money. So we provide them money and become partners. The credit delivery, management and customer relationships are handled by them. We share the risk and reward. This model is very unique.  It is working very well and we will scale it up in the next five years.

We are also starting our CV trading business through ‘Auto Mall’ and ‘One Stop’. As I told you earlier, after providing credit to the trucker, we look around to see what else we can provide him. We have found that he is struggling to buy and sell second-hand vehicles. This is tough as it is dominated by intermediaries and (the) unorganised sector. There is no transparency. It is not a very efficient system. So we felt that we should create a system, a process and facilities which these truckers will be able to use. So we are creating ‘Auto Malls’ in 50 locations in the country, which will physically house stock. It is a place for buyers and sellers to come together. This will be a fee-based model; we are not going to buy and sell.

We are creating ‘One Stop’ which is a touch-screen in our branches. Here, people can register their vehicles, check out the stock and buy. We are also providing refurbished vehicles, which are neither old nor new. Tomorrow, we will look at providing some third-party warranty also. These are some of the initiatives which will get rolled out from April onwards.

ML: How is the company going about acquiring the banking license? What will be the key focus area once the banking operations start?
RS:
We as a large NBFC, particularly in this un-bankable customer space, are well positioned for banking operations. So STFC will apply for a fresh banking license. If we get it, we will carry on the business like any other bank. This bank will be owned by STFC as one of the shareholders. STFC will continue to be a separate NBFC. The bank will remain true to our culture and style of looking at niche businesses.

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