Regulations
SEBI plans to introduce transaction fee on MFs to incentivise agents, but will this move help in health anyone

The proposed fee (Rs100-Rs150 on investments above Rs10,000) might be too little to help agents—who find peddling ULIPs more lucrative

The Securities and Exchange Board of India (SEBI) plans to impose a transaction fee of Rs100-Rs150 on investments above Rs10,000 in mutual funds to incentivise brokers to sell schemes to investors. This transaction fee is another form of entry load which was banned by the earlier SEBI chief CB Bhave in August 2009. Since then there has been an exodus of nearly Rs20,000 crore from equity funds and a decline of nearly 22 lakh equity-oriented mutual fund accounts.

But could the ban on entry load be a major cause of such a huge outflow? For sure, there have been other factors which led investors to exit from participating in the market. Among some of the other factors that deter retail investors from putting money in the markets are the unexplained volatility in the market, manipulation of IPOs (initial public offerings), poor performance of 40% of funds, several counts of mis-selling, lethargic complaint redressal and lack of financial awareness.

A majority of the population, therefore, finds it safer to keep cash lying in savings accounts or fixed deposits. In 1990-91, 32% of household savings was invested in bank deposits. Now that figure has climbed to 51%.

The regulator has failed to look into the other factors for poor retail participation. Without adequate research, survey or discussions with investors, is SEBI making the same mistake all over again?

The entry load for mutual funds was banned in order to make it fairer. "The investor is more important to the market than the distributor," said Mr Bhave at the announcement of the ban on entry loads. This decision never went down well with the fund industry. Distributors found fund-selling unviable and have been moving out of the business. The penetration of mutual funds is so poor that brokers had little incentive to sell mutual funds. The zero entry load was not motivating enough either for the investor to go in for mutual funds on their own.

SEBI chairman UK Sinha said that the transaction fee paid to distributors would help mutual funds penetrate the retail segment in smaller towns. But would it benefit agents, who, after the ban on entry load, opted for selling products like ULIPs (unit-linked insurance plans) which earned themselves higher commissions? The commission earned on ULIPs is still much higher than the measly Rs100, so will agents actively push mutual funds to customers? Investment in ULIPs start at around Rs10,000, therefore a customer having the finance would be pushed by the agent to go for a ULIP where "he will get a life insurance benefit as well".

This would earn the agent a higher commission and would defeat the purpose of the transaction fee planned to be introduced by the SEBI chief.

What about agents who don't sell ULIPs? During the time of entry load, there were numerous cases of distributor's hard selling mutual funds to hapless investors. The transaction fee may lead to the same practice distributors were following earlier.

The other changes SEBI has proposed-like simplifying the IPO form and providing a new format for opening a trading account that will require the investor to make only a single signature compared to the 50-odd signatures earlier, will allow investors to participate with ease. However, SEBI has overlooked the main problem of getting investors to participate in the market.

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COMMENTS

Mukesh Parikh

6 years ago

SEBI introduced transaction fee to incentivize agents but in already down market where investors have disappeared.You will see that 95% of the agents will opt-out i.e. not agree to charge his investor Rs.100/150.
If SEBI wants to implement it, make it compulsory.

pankaj kapadia

6 years ago

Call it entry load or trasaction charge it should be 5% on the investment made. Alongwith this rebating should be made legal. Let investor and distributor decide withing or above limit of 5%. It should be reduced from the investment amount and be stated in the form. It is fair to investor and distributor. There is transaparancy as sebi wants and compensation as distributors want. This will work with investors...

REPLY

Keshav B Bhat

In Reply to pankaj kapadia 6 years ago

why SEBI should limit anything? as it is said let the investor and the distributor decide and mention the copansation to the distributor and mention in the application form and the amount to be deducted from the investment amount and given to distributor by the AMC. Those who dont want to pay the fee to the distributor can always do their investments directly.

Harish N

6 years ago

This is neither going to help the cause of the distributors nor that of investors. Rs. 100/- now a days is not even peanuts. In any case, one who thinks that anything can be charged to investors certainly lives in fool's paradise.

Yash Verma

6 years ago

Its a welcome move by SEBI. Though Rs 100/- is peanuts these days, but something is better than nothing. Mr Sinha is thinking right, unlike his predecessor. This amount should be gradually increased.

Prashant Bhawar

6 years ago

Sir I think that this is very good design by SEBI for working MF adviser. And no entry load is very profitable in view of customer. In our town we charge fees for investment and customer don't have any obligation for such fees because he know very well that whatever we demand that is right and don't have hidden charges

REPLY

Keshav B Bhat

In Reply to Prashant Bhawar 6 years ago

Dear Mr Prashantjee,
I do hear in mumbai also a lot of people saying they charge fee to their clients but in reality only a few client pay the fee to the services they received and maximum no of people do not mind if it is included in their investment but to pay separately to the services they think it is expansive and this mind set will not go out so eassyly as we indian want everything cheap or free. Even if they are ready to pay they beleive in bargaining rather than paying the reasonable fee asked by the service provider. ( Further i find some people who used to rebate even the gifts received for the ake of the bussiness are telling they r charging fee to the client, which is not digestible by any one who has seen their way of dealings). any way all the best.

Vikas Gupta

6 years ago

Rs.100-150 Transcation is not going to help IFAs as once again it has to be charged by IFAs only. AMCs don't have any role in this. SEBI has already given liberty to IFAs that they can charge up to 5% from MF Investors according to the services rendered but a very few of us are able to charge our investors. So I doubt how many among us woul have the courage to apply the new Transcation Fees on our investors

REPLY

KESHAV B BHAT

In Reply to Vikas Gupta 6 years ago

Dear Sir,
when Mr siha was heading the UTI, he was the main supporter of baning entry load and the UTI relationship managers used to encorage rebating by the IFA's, so what else you can expect by him just because he has become SEBI chairman?

Roopsingh

In Reply to KESHAV B BHAT 6 years ago

I agree to u fully and further i will add that Mr Sinha was staunch supporter of promotion of online facility at UTI offices,during his tenure custoemrs were regularly sent letters to register for online transactions via UTI portal and letters were sent for registering email and phone nos(i knew it will happen so i rarely used to submit these deatial in application form),
but when all his efforts failed he realised importance of distributors as important link to bring business,but still he gave only a lollipop of 100 Rs which looks more like a beggers bite rather then a professional fees.
i am sure this is not goping to help much to recover the damaged industry.

Gunalan

6 years ago

Sir, There is an association called AMFI - Association of Mutual Funds of India headed by a Chairman. When there was a ho and cry that so much of vol. of amount had gone out of equity funds, what this is assn.is doing. Is it not a primary duty of this asson. to find the cause and rectify after taking up this issue with SEBI. " No entry load" was introduced and then Demat in MF was introduced. All these things are main cause. IF this being the case where is question of penetrating MF in small town. No advisor in MF industry can do free service. A noble laurette said "Nothing is free in the world." There should be appropriate incentive

Who is an independent director? Who should be treated as an independent director in NBFC MFIs?

It is critical to define the criteria for independent directors and implement this strictly in the interests of good governance; otherwise we could be in for a ‘blind date’ with yet another crisis

Consider the following occurrences that happened in some NBFC MFIs.

The first instance is an email conversation between two members of the board at a large NBFC microfinance institution. The mail was supposedly received on Wednesday, 23 September 2009.
> "I noticed something in the AGM notice that I had not seen before and specifically raised it to person YYY. The agenda item is a supposed discussion on a NNN year contract for ZZZ person (to be filed with GoI for concurrence) and that this was approved by the compensation committee, on which I also happen to sit. I spoke with CCC and BBB, both of whom are members of the same committee with regard to this and they have absolutely no recollection of such a proposal. Hence, I have asked for some clarification on this and I also thought that I should also keep you posted of the various happenings.i

The second instance concerns a large NBFC and its ESPS (employees stock purchase scheme) agreements with employees. This event apparently occurred in September 2009.
> The last page in the ESPS agreement with several employees was supposedly changed because the auditors suddenly noticed (in September 2009) that payments from employees were due by end March 2009 and had not been deducted and/or collected. However, because they did not notice it until September 2009 (when they would have had to list it as an overdue), the last page of several such agreements was supposedly changed to reflect a new (future) due date for repayment of the ESPS loans owed (to the trust) by the various employees. This enabled the ESPS loans to be not shown as an overdue. Now, I have the concerned documents but have refrained from naming the MFI because my intention is not to report on any single case-rather, I want to use this example to illustrate the kind of governance that occurs at many MFIs.

The third event relates to a connected lending transaction where the NBFC MFI lent its founder managing director a sum of Rs 1.636 crore to enable him to buy shares at par in the same company (Professor MS Sriram's paper in Economic and Political Weekly, 12 June 2010).

And there are many more similar instances, but the idea is not to provide a long list of such happenings to tarnish the image of concerned MFIs. Rather, it is to merely demonstrate the kind of not-so-good governance practices prevalent at some of India's largest (NBFC) MFIs and strongly drive home the point that we need more stricter and precise laws regarding definition of independent directors. Otherwise, the NBFCs (MFIs included) will simply get away by perhaps appointing all and sundry and "yes" men/women to the board - and then governance will sadly falter, despite the presence of even so-called institutional directors.

For example, the nominee director of a large financial institution kept quiet when some of the above instances happened, perhaps because of serious conflicts of interest, such as the likely loss of an MFI client/market for their loan funds, if they were to speak out.

All of this makes the role of independent directors very crucial and therefore, the determination of who is an independent director and who should be treated as an independent director becomes very important.
Two key questions arise here: (a) How to make this determination of a director's independence; and (b) What objective criteria can be effectively used in microfinance in India and especially for unlisted companies (NBFCs) involved in financial intermediation. I offer some suggestions here and these can be used by the Reserve Bank of India (RBI) and the Union Ministry of Finance (MoF) as part of their current efforts in framing the regulatory (including corporate governance) guidelines for the crisis-ridden Indian microfinance industry.

Firstly, for an MFI director to be considered independent, it must be conclusively and affirmatively determined that the director has no materialii relationship (whether financial, business, personal or otherwise) with the MFI, or any of its sister concerns or subsidiaries or affiliates or group entities, either directly or as a partner, shareholder or officer or employee of an institution, which in turn has a relationship with them. This is very critical.

Further, in making the determination of independence, a director's relationships can be deemed immaterial as long as the following standards are met:
(a) Director's relationships: The director is not, and has not been within the previous three years, an employee of the MFI or any of its subsidiaries or affiliates or sister concerns or any other group institution.
(b) Relationships of the director's immediate familyiii No member of the director's immediate family  is/has been, within the previous three years, an executive officer of the MFI or any of its subsidiaries, or affiliates, or sister concerns, or any other group institution.
(c) Compensation of director/family members: Neither the director nor any member of his or her immediate family has received, during any 12-month period, within the previous three years, significantiv direct compensation from the MFI, or any of its sister concerns, or subsidiaries, or affiliates, or group institutions (including without limitation, any consulting, advisory or other compensatory fees) except (1) fees which the MFI pays to its directors for their services as members of the board, and members or chairs of board committees, and (2) fixed amounts of deferred compensation for prior service, which is not contingent in any way on continued service; provided that compensation paid to an immediate family member for service as an employee other than an executive officer will not be considered in determining the director's independence, so long as the compensation is comparable to the compensation paid to other similarly situated employees.
(d) Director's/family members' relationship with MFI auditors: The director is not a partner or an employee with a firm that is the internal or external auditor for the MFI, or any of its sister concerns or subsidiaries or affiliates or group institutions; nor is any member of the director's immediate family a partner with such a firm or an employee who participates in the firm's audit and/or tax compliance practice (as well as similar tasks); nor has the director or any member of the director's immediate family, within the previous three year's been a partner or employee with such a firm that has, within that time, personally worked on the audit of an MFI or any of its sister concerns or subsidiaries or affiliates or group institutions. {break}
(e) Compensation committee aspects for director/family members: Neither the director, nor any member of his or her immediate family is employed, or has been employed, within the previous three years, as an executive officer of any company whose compensation committee, at the same time, included an individual who currently serves as an executive officer of an MFI or any of its sister concerns or subsidiaries or affiliates or group institutions.
(f) Director/family members' relationships with MFI service providers: The director is not an employee, nor is any member of his/her immediate family an executive officer of another company where payments by the MFI to that company or from that company to the MFI, including their respective subsidiaries and affiliates or sister concerns, for property or services, have exceeded more than 2% of the other company's consolidated gross revenues in any of the other company's past three fiscal years.

However, notwithstanding anything to the contrary in standards #a through #e above, any MFI shall not treat as categorically immaterial, but instead will discuss case by case and will disclose (i) any relationship between a director and the MFI or any of its sister concerns or subsidiaries or affiliates (or group institutions) that is required to be disclosed under the relevant section of the Indian Companies Act, 1956 (and other SEBI/RBI directives from time to time) and (ii) any contributions made by the MFI or any of its sister concerns or subsidiaries or affiliates to any tax-exempt organisation of which a director serves as an executive officer if, within the preceding three years, such contributions in any single fiscal year exceeded 2% of the tax-exempt organisation's consolidated gross revenues.

You may wonder why I have dwelt so much on the topic of independent directors. One of the most critical reasons for the importance attached to the topic of independent directors in any organisation (including MFIs) relates to conflicts of interest. There are several issues here: (1) Conflicts of interest hinder judgement and affect decision-making. (2) Judgement and decision-making are what directors are asked to do. And (3) directors must feel free to think, express, question and decide in the interest of those they represent.

And all of these apply very much to microfinance institutions as well who, during the last year or so, have received a lot of (negative) publicity with regard to corporate governancev conflicts of interest and the role of independent directors on their boards. In fact, the debate has widened to encompass not only the roles of independent directors, but also that of nominee directors from financial institutions, and several questions continue to be raised regarding real and potential conflicts of interest on the ground.

Some of the key issues that the microfinance industry continues to grapple with are: (a) Does a board need to have clear guidelines with regard to conflicts of interest that must be disclosed? (b) Who discloses conflicts? (c) To whom are conflicts disclosed? (d) What happens if conflicts are not disclosed? (e) What if conflicts are disclosed later? (f) What if all is not disclosed to the board and/or to shareholders?

Without question, the above issues need to be addressed fair and square, and there can be no compromise with regard to that. Therefore, unless and until the RBI and the Union Ministry of Finance specifically address the issue of precisely defining independent directors with regard to microfinance and especially non-listed systemically important NBFC MFIs, we will continue to see colleagues, friends, associates and relatives functioning as independent directors (with huge conflicts of interest) and good corporate governance will remain an elusive dream. And if that happens, we could be making a 'blind date' with the next microfinance crisis (as the well-intentioned regulations will not be implemented on the ground) and responsible microfinance will continue to remain an illusion indeed!


i Names have been withheld as the idea is not to embarrass any individual MFI; but the original email can be provided if required!
iiMateriality" is to be considered from the standpoint of the director and that of each person or organisation with which the director is affiliated, including organisations of which the director is a partner, shareholder or officer. The determination that, as to each director individually, there is no material relationship (whether financial, business, personal or otherwise) will have to be made after due consideration of the information provided by the director and any other information that may be known to the board. The purpose is ultimately to determine whether a director has any relationship with the MFI that may interfere with the exercise of the director's independence with regard to the MFI and its management.
iiiImmediate family" means a director's spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law, and any person (other than a tenant or employee) who comprise the director's household, but not the physical space necessarily.
iv This has to be debated and decided accordingly, as per consensus. The RBI and Ministry of Finance would have to take initiative in this regard.
 

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COMMENTS

ramesh s arunachalam

6 years ago

Thanks and my mail ID is r_arunachalam@hotmail.com

Andy Ram

6 years ago

Dear Mr. Ramesh, Your articles on governance are great. I would like to share some insights & case studies with you. Request you to advise as to how I could e-mail you the same.

Ramesh S Arunachalam

6 years ago

I agree that in most cases, nodders and yes men/women get to being called independent directors. That is why we need to try and define it appropriately in law - While we cannot guarantee 100% results, the least we can do is to plug the loopholes in the law.

R Balakrishnan

6 years ago

An independent director is "fiction". Does not exist in real life.

Moneylife stand on SEBI-NSDL vindicated

The scandalous ganging up of some SEBI members to protect CB Bhave and NSDL was reported extensively only in Moneylife and conveniently glossed over by the mainline media. SEBI's decision to release orders from the Mohan Gopal report to NSDL for compliance, just vindicates the stand taken by us

The Securities and Exchange Board of India (SEBI), which had last year given a clean chit to the National Securities Depository Ltd (NSDL) in the IPO scam of 2003-06, has now re-opened this case vindicating the stand taken by Moneylife

The market regulator announced last evening that following the orders by the Supreme Court, it has been decided to release the orders of the two-member Mohan Gopal Committee, in the matter of the IPO irregularities and DSQ Software case to NSDL for compliance.
 
Speaking to journalists after a meeting of the SEBI board, chairman UK Sinha said that the regulator has decided to implement the committee report on the role of the NSDL in the scam.
 
The committee, comprising the then SEBI board members G Mohan Gopal and V Leeladhar, was constituted in 2008 to look into NSDL's role in the IPO scam and it found various lapses on the part of the depository, as well as SEBI itself.
 
Moneylife has been the only publication to point out that the spate of eulogies by the mainline media about CB Bhave’s tenure as chairman of SEBI (like “best SEBI chairman” and “the best three years of SEBI ever”) were motivated and highly misplaced.
 
Moneylife has long pointed out how the government had erred in appointing CB Bhave as chairman when there was this pending matter between SEBI and the NSDL, which Mr Bhave himself founded and headed for over a decade. The SEBI action against NSDL was based on an independent inspection ordered by the regulator into the systems, processes and multiple IPO applications scam that went unnoticed by both depositories, indicating serious flaws in their operations.
 
The finance ministry came up with a dubious strategy to “ring-fence” Mr Bhave as SEBI chairman from the NSDL-SEBI litigation, by appointing a two-member bench of the SEBI board to investigate the allegations afresh. It comprised Dr Mohan Gopal, who headed the National Judicial Academy and Reserve Bank of India’s former deputy governor V Leeladhar.
 
However, it was soon clear that the ‘ring-fence’ was a sham and SEBI moved rapidly to eliminate all traces of the IPO scam, clearing NSDL and exonerating Mr Bhave. Almost everyone accused was cleared through consent orders. The most outrageous was the one-line order closing the case against CDSL, with no attempt to ensure that it has cleaned up its act.

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COMMENTS

ramanan

6 years ago

I have been following the relentless pursuit of Ms Dalal regarding this for a long time now. Kudos to her for the perseverance.Please continue to expose the misdeeds of the 'old boy's club'

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