SEBI has again put its foot down on the trail commission issue. Will AMFI comply this time?
As the Association of Mutual Funds in India (AMFI) continues dilly-dallying for over six months on whether trail commission would continue to be paid to the old distributor even after a customer has walked away, the market regulator, Securities and Exchange Board of India (SEBI) has rapped AMFI on the knuckles asking it to implement a clear-cut decision taken more than two years ago.
On 30th December, SEBI slammed AMFI with a polite but firm email which says that AMFI must implement its own circular of 5 September 2007 along with the SEBI circular of 11th December. The December circular of SEBI clarified that distributors cannot insist on non-objection certificate (NOC) when a customer moves from one distributor to another. The SEBI email reads: “the non-insistence of NOC has to be implemented in conjunction with adhering to AMFI circular of September 2007 regarding payment of commissions. Please confirm that SEBI circular of December 11th and inter alia references to AMFI circular of Sep 20007 are fully complied with by all mutual funds.”
The 5 September 2007 AMFI circular had categorically said: “On receipt of letter from the investor advising AMCs about his desire to change his distributor, AMCs will act on the instruction. Once the distributor (ARN code) has been changed, the trail commission thereafter for all business done by the old distributor (under old ARN code) may be payable to new distributor (under new ARN code) on a prospective basis subject to terms and conditions, if any, entered into by AMCs with such distributor.”
This was a clear-cut decision and direction. Mysteriously, it never got implemented. Instead, AMFI put the matter to vote a few months ago—two years after having issued a clear-cut direction. In the process, 11 out of total 17 voted in favour of giving trail commission to the new distributor. However, AMFI did not implement this as well, which was first reported by Moneylife Digital (read it here).
In a remarkable example of cussedness, AMFI then asked for votes by email, also first reported by Moneylife Digital (read it here).
All chiefs of asset management companies got an email in the afternoon of 22nd December asking them to vote on three questions—whether the trail commission of a departing customer: a. should be paid to the old distributor; b. should be paid to the new distributor; c: should not be paid at all. Funds are supposed to vote a simple yes/no to each of these three questions.
It now appears that AMFI’s move on 22nd December came just a few hours after SEBI sent a mail to AMFI which read: “Please read the circular on the unambiguity on the payment of trail commission in case of change in distributor. However, we understand that there is lack of uniformity among AMCs in compliance with the said guidelines of AMFI. You are advised to revert to us with a confirmation on compliance with the said AMFI guidelines in the AMFI circular on September 5th 2007.”
In a remarkable example of cussedness, AMFI ignored SEBI’s clear directive and instead went in for an email vote. But eight days later, one day before the deadline of the email vote were to lapse, SEBI issued its missive to AMFI, asking it to implement the simple, logical decision taken in September 2007 that trail commssion has to go to the new distributor. The question is who benefited from the years of stalling and the cat-and-mouse game AMFI has been playing?
After the ban on entry load from 1 August 2009, the mutual fund industry has seen a massive outflow of investments even as the bull market continued
Ever since the Securities and Exchange Board of India (SEBI) has banned the entry load for mutual fund schemes, fund companies have been suffering from a steady haemorrhage of cash in their equity schemes.
Here are some facts that will show you how badly this ban has affected the mutual fund industry. The ban on entry load took effect from 1st August last year. Between August 2009 and December 2009, when the Sensex was up 15%, the mutual fund industry saw a massive outflow of Rs7,315 crore. This is all the more galling for the fund industry, because mutual funds normally benefit from inflow of funds when the market is rising. Between March 2009 and July 2009 when the Sensex was up 88%, the fund industry saw an inflow of Rs7,429 crore.
Therefore, the continuous outflow of cash can only be attributed to SEBI’s order of banning entry loads and forcing fund distributors to make money by ‘advising’. Distributors have simply stopped selling funds. Indeed, when the Sensex came down crashing by 39% between April 2008-December 2008, the mutual fund industry still saw an inflow of Rs1,254 crore.
The truth is that, the ban on entry loads has dried up the distributors’ revenues and they are now asking investors to consider Unit-linked Insurance Plans (ULIPs) and company fixed deposits as the next best investment opportunity.
This is unfortunate because ULIPs are no better than funds unless they are held for a longer period and fixed deposits are unsecured. But the commissions on ULIPs and FDs are extremely attractive which is why distributors are pushing them.
Till July last year, the entry load used to come from the corpus of the fund which the distributors used to receive for pushing funds. However, SEBI mandated that investors have to pay the distributors directly for the services they get and it is up to them to negotiate what those services are and how much they should pay. This ban has severely affected the distributors—especially independent financial advisors—as they earned attractive fees. It has also brought down the number of new fund offers (NFOs). There have been just 22 NFOs since March last year when the long rally started taking the Sensex up by over 100%.
The government has assured NRIs that it would work out a solution to the non-delivery of flats sold by Maytas Properties, promoted by relatives of disgraced Satyam founder B Ramalinga Raju
Ruling out any bailout package for Maytas Properties, the government on Thursday assured non-resident Indians (NRIs) that it would work out a solution to the non-delivery of flats sold by the company promoted by relatives of disgraced Satyam founder B Ramalinga Raju.
"I am confident of finding a solution to the problems. We are looking at it seriously. I am hopeful of resolving the issue as soon as possible," corporate affairs minister Salman Khurshid told reporters on the sidelines of the Pravasi Bharatiya Divas.
"We will not offer any bailout for the company. They don't need a bailout. They need just cash flow," Mr Khurshid said at the conference where many NRIs and persons of Indian origin (PIOs) raised the issue of non-delivery of flats sold to them by the company.
According to a delegate, around 400 NRIs from Australia, the US and the UK have purchased flats being developed by Maytas Properties.
Maytas Properties, which ran into trouble after Mr Raju admitted to a multi-crore rupee accounting fraud, was developing a Rs1,100-crore residential ‘hill county’ project near Hyderabad. The project, however, could not be completed as the company faced financial problems.
Before the disclosure of fraud by Mr Raju in January 2009, the shareholders of Satyam had rejected the efforts of the then promoters to acquire Maytas Properties along with another sister company Maytas Infra.