Trail commission: AMFI ignores internal verdict

The fund lobby continues with its anti-investor stance and its latest move only serves to highlight its ineptitude

There is continuing confusion about who gets the trail commission in a mutual fund transaction, where a client has moved away from one distributor to another. A large part of the blame for this confusion must lie with the fund industry, especially the Association of Mutual Funds in India (AMFI). It is a shocking story of ineptitude and anti-investor stance of the fund lobby.

About five months ago, AMFI formed a committee with representatives from ICICI Prudential and Birla Sun Life to decide on who should be getting the trail commission. The committee argued that that the original trail should be there for life even if the client has shifted. There were huge objections to this obviously flawed idea. The simple principle was that the trail commission was being paid for maintenance of an account, not acquisition of clients. For acquisition of clients, fund companies were paying upfront commissions anyway. If a distributor was not maintaining the account, why would the fund company pay him for ever? “It is a matter of principle and it is the client’s money. We have no right to direct it wrongly,” argues the chief executive officer (CEO) of a mid-sized fund company.

The decision was put to a hand of vote. According to one of the CEOs, 11 funds voted in favour of the committee’s flawed decision while 17 were against. “Amazingly, till date, it has not been implemented. For any other decision, we get the AMFI circular the very next day. But on this, five months later, we have no clarity.” Indeed, quite shockingly, a few of the CEOs who voted against trail commission continuing, got calls from top AMFI officials asking them whether they had really thought through the implication of changing the trail decision. “If you want to take your vote back, please write to me,” was an open hint.

Since the voting of trail commission turned out to be such a farce, one of the CEOs commented “when voting has no meaning why vote”, when the issue of fund trading platform came up for discussion and voting.

While the regulator, the Securities and Exchange Board of India has scrapped the need to get a ‘No Objection Certificate’ to change distributors, it has to now step in and give a clear directive to AMFI since AMFI will suppress what its own members have decided.

This is of course one more example of the way AMFI functions. There are no elections for the posts of office-bearers, and the head of AMFI, AP Kurian, apparently gets paid a hefty salary. Over the past decade, SEBI has had four chairmen and the Insurance Regulatory and Development Authority has had three. But the AMFI chief continues to rule unelected and unhindered. Even the board of directors of AMFI does not change. Naval Bir Kumar resigned from the board a year ago but there has not been a replacement. About six years back, the CEO of Birla Sun Life took the signatures from some 20 funds to ask for a change.  



Vivek Rege

7 years ago

I marked a mail to SEBI directly on 9th December explaining them the need to get rid of the NOC required from a distributor and let the distributor compete on Quality Advice and the fact that the spirit of the Regulations are not to sheild a distributor for poor show . Moreover Trail Commission be paid to the New Distributor since that is the spirit of the investors decision , also receving Trail will help subsidise the Investor on fees which are now charged for the value added services rendered . If Trail is not paid to the new distributor in which case the wrong person is being compensated , the investor needs to pay higher fees since the same cannot be subsidised hence once again the investor bears the brunt , which in my opinion any investor would want his fees subsidised when he knows that the advisor is being paid through trail hence he can afford to charge lower there is no magic here . The need to mail to SEBI directly has arisen from the fact that there are no proper reliable channels before going to the regulator directly which if it was there i would have opted for the same. I hope SEBI gives guidance on this front as well in the broader interest of the investor and to promote advisory services which was the intent of the new regulations , hence condusive regulations are required .

Tata Steel hints at price revision

Several steel makers in the country are expected to revise prices upwards from early next year to cash in on the uptick in demand

Tata Steel Ltd on Monday hinted at increasing prices of its products, reports PTI.
"What has gone down has to go up," Tata Steel's managing director HM Nerurkar said at a conference at the CII-Suresh Neotia Centre of Excellence for Leadership today when asked about his view on steel prices after the PSU steel maker SAIL hinted at price revision from January. Mr Nerurkar, however, declined to divulge more.

Several steel makers in the country are expected to revise prices upwards from early next year to cash in on the uptick in demand. Earlier, State-run SAIL, private players Bhushan Steel, Essar & JSW Steel had said they were likely to hike prices of their products by January 2010 as demand was picking up.

Steel prices had gone down globally by $100-$150 a tonne to $400 per tonne during the past few months on account of influx of cheap imports from China. But in the past month, prices have gone up worldwide by $50 on good demand.

Speaking about Corus, Mr Nerurkar said Tata Steel would leverage the capabilities of Corus in the construction space back in India. He said the European steel market was shrinking and it needed to make profits from lower production.

He also expects more orders from the European Union in the construction space after it got two orders from Europe recently, including one from France.

Speaking about challenges in leadership, he mentioned that one challenge for Tata Steel is managing talent, as some 25%-30% of its managers are due to retire from the company in the next two-three years.


BSE cuts charges for equity derivative trades

In a desperate attempt to capture volumes from NSE’s vastly superior derivatives segment, BSE slashes transaction costs for its F&O segment

Asia’s oldest stock exchange, the Bombay Stock Exchange (BSE), is introducing revised transaction charges in the equity derivatives segment in a bid to attract more liquidity into its platform. This move, which will reduce the overall impact costs of investors, will be effective from 29 December 2009. With this, the BSE hopes to grab market share from the National Stock Exchange (NSE), which virtually dominates the domestic futures and options (F&O) segment.

According to BSE, the innovative fee structures will substantially lower transaction costs for all market participants and improve depth and liquidity in BSE’s equity derivatives segment.

The charges applicable will be Rs1 per Rs1 lakh for passive orders and Rs1.50 per Rs1 lakh for active orders inclusive of investor protection fund (IPF) and trade guarantee fund (TGF) for stock futures and index futures category. This essentially means that BSE will pay Re1 on every Rs1 lakh of passive orders placed by its members in the stock and index futures segment. Similarly, it will pay Rs15 on every Rs15 lakh passive order placed in the stock and index options segment.

Passive orders are orders that already exist in the order book at the time of matching (order taking place) while active orders are orders that are matched against the orders already existing in the order book at the time of matching.
How do brokerages and other market participants view this move by the BSE? “Most of the brokerages and market participants have welcomed this move, but the impact will take its own time. BSE’s recent move will give another opportunity for market participants to improve their volume and liquidity. Compared to the rival NSE’s volume, BSE’s derivatives volume is negligible, but the recent steps taken by it have created a positive environment in the minds of brokerages and market participants,” said Chandrashekhar Layane, senior vice president, FairWealth Securities Pvt Ltd.

Although BSE is betting on volumes to increase as a result of this pricing strategy, the end result has more to do with attracting market participants to the derivatives platform. “The claim as made by BSE may reduce some transaction costs, but it is subject to increase in trading volume. The volumes will increase only if BSE is able to attract market participants to its derivatives platform. Recently, BSE announced changes in monthly derivatives and weekly derivatives expiry dates effective from February 2010. Day-wise it is pre-poned to 3rd Thursday of the month instead of the 4th and Thursday for weekly contracts instead of Friday. This will help in easing the cost of carry due to duration of expiry day/dates and will also improve liquidity,” added Mr Layane.

The BSE index and single stock futures and options markets will now provide a whole new range of hedging, investment and trading opportunities to exchange members and their retail and institutional clients.

BSE launched the first exchange-traded Index Derivative Contract on 9 June 2000. Ever since, it has struggled to attract participants, affecting the liquidity on its derivatives platform. NSE, on the other hand, has made giant strides in the derivatives market, emerging as a virtual monopoly in this lucrative business, with a whopping 98% share.

Interestingly, however, BSE enjoys a lot more goodwill from many of its broker participants. Several of them also have a stake in the stock exchange. As such, they have a vested interest in providing support to BSE’s efforts to revive its struggling derivatives segment. Hence, it would not be surprising to see brokerage houses put their weight behind BSE’s latest move.


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