HN Sinor, chief executive of mutual fund body AMFI, feels that the industry will go through a rough patch for at least six more months

Now that the finance ministry has granted the Insurance Regulatory and Development Authority (IRDA) regulatory supervision over Unit-linked Insurance Plans (ULIPs), participants in the mutual fund industry are a worried lot. HN Sinor, chief executive of the Association of Mutual Funds in India, in a candid interview with Moneylife, admitted the consequences of this decision on the mutual fund industry. "It is very clear now that it is a law, as an ordinance has been passed. So there is no question of dispute on this. I believe that we may go through a rough patch for the next six months, because distributors would prefer to distribute insurance products, wherein the commission structure is quite different from the mutual fund products. So naturally, distributors will ask why they should sell something where they are not earning anything."

Capital market regulator Securities and Exchange Board of India (SEBI) had abolished the entry load on mutual funds in August last year and attempted to regulate ULIPs earlier this year. However, the finance and law ministries passed on ordinance that has stopped SEBI in its tracks and granted IRDA powers to continue to regulate ULIPs.

Mr Sinor expressed the hope that, in the meantime, the insurance regulator would further tighten the commission structure to bring in an alignment with the system.

Already, IRDA has made several attempts at revamping the product structure by introducing cap on surrender charges and mandating a certain amount of life cover on all ULIP products.

Speaking about the entry load ban on the occasion of a recent industry summit, Mr Sinor had said, "Commission payouts are an integral part of this industry. A fresh review is needed in this regard. Such attempts (at regulatory change) could disturb the industry." Responding to a question whether SEBI will be open to rethinking on the matter, he said, "That was a proposal which we made yesterday.

But if I heard Mr Bhave correctly, it would be difficult for them to review this. Anyway, our job is to keep on trying and their job is to see what is best for the investors."

Commenting on the proposals in the revised paper of the Direct Tax Code that suggests introducing long-term capital gains tax on equity-linked instruments, Mr Sinor pointed out that AMFI was reviewing the matter and that it would make suggestions to the Central Board of Direct Taxes (CBDT). "The major issue is, if certain long-term investments are in EEE (Exempt-Exempt-Exempt) category, then benefits should also flow to small investors in mutual funds. If it were stated that there would be no exemption hereafter for anything, then I can understand that it cuts across everybody. But if it is available for one financial product and not for another, then it is not proper."

(Look out for a detailed interview with the AMFI chief on Monday, 28th June)