Edelweiss attracting investors by offering passbacks. Is SEBI watching?

Edelweiss Broking is offering gift vouchers to invest in ELSS. This amounts to offering passbacks, a practice barred by SEBI.

Edelweiss Broking Ltd is offering its clients a waiver of transaction charges for investing in equity linked savings schemes (ELSSs) through its online platform and along with this, if the lumpsum order value is above Rs40,000, the clients would receive a Flipkart gift voucher worth Rs500. “This special offer is valid for all ELSS transactions carried out upto the 31st of Dec, 2013,” mentions a promotional mailer sent out to its clients. The mailer goes on to mention the benefits of investing in ELSS offers with its top four ELSS recommendations. The ‘Code of Conduct for Intermediaries of Mutual Funds’ laid down by the Securities and Exchange Board of India (SEBI circulars: MFD/CIR/06/210/2002 dated June 26, 2002 and SEBI / IMD / CIR No. 8 / 174648 / 2009 dated August 27, 2009) clearly states that “Intermediaries will not rebate commission back to investors and avoid attracting clients through temptation of rebate/gifts etc.”

 

“This is an innovative idea of Edelweiss to offer a “pass back”, according an independent financial advisor Chilukuri KRL Rao. Mr Rao from Hyderabad has drawn our attention to the ground-level practices that hurt investors and smaller distributors. He says, “The lack of transparency in payment of commissions is the root cause of all the ills associated with the industry including upfront commissions.”

 

We had earlier reported on how fund houses were paying upfront commissions for ELSS (Equity Linked Saving Schemes) and other schemes to garner assets. (Read: Upfront commission being granted for ELSS schemes and MIPs become attractive for distributors due to upfront commissions) Upfront commission as high as 3% were being paid for ELSSs and as much as 1%-1.5% was being paid in the case of MIPs (Monthly Income Plans).

 

“High upfront commissions lead to the practice of excessive churning by unscrupulous mutual fund distributors in order to earn themselves a higher commission. This practice of fund houses offering a higher upfront commission and lower trail commission is detrimental to many honest distributors who promote investing in mutual funds for the long-term,” says Rao.

 

The regulator once again fails to take strict action. We have seen this in the case of portfolio management schemes as well, where many PMS companies, including the big ones, are not complying with SEBI’s directives on disclosure of performance data. Portfolio management services (PMS) companies are to “ensure that the clients have access to updated information about the portfolio manager, portfolio managers shall place the latest disclosure document on their website, wherever possible.” But still a large number of asset managers are not following these instructions. (Read: PMS firms misinterpret SEBI rule and avoid disclosure and Investors kept in the dark and hard-sold poor PMS schemes, due to bad disclosure practices)

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    COMMENTS

    mAYANK

    7 years ago

    The Industry is digging its own grave.In the RGESS schemes the Industry gave a huge upfront commission of around 6-8% and this was within knowledge of AMFI. Industry was aggressively pushing RGESS because it was Mr. Chidambram's baby.

    Saraswati

    7 years ago

    Wow...i don't understand the regulations. But it's good to get something while you save!!!

    Manmadha

    7 years ago

    Boooooo....

    REPLY

    Debashis Basu

    In Reply to Manmadha 7 years ago

    Very intelligent comment ;)

    Krishna

    7 years ago

    Chilukuri...KRL....Rao....who? Do his comments and quotes matter? Edelweiss is a wonderful company and has wonderful website. With this offer I would invest it through them than investing through icicidirect! They are not recommending any fund. If I invest in ELSS, I am happy investing through them.....Moneylife - pls get your analysis right!!!

    REPLY

    INDLA SREEDHAR REDDY

    In Reply to Krishna 7 years ago

    Hi Krishna, first understand one thing. Mr. Chilukuri KRL Rao brought one unethical promotion by Edelweiss into limelight.we have to applause him for that. When SEBI issued clear instructions not to give/payback any inecntives/gifts to customers in returns to the investments. How Edelweiss is offering flipkart voucher.Even if it is Edelweiss or some other big brand company also, everybody has to follow SEBI's rules and regulations. I request Money life to take this matter with SEBI.

    Raghu

    In Reply to Krishna 7 years ago

    Dear Mr Krishna , Please do appreciate that some one comes out in the open only with details.The analysis part ,why only money life , even SEBI will do and actions will follow.Money life had published this article , only after the initial scrutiny.Even I have great respect for Edelweis, probably , in this case they might have done it by oversight( even then they are guilty, there is no doubt). But this is un ethical practice.Just see the other coment , one investor wants to buy this for an a small ice cream!The gift is taking over the financial objective!Financial decissions should not be entered because of temptations. One should understand the product first. Unfortunately , when there is a free bee , there are so many who get duck out.

    Vikas Gupta

    In Reply to Krishna 7 years ago

    Mr Krishna! His comments matter a lot for the system. If somebody dares to bring the illegal activity of such a giant to the general public, one should applaud for him.

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