Now, banks blamed for continuous equity mutual fund outflows!
Moneylife Digital Team 16 November 2010

While banks indulge in mis-selling mutual funds, as Moneylife had warned 10 months ago, it is far-fetched to blame them for steady equity mutual funds outflows and not SEBI’s hasty and utopian rules on mutual fund selling

Almost 15 months after the Securities and Exchange Board of India (SEBI) set in motion extensive changes as to how mutual funds are sold, and well after the regulator's hasty changes started affecting both the fund industry and the investors, the media has started to get agitated against just one of the fallouts of the sweeping measures-how the national distributors are leading investors up the garden path. According to two business newspapers, banks are encouraging retail investors to churn their portfolio, which is leading to lower gains for investors.

Banks are motivated to do this because of SEBI's rules for selling funds. According to the rules, fund companies cannot pay upfront commission to distributors at the expense of fund investors. They can get upfront commission from fund companies and trail commission on assets that their customers have kept with the fund. Banks have discovered that they make more money from the asset management companies on fresh investment (upfront commission of around 1%) and make less if it is a continuing investment (around 0.5%). If banks can get customers to buy and sell three times a year (which is churning), they make 3%, whereas if they encourage investors to buy and hold over a year, they would get only 0.5%. This is what they seem to be doing.

Mis-selling by banks as a possible fallout, (one of the many, as a result of SEBI's changed regulations), may be a surprise to both the regulator and the media, but not for Moneylife, which documented this 10 months ago based on feedback from the Independent Financial Advisors (IFAs). But at that time, neither the fund companies nor the regulator (much less the media) seemed concerned. Now, the regulator seems to have woken up to this obvious consequence of its actions and is bleating that the Reserve Bank of India (RBI) should come down on banks to stop them from churning investors' portfolios.

The Mint wrote on Tuesday last week, "Retail investors, advised by large banks and distributors, exited mutual funds (MFs) after entry loads on these were removed and even as the stock markets continued to rise. Meanwhile, high net-worth investors (HNIs-those who invest more than Rs5 lakh per folio) and those who invest directly with fund houses have stayed invested, benefiting from rising equity markets. Bankers and wealth managers attribute this to the end of entry loads (costs charged to investors upfront at the time of investment, that were eventually passed on to agents as commission), which have meant that large sellers of MFs no longer have incentive to push the product." On Monday, The Economic Times reheated the same information and served it up with a comment: "The ingenuity of national-level distributors appears to be neutralising much of market regulator SEBI's efforts to curb mis-selling of mutual funds to investors."

These reports paint a picture of a well-meaning regulator being undermined by nasty and greedy banks. We had mentioned several times, based on the feedback from IFAs, that the series of actions SEBI took would lead to precisely this. In fact, we had pointed out in January how Axis Bank was charging Rs225 to investors without their consent to the New Fund Offer of Axis Mutual Fund, without the customers knowing about it. (Read When the Axis Bank practice came to light, Moneylife argued that "this puts a different light on the entire issue on how distributors can charge their customers." SEBI banned entry loads in August 2009, arguing that customers must have the option to negotiate and pay what they can to distributors. But the Axis Bank move underlined the fact that while it is laudable that customers must have the ability to decide for themselves what they are paying for and how, it is a utopian idea in practice. In reality, distributors who have a strong relationship with customers in some manner or the other and an ability to charge them, will get away by doing exactly that. Customers may neither notice nor protest. Since commercial banks enjoy a relationship of trust with their customers, they may misuse it. This is simply because, with long years of experience of watching both regulators and banks, Moneylife editors had pointed out that banks have often abused the trust in the past, when they have debited millions of customers for a service that they have not asked for. The most notable is the example of Citibank which debited some amount from its customers' accounts for an insurance policy, the Suraksha scheme, which they had not explicitly consented to buy.

We had pointed out that this practice would spread into fund selling and SEBI would not be able to regulate banks. Neither does it have a foolproof mechanism to regulate the distributors. SEBI regulates fund companies. However, funds would not exactly be bothered by any abuse of trust by banks; they would be keen to raise as much money as possible-no matter how a distributor sells a scheme, we had pointed out. Also, many mutual funds are sponsored by banks. We asked, way back in February: "Why would a fund complain about any malpractice? The Reserve Bank of India would also not be concerned."

This is exactly how it has played out to the utter surprise of SEBI, which had pushed a utopian regulation down the throat of the fund industry without thinking it through.

After SEBI implemented a series of changes governing the selling of mutual funds, and then tried to implement a patchwork of futile solutions, money continues to flow out of mutual funds. Between August 2009 and October 2010, Rs24,330 crore has gone out of mutual funds. All this, while SEBI and fund companies have argued that this haemorrhage has nothing to do with SEBI regulations, but investors booking profits. While this no longer washes, pro-SEBI commentators have now found another villain: banks encouraging churning.

Unfortunately, even this does not explain why churning by banks should lead to large continuous net outflows from funds. Unless SEBI admits that it has forced a set of regulations without thinking through the consequences, healthy growth of the mutual fund industry seems a remote possibility.

Meanwhile, let's hope that a trigger-happy SEBI does not try to cure the disease by attacking the symptom and banning distributors from churning more than once a year, as another of its pro-investor moves!

1 decade ago
Top Axis Deck sent home by giving a Non Ceremonial Exit by New MD & CEO

All is not well with Axis. Refer ET 13/12/2010 where in two presidents Mr. Rajgopal Srivasta & Mrs. Manju Srivasta ( pillars of Axis ) have been sent home by giving a non ceremonial exit in the form of Early Retirement.

More VP, SVP & Presidents are in line for non ceremonial exit and news is that all those who where close to Dr. P J Nayak & Mr. Heman Kaul, will be forced to take ERS ( early retirement scheme ) or will be transferred to remote location.

New MD & CEO is using the Dr. Nayak two army chief i.e. Mr. S K Chakrabarti – DMD & Mr. S. Bhattacharya – ED (HR) to sack all those Seniors to whom they have promoted on the basis of roll number and now those two have been given the job of clearing the top deck. Groom and Kill strategy.

Is New MD & CEO pulling the right talents from outside? Is the change good for the shareholders of Axis Bank? Only time will break the silence.
Shibaji Dash
1 decade ago
The relationship between a bank and its customers is not only contractual but also one of fiduciary relationship based on tust. Ethics is the very essence of such trust- I mean business and not spiritual ethics. Going by experience and what is reported, this delicate but vital aspect of the bank and customer relationship is under severe stress since the day banks were permitted to do business for their asset management companies. The knaivette of our policy makers and regulators in this matter is of astounding proportion. Just lift the corporate veil of the banking company and its asset management company. What does one see? The economic and financial reality hidden behind the two apparently seperate corporate entities is that it is the same set of people managing both the business of banking and mutual fund with the money of the customersand prifiting at their cost without any recompense for the customers.If someone argues that the banking company and its asset management company are two seperate corporate entities, then he is arguing that Mr. Tweedledum and Mr. Tweedledee are two different persons. The bank is of course playing the money game according to the rule book.The rule book must therefore be amended.Our policy makers /regulators of all kind appear to be learning nothing from the why's and hows of the Great American scam that continues its nightmarish blood bath unabated.They appear to be too self absorbed to recall the grandma advice: prevention is far easier because cure would be too expensive . Banking business must be delinked and seperated from mutual fund business.
As regards the issue of debarring the IFAs, SEBI's decision was a great Himalayan blunder. If according to some it was a utopian decision, the turth is it was based on an inadequate understanding of how humans- whether a banker or an MF agent or the 'retail investor'- behave in the money making game. That decision has created a dystopia- the opposite of utopia.
1 decade ago
SEBI must ban on Banks for selling MF and RBI on Insurance.Both products(MF & Insurance )are selling wrongly by Bankers in India.The personn who is selling is not AMFI passed or IRDA Examassed for selling these products, (this is the fact in Tier II cities , and in Rural India)Manager comes to party and asked them to buy such & such Ulip Insu. or MF NFO for which their H.O. has given target.
1 decade ago
THERE is a strong need to BAN banks from selling MF. Reasons given below:

1) Banks have vested interest that investors sell his MF and keep money with bank either in savings or FD.

2) They can deduct whatever amount from his bank account for service, which is not rendered at all as bank never approach investors, it is investors who come to bank for their banking transactions and Bank staff loaded with stiff targets lure them to MF or Insurance.

Where is the level playing field for small retail distributors and Giants like bank and big brokerages?

AMFI, SEBI and AMC need to look into competition between Giants like banks and Pygmies for the same business.

Financial inclusion means approaching customers having no banking but for investment in MF bank account is a pre-requisite.

I would like narrate high handedness of HDFC bank branch in Mumbai. It dishonoured cheque of one of my investor name 'Sanjay Waghmare' and when he inquired he was handed over fresh application with banks ARN-printed. Same was the case by SBI branch in Chennai. My investor approached to deposit application with my ARN. He was forced to fill new application with Bank's ARN. This investor is Narendra Kumar and investment is Magnum Taxgain.

Is there anybody such that SEBI or AMFI or RBI listening? Is it possible to curb such unethical practice by banks?

So there is no way out except Banning bank to works as agent of MF.
Replied to madx comment 1 decade ago
Dear Madx, we fully agree with you, In Axis Bank also the pressure on staff including the Branch Head is tremendous. Employees have forgotten the basic banking and have been forced proxy agents misselling Metlife, Max NY Insurance and frequently churning the portfolio of the investors in order to achieve the banks fees income target.

Due to Insurance pressure branch employees started fraudulent activities such as encashment of unclaimed Demand Draft, Pay Orders, increasing the expenses bills, debiting customers account by forging the signature of the customer etc.

So it will be better if banks do their own business, or else permit the insurance companies to cross sell Banks FD and let the bank pay commission to Insurance Companies or its agents.
1 decade ago
trail commission and upfront commission, though not charged to investors should go back to investors and not distributors. majority of distributors have cheated investors since private mutual funds started. it is time investors are given back for mis-selling by 80% of distributors since 1992-93 and enjoyed hundreds of crores overall in commission from investors.

same thing should go for insurance companies who have passed fat % to agents by collecting from insured.

both mutual fund distributors and insurance agents are creation of middle men by the respective industries and only 10-20 % real gain has happened to invstor public.

what SEBI did in banning commission to MF distributors should have been done in the beginning itself.

too little done too late!
Replied to krish comment 1 decade ago
how rightly said. Why should there be agents at all. WTF lofty socialist mindset. You should start buying from your ration shop all insurance and mutual funds with a limit on how much you can buy. You will get it free, excellent service at least cost.
Replied to krish comment 1 decade ago
Dear Mr Krish,
Congratulations Mr Krish, if every one thinks in this world there is no necessity for money as everyone will work for free and everything will be available free of cost so where is the necessity for earning or saving or wealth creation. May god bless you and make you the savior of mankind
Keshav B Bhat
Replied to KESHAV B BHAT comment 1 decade ago
There is nothing talking with people like krish because those type of people are insane and paranoid.........
girish prasad
Replied to krish comment 1 decade ago
i wll be very happy to work with you specially because i hope that you are giving all your services free of charge. you are not taking any renumeration from employer. you never charges any expense while giving services because you are also getting petrol food all free but not all distributors not .there working schedule is .1.visit the probable investor and explain them about mf
2.after few days make enqiry and visit with forms take his sign and papers after filling it.
3. submit it to pos or center and follow it till investor get the statement .
4. review it time to time ang prompt reply to keep the investor intact. the same way as collection and submission of form from home.
and if you are ready to do all this free of charge then you are wellcome.atleast you collect all form and submit at all center for free of charge and if not then you decide who is cheater?
1 decade ago
SEBI know every thing....But keeps quite....The reason is best known to SEBI....BHITAR KA MAMLA HAI.....
Stephen Noel DSouza
1 decade ago
I think the word ‘UTOPIAN’ is most appropriate. The fact is that worldwide mutual funds are not sold in this manner. It is very awkward to bill a person and how is one to bill ones parents, brother, sister, relatives, close friends, doctor etc. – also how is one to send a bill of a big amount of Rs. 1 lac etc. So mutual fund distributors prefer not to do business rather than get involved in these awkward situations. Also billing is a very tedious and time consuming process for which there is no software available. Billing on SIP’s is almost impossible and economically unviable especially when the sip is for a small amount of around Rs. 1000. On the other hand if the billing process is skipped (as is the case with 95% of the distributors) then mutual fund distribution becomes unviable. So the distributor is between the devil and the deep blue sea. SEBI is totally to blame for this mess. What is surprising is that the Government has been watching this slide and doing nothing about it for more than a year.
Shibaji Dash
1 decade ago
Axis Bank's business culture has drastically changed in last one year or so - I was told by a friend who has since moved out to a PSU bank. Axis according to my friend is not what it used to be.I'm therefore not surprised to view these comments though I feel sorry. After all it was very thoughtfully and painstakingly built up over the years. Today I'm told the employees are being driven up the wall.
Replied to Shibaji Dash comment 1 decade ago
Axis Bank cannot retain its own employees and hence their branches are in big trouble with serious operational issues, frauds, due to lack of staff accountability since inception.

As the bank has started loosing the CASA & Retail Term Deposit due to loss of customers trust on the bank, and hence the Bank has started image rebuilding exercise by spending crores of rupees on TV commercial especially on Amitabh Bachchans show Kaun Banega Crorepati which is one of the costliest time slot with Associate sponsorships at Rs 8 crore plus 10-second spots at Rs 1.2-1.75 lakh and the bank is spending more than 15 cores at whose cost? Naturally investors / depositors and hence RBI should restrict / put limits on commercial advertisement expenditure made by the banks.

Issued in Investors Interest
v subramanian
Replied to Shibaji Dash comment 1 decade ago
A new CEO brings a culture that was prevalent in the previous organisation. This may not always build a conducive environment particularly in Axis Bank which has a public sector culture of its parent.
1 decade ago
Dear All,
I got a call from one of my client saying his bank has sent him a letter saying to submit his passpot copy and PAN card copy immidiately (the Bank is a leading international BANK) to enable them to make his investments mutual funds etc. He called me asked me what can be the matter as KYC was already veryfied. I advised him to go and meet the bank officials and tell them his KYC is alrady done and can be checked on net.
When he went to the BANK the concerned official said they want to open an investment servics account for him and will do his invest ment in G SEC funds with a guarenteed return of 55% (annual). I told my client that I donot have any G SEC fund which is giving a return as high as 55% annually. Can any one tell me is there any such G Sec fund in INDIA.?
Mr Bhave, savior of investors can you tell me how this type of activities by Banka are allowed, and lot of non resident Indians are duped in the day light (most of these people sign on the blank forms given by the bank officials and even do not know for what these papers are used.

Keshav B bhat

Replied to KESHAV B BHAT comment 1 decade ago
from ministers to govt peons are allowed to do malpractices you are not .dont surprice this is start only.
Replied to girish comment 1 decade ago
Why blame govt. staff or minister alone when there are so many malpractices in the private sector? After all size of private employees is many times the govt. staff by now.
Replied to KESHAV B BHAT comment 1 decade ago
bhat sir, have the courage to name the not let them go away like must be HDFC bank where i have seen a non ARN holder selling mutual funds(nfo) and the customer buying it.later i asked that client why he bought it."bank ke saath relation rakhne ki majboori hai,kuchch fayda hote hee nikaal loonga."do you think afool like bhave will ever analyse the situation?
S Pramod
Replied to bhaskar comment 1 decade ago
Its not HDFC but Axis Bank adopts such type of tricks to catch a fish in the net.
1 decade ago
SEBI is not ready to accept its mistake. This ego problem is hurting mutual fund industry and consequently the economy. So, in national interest, all the SEBI men should be shown the door and tried in court for destabilising Indian economy. They have severely tarnished the image of India Shining.
1 decade ago
If the security code does not match, why should it erase the comments drafted by me after taking so much of time and mind application ?
Please correct this mistake.
Amalaraj Marian
1 decade ago
The fact is that the regulator instead of taking a direct route went about beating round the bush. The regulator is sitting on a pile of records which if shifted properly will give the exact details of what an individual participant is upto. The Regulators shot in the dark was started when some of the large players earned huge amount of commissions and there was no increase in the fresh business. Now we are back to the square one. Each RTA generates records which shows very clearly the ageing of the assets that are managed by the participant. The industry average ageing is about 18 months the IFAs should have ageing which will be upwards of 24 months. Anyone who will not be matching these numbers should have been called up and made to explain. Since The regulator has the power to do so along with the AMFI.
I don't understand how the knowledgeable dealt the situation in an amauter manner or was it that it was powerless in front of the other regulator or was there some more sinister motive.............
Replied to Amalaraj Marian comment 1 decade ago
Axis Bank is known for all types of frauds and they declare 70% growth by looting the public. They debit your account without the consent and knowledge of customers, through fraudulent signatures. So i request all the Axis Bank account holders to check your account for debits if any without your consent, especially for Insurance, Mutual Fund and ATM Cash withdrawals

For modus operandi please click on the following links

Majority of the Axis Bank branch employees are already under tremendous pressure of handling customer complaints & frauds popping up daily at one or other branches, collapse of the operational systems due to staff resignation and failure of HR polices, tremendous business pressure of mis-selling Max New York Life Insurance and on the other side involvement of central and zonal offices in various frauds with the Govt Accounts, Defense Accounts frauds, Defense Employee unclaimed salary A/c frauds, Defense Employee unclaimed pension A/c frauds, Retail Assets frauds, Excise & Income Tax Frauds, Capital Market frauds, IPO Reimbursement Frauds, ATM Cash Shortage Frauds of more than 60 crores, Debt Relief Fund Frauds, Unclaimed DD/PO frauds, ATM / Interior Decoration and Branch premises lease rental frauds, Issuing Fake Term Deposit to customers and government authorities at Jabalpur Bhopal & Kashipur other branches, Agri Credit Frauds, 165 crores Priority Sector Lending frauds at Bhopal and other centers, One time Loan settlement fraud at Nashik and other agri credit centers, Debt relief waiver fraud at Rajkot and other centers etc., where in the bank has breached the trust with Government of India and the State Governments. Government and the investors in general has lost the faith and the trust of erstwhile UTI Bank which transformed SOLUTIONS FOR LIFETIME to THERE'S ALWAYS A SOLUTION for business & personal growth of senior management through high level frauds.

Replied to SANJAY PRABHU comment 1 decade ago
Ernest Moraes Goa
Replied to BEIP FORUM comment 1 decade ago
Private Banks should be brought under the purview of CAG ( Government auditor ) & Central Vigilance Commission , as those banks too deal with the public money and the depositors should not get any further shocks as in the case of GTB & Satyam where foreign consulting firm where involved in manipulations of Accounts & Audit statement.

Who is next after Telecom Raja Scam?
1 decade ago
SEBI must come out with a law which will not allow the banks to do what they are doing now...The banks and large distributors are making money out of investor but the investors are not making out of Mutual fund investing through banks...I think the upfront that the banks get must be stooped......those must be paid to the IFA's who really work hard to keep the investors money in the market for a longer period of time.....SEBI should know that the Investors will only benifit if they go through a IFA..One more thing I want to say that in Mutual Fund their is STP-systematic transfer plan which is one of the best way to enter equity market in present scenerio but i think the banks do not ask their investors to do STP.also the banks do a SIP for 6months - 1yrs...but generally a SIP is for longer period and it helps achieve financial goals....but the banks do nothing.....Please I request Mr C.B Bhave to have a close look in this present situation and do some thing against those banks and big distributors if Mr Bhave really care about Investors......
Deepak R Khemani
Replied to shankar comment 1 decade ago
Nobody is ready to listen my dear Shankar ji, The poor little retail IFA has to fend for himself without support from anyone.
Deepak Khemani
1 decade ago
Hey MDT guys delete that last para in the article or else somebody from SEBI might wake up and do exactly that!!!!!.
It would however be the stupidest thing to do, wouldn't it?
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