SEBI’s whirlwind regulatory changes leave a messy trail
Moneylife Digital Team 05 October 2010

SEBI’s knockout punch to mutual fund distributors in August 2009 has left a trail of tribulation across all intermediaries in the mutual fund industry. We put together the actions and their impact to highlight why even a raging bull market has failed to enthuse the fund industry

The Securities and Exchange Board of India (SEBI) abolished entry loads in August 2009, in what it thought was an investor-friendly move. But consider how a slew of thoughtless actions that followed this move have bludgeoned the mutual fund industry and every one of its intermediaries until assets under management are dwindling rapidly.

The starting point was of course, the distributors who were suddenly left without a business. Without fees, it made no sense for them to dish out free advice, while investors, who were unused to paying for advice, weren’t willing to start now. SEBI couldn’t care less, beyond regulators loftily pronouncing that “distributors must charge customers” and “investors must learn to pay”.
When a few hundred crore rupees began to be pulled out, SEBI swung into action to make the situation worse. It started its infamous turf battle with the insurance regulator to stop mutual fund assets flowing to unit-linked-insurance products. The result: legislation that put the finance ministry in charge of sorting out squabbles between regulators. Also, hundreds of distributors have shut shop and are looking for alternative business avenues.

In July 2009, just before the ban on entry loads, SEBI exempted micro SIP investments upto Rs50,000 from having to submit PAN numbers. This translated into higher volumes under SIP without any significant addition to the overall Assets Under Management (AUM) of fund companies. An unintended consquence was that Registrar & Transfer Agents (RTA) were burdened with additional work and no commensurate increase in income.

In December 2009 came a circular asking for stricter and more detailed Know Your Customer (KYC) documentation for “prevention of money laundering”. This happened when SEBI realised that some mutual funds did not even know their customer and were entirely dependent on distributors not even RTAs.

This triggered huge documentation efforts between RTAs and channel distributors — the top 20 distributors account for 4.78 lakh unique investors with a minimum of three documents (a/c opening, KYC, PAN ) consisting of 65–180 pages each (4.78 crore records). While the process was being completed, commissions to the tune of Rs100 crore were withheld, angering the distributor community even further.

Interestingly, all this was left to a few RTAs to handle — it is interesting that the entire capital market boom since 1990 has not led to increased competition in the RTA segment — Karvy remains the dominant player, with three or four others picking up the rest. SEBI has never tried to find out why this business does not attract more participants.

Incidentally, SEBI’s fatwa meant that to comply with KYC norms, old and inadequate customer data, with older funds such as UTI Mutual Fund had to be obtained afresh, with identification (photo, phone and address) and put in a standard format for easy access. We learn that RTAs coped with this by procuring third-party screening software to aid in this process.

In March 2010 SEBI decided to attack trail commissions and permit investors to change distributors without a no-objection certificate. It decided that in case of any change in the broker code, no trail commission would be paid to both brokers — the one who lost a customer as well as the one who gained a customer. This immediately triggered a virtual war to grab customers by hook or by crook — it only led to RTAs being choked by reams of paper requesting a change in broker code. The apparent lack of clarity between SEBI and the industry body Association of Mutual Funds in India (AMFI) didn’t help matters either. The misinterpretation of the rule unleashed trading in customer data. Only after AMFI issued a subsequent clarification did the volumes subside.

Many other proposals introduced by SEBI, such as shrinking of NFO allotment time from 30 days to five days or extending the ASBA facility to mutual funds, although for the benefit of investors, led to confusion because the industry and intermediaries were never given enough time to set up robust implementation processes.

One example is SEBI’s decision in June 2010 to switch from AMFI certification for mutual fund distributors to certification by the National Institute of Securities Management (NISM) which has been set up by SEBI and is now scouting for revenue opportunities. The certification leads to the issue of a certification number or code. Since older IFAs (independent financial advisors) are unlikely to get an NISM code, it has created an additional process for fund intermediaries to manage NSIM and AMFI codes.

In August 2010, SEBI asked all fund houses to facilitate smoother shift of mutual fund units between two demat accounts. This not only meant that AMCs would have to shoulder additional costs, but it would also increase activity at the RTA’s end. Various participants have pointed out discrepancies in this system, with several intermediaries submitting their own challenges in dealing with the requirement in its current form. Similarly, in order to check fraudulent activities by some distributors, SEBI asked fund houses not to accept third party cheques for mutual fund subscriptions. This is under implementation, requiring fund branches to track investor applications with investor cheques to corroborate the investment.

SEBI followed this with a killer blow to the distributor community, when it introduced tedious and intrusive know your distributor (KYD) norms. These didn’t go down well at all with some distributors, who felt they were being treated like common criminals, particularly questioning the extent of verification as demanded by SEBI. Moneylife’s article on this matter (see here: http://www.moneylife.in/article/78/9202.html) generated significant interest from the distributor community.

The problem is that each time SEBI introduced a change, without enough thought or discussion, the industry began to invest in systems and processes, only to have the regulator move on to another change. Or worse, the investment was wasted because investors were unimpressed by the change.
One good thing that has come out of all this mess is the facility of consolidated account statements on a monthly basis. This service provides the investor with the ability to track his mutual fund investments across all fund houses under a single roof. This may also reduce the costs and efforts at the RTAs’ end as it will eliminate the need for daily confirmations. 

With SEBI mulling more regulatory changes for the industry, any move without involving the industry participants will only create more headaches for all the players in the industry.

Comments
a
1 decade ago
one man's ego(mr Bhave's) is kiling mf industry..

market has grwon from 8000 to 20000.and MF industry AUM has decreased...........

Hari Baldawa
1 decade ago
ITS PURE NONSENSE the way Bhave thinks of MF business and it is PURE INSULT the way DNA Money editor ( I didn't care to get this guy's name) has published, on Oct 9th, the interview of Mini Menon of Bloomberg UTV. These two guys will get their pants wet with dirty smell, if they take guts to get a new small investor into Mutual funds. These guys don't have the noble idea behind MFs, which can benefit each and every person, rather than talking and publishing big nonsense figures.

If the SEBI was capable of controlling properly, then the investment figure should have been at least double of what has been printed big in DNA money and number of investors should have be more than 5 times. Collecting 65000 crores is ashaming with the investable wealth available with HNIs, NRIs, Wealth Mangers, FIIs etc.. who were directly benefited. This wealthy investing circle is well knowledgeable, organised and have excellent tools and resources to access Mutual funds. What about others? Can Bhave give the comparative report and justify how many small and fresh investors have entered into mutual fund investments? What is the use of making impractical policies, just to prove that they are too smart and they know all. IFAs, distributors and AMCs are not nikmaas or fools to raise unnecessary issues.

It is easy to think of big figures and big blahs.. blahs ..... sitting in AC office with materialistic and wealthy environment and take decisions to please them, but who is there for small and uninitiated investors. Please note, IFAs and DISTRIBUTORS ARE ENTREPRENEURS ON FOOT, who are serving noble purpose to broaden investment reach by taking financial, mental and physical risks. The foolish power misusing leaders sitting in AC offices should properly understand the long term importance of these guts and challenges for the benefit our country and citizens.

There are so many important issues which needs to be simplified at the earliest. One of the most urgent issue is making common applications, formalities and routine matters in simple format to serve all all funds. The organised distributors serving wealthy and regular investors get compensated for this complexities, but others drag this heavy burden in silence.

Mobiles and so many common utility products are reached every person, then what is short in mutual funds to acheive this. Does Bhave and his team have ever overdriven their brains to understands this missing link? Mr. Gopal tried to fight for this and SEBI has made him behave like untouchable.
Madhusudan Thakkar
Replied to Hari Baldawa comment 1 decade ago
During same period ULIPs of Life Insurance companies have shown BIG growth at the cost of mutual funds.Why our policy makers are silent on Lakhs of Crores remaining IDLE in savings bank account.
Paressh
1 decade ago
There are number of investors currently investing in mfs through distributors way.And AMCs have to pay something them.Its indirectly affecting their revenue.They have to maintain ihe required infrastructure,salaries to there staffs and so on.....If they can't provide sufficient resources it will definitely affect the returns and in turn harm the investors more than that of current entry load of 2.25%.
Paressh
1 decade ago
I think Mr. Bhave is carring some bad mutual funds,may be advised by any of the advisor.
Madhusudan Thakkar
1 decade ago
During recent interview with Mini Menon of Bloomberg UTV[The excerpts of this is published in today's DNA] Bhave has also once again justified ban on entry loads by giving frivolous arguments. There appears to severe disconnect between people like him and Media[Except Money Life] and people who are at ground Zero. .Why are MPs silent on this issue? why there is no serious discussion in Parliament?.When we talk of "retail participation" in India's growth story. How will common man participate without distributor.Earning 1-2% commission is CRIME in our country.
Roopsingh
1 decade ago
http://bit.ly/9i3Pa2
This link of economic times article clearly states what SEBI official Mr VAidhyanathan thinks about IFAs-he quoted them as BARKING DOGS-
he is man who looks to matters concerned to MF and FII investments-so we can guess what is cooked in SEBI by such people who try to be dearer to FII by easing norms for their dollors and treat their country brothers as barking dogs-
Roopsingh
1 decade ago


If Mr Vaidhyanathan sitting in AC ofice and calling IFAs and its upporters as dogs-then he must be sent to get applications directly from MF investors and his salary should be banned-
the new law shaould be that he will get his FEES from invetsors on business procured by him-even if this looks funny-then he should be incentivised for AUM accumulated in all amc'x every month-the month in which fund outflow is more then inflow-he should not be paid a penny-If this type of rule is formulated for all concerned officials who are MIS regulating the MF industry-then ONLY HE AND HIS COORDINATES will realise the real situation-
If he is so confident of his IDEALOGY-he should accept this challenge -IF HE CANT ACCEPT_HE SHOULD APPOLOGISE for calling IFAS as DOGS-
To read this-pl visit recent interview of Mr Vaidhyanathan published in ECONOMIC TIMES where he quoted IFAs as barking dogs-
sameer
1 decade ago
What is to be said or done SEBI / AMFI are here to stay as a manager / damager only to make things easy for investors. If all the distributor paid STT(sebi transaction tax) out of the brokerage / incentive we all could by peace with sebi / amfi. We all must understand that there is more than meets the eye.There is something that we all are not aware of for sudden measure for mutual fund and insurance industry.We all cannot take this sudden change and were thing will end up, as financial products are sold not purchased in India.
sunnny
1 decade ago
Now a days if investor comes to me who is not willing to pay fees or less than my threshhold,
I gave them name and address of Mr.Bhave stating that he is your maseeha and willing to help you going out of way.
The extent of direct damage he has done to distributors is really bad but more so indirect damage he has done to retail investors is very big. the impact will be really bad.
No one is willing to service them as there is no compensation left for him.
Mr. Bhave please read basic economics or a book called WORLD IS FLAT.... Any way no point in breaking head on stone who is not going to listen.
Madhusudan Thakkar
1 decade ago
According to today's "Mint" C B Bhave has written to finance ministry that asking to appoint his his successor a MONTH BEFORE he steps down.One of the potential candidate is U.K Sinha,chairman of UTI.Past experience shows that people from UTI & LIC are pragmatic and understand ground reality.Damodaran and G.Bajpai were from UTI and LIC and under them mutual fund industry grew by leaps and bounds. LET US HOPE FOR THE BEST.
sunnny
Replied to Madhusudan Thakkar comment 1 decade ago
Mr. MT--- Dont forget the root of the whole problem is damodaran and not bhave.
He is the one without too much thinking given a no load invesment option to the investor who wants to go direct.
what a stupidity if distributor wants to discount his copensation then it is ill legal and called as passbacks or kickbacks and the same investor can go to mf and buy without any price. very funny...
I think damodaran should be blamed for the problem.
And funniest part is now he is now on the ING board which is a amc itself
Deepak R khemani
Replied to Madhusudan Thakkar comment 1 decade ago
I don't think that is possible as Mr. Sinha has already been appointed as chairman of SEBI although if it were to happen then it would be great for the IFA Community and the mutual fund industry as a whole
Madhusudan Thakkar
Replied to Deepak R khemani comment 1 decade ago
Deepak Ji is high time that AMFI is dismantled.It has remained silent on" EMOTIONAL ATYACHAR" of distributors.
Deepak R Khemani
Replied to Deepak R khemani comment 1 decade ago
Sorry guys typo, it should read CHAIRMAN OF AMFI in the above para and not chairman of SEBI, sorry again
sunny
1 decade ago
exceelent very good
RAMESHKUMAR GP
1 decade ago
THERE IS LOT OF SIMILARITY B/W MR BHAVE &MR KALMADI ,BOTH ARE EGOISTIC ,CORRUPT ,SELFISH PERSONS ,THEY HAVE DONE EVERYING FOR THEIR SELF INTEREST BY MISUSING &MISGUIDING INVESTOR/PUBLIC.ITS A CURSE THAT WE ARE VICTIMS OF THESE BUROCRATES&POLITICIANS.
sameer
1 decade ago
Its time the finances ministry needs to get a new think tank for SEBI.. Every new person as SEBI head only wants to out perfome the other.
RAMESHKUMARGP
Replied to sameer comment 1 decade ago
sameer its one fool wants to out perform other fool in this we all victims .
fundResearch
1 decade ago
Please go through this link

http://economictimes.indiatimes.com/opin...
Roopsingh
Replied to fundResearch comment 1 decade ago
Mr Fundresearch-i know what kind of news are highlighted in economic times-they fully ""EDIT" the comment and dont put it if that does not suit them-they put only those comments which are favourable to them-they are a sold out magazine to Ad agencies and vested interest-i have several times tried to put comments in economictimes-but my all hard efforts to put my emotions get evoparated because my comment does not suit to editor-it is like SARKARI MEDIA-it is never comparable with MONEYLIFE_so pl dont dare to paste such useless links-
Madhusudan Thakkar
Replied to Roopsingh comment 1 decade ago
Media has spared no efforts to paint entire distributor community as villains. Like word "Secular" the word Distributor is twisted by media in showing that they are on side of people.I agree with Roopsingh Ji that Moneylife is the only journal/site which understands ground reality.Please inform other friends to visit this site for "TRUE PICTURE"
nishi rotkar
Replied to fundResearch comment 1 decade ago
i think some of the comments on this article are sponsored by SEBI.

fundresarch, i dont know what kind of research u have done on mutual funds.
the link u have given is from economic times. i have posted a comment on that article, but they have no guts to post it.

3 fold rise in AMCs profit is due to exploitation of unorganised distributor community. if u cut the salary / wages of employees in any company by 1/3 or 1/4 ur profits is going to rise by many folds.

but the rise in profit of the AMCs does not indicate that ALL IS WELL.
monil daru
1 decade ago
IFA MUST DEMAND FOR THE UP FRONT BROKERAGE AGAIN & MUST FIGHT FOR IT WITH A UNIQUE WAY.PLEASE DECLARE THE MF INDUSTRY AUM BEFORE & AFTER AUGUST 2009 & TILL AUGUST 2010.
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