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.
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market has grwon from 8000 to 20000.and MF industry AUM has decreased...........
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.
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-
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-
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.
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
http://economictimes.indiatimes.com/opin...
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.