AMFI chief HN Sinor has admitted that SEBI and AMFI had made a costly error in banning entry load for mutual funds. Remember, fund companies had welcomed the ban, as had mainstream media

In a recent interview with Economic Times the Association of Mutual Funds of India (AMFI) chairman HN Sinor has admitted that Securities Exchange Board of India (SEBI) made serious a policy mistake of banning entry loads on mutual funds. He said, “One mistake SEBI made was to implement the entry load ban in a cut-and-dry manner.” Moneylife foresaw the mutual fund industry decline, especially with distribution largely getting affected. (Mutal Fund turmoil: Can SEBI be held accountable?).

Mr Sinor hopes there will be a ‘review’ for rolling back the entry load ban. This a volte face by the fund industry. In a conversation with Moneylife, several AMCs had welcomed the move made in August 2009. Mr Sinor now says, “In those days SEBI and AMFI felt the Indian enterprise was very smart and would find a way to come around it. But after two years, I realise, we’ve not been able to adjust our business model to the entry load ban. We need to dispassionately review the (entry load ban) decision once again. We have to expand this industry, and for doing that if we have to bite the bullet, we should bite the bullet.” So, at least the AMFI chief has admitted to what Moneylife has been pointing for so long. Will SEBI take heed, especially since its current chief, UK Sinha was against the ban when he was heading UTI Mutual Fund.

The resultant entry load ban has claimed many causalities, most notably the small distributors and even a reputed asset management company—Fidelity. With one single swipe in August 2009, without much discussion, SEBI changed the mutual fund industry, for the worse. Mr Sinor has admitted that Fidelity’s exit has posed a dilemma for the regulators. He said that the confidence level is very low in the industry. “After Fidelity’s decision to move out and the quick exit of four CEOs, even we’re a little worried. If officials desert the industry like this, we have a big problem at hand”, the AMFI chief openly admitted.

All this QED for us. Moneylife had written about the implications of SEBI’s actions on Fidelity, and what it means for the industry (Fidelity’s exit, a slap on SEBI’s face). We had also pointed out that with the ban on entry-load, small distributors have got squeezed out (Can relationship managers of banks replace independent financial advisors?), and because of this, banks have monopolised distribution of MF schemes. We had written recently in Moneylife magazine, citing recent data from Computer Age Management Services (CAMS) which showed that over the 11-month period (from April 2011-February 2012), banks have managed to corner 40% of SIP accounts and 30% of non-SIP accounts, when compared to Independent Financial Advisors (IFAs) who could manage only 8% of SIP accounts and 11% of non-SIP accounts. Mr Sinor pointed out that out of the 16,000 odd advisors, only 185 (independent distributors) are earning reasonable amount of money. He further says, “If you look at the commission pay-outs of distributors, there are just about 200 distributors who draw gross revenue of over Rs 1 crore. Of the 200, the top-20 are institutions and banks.” He even admits that mis-selling has happened because of the entry load ban. He adds, “This environment is pushing them (distributors) to do something which is not right.” Despite banks cornering the distribution market, mis-selling did not stop and they continued to indulge in questionable practices in mutual fund selling which Moneylife as been pointing out. (Banks receive NFO commission under the garb of ‘bank charges’) and (Now, banks blamed for continuous equity mutual fund outflows!).

According to Mr Sinor, “Distributors are not finding it worthwhile to sell mutual funds. Manufacturers are finding it difficult to expand or penetrate beyond 20 cities. It does not make a business case for manufacturers to go and sell the product in Timbuktu to collect just Rs 5-Rs10 lakh of investments.” The entry load ban has further accelerated the decline of equity culture and number of investors. In order to tackle this, our regulators and the government have come up with the half-baked Rajiv Gandhi Scheme, instead of tackling the root problem of the issue: distribution. We had written about the Rajiv Gandhi scheme here (Budget measures will leave small investors cold).

Without much empathy for the small distributor, the National Institute of Securities Markets (NISM), a certification provider which was set up by SEBI, has gone further and doubled the certification fees required by advisors to distribute mutual funds, thus increasing their costs of doing business. We had written about this here (Revised mutual funds requirements will hurt independent distributors, enrich NISM. SEBI is not really bothered about the small distributor, even after all these years.

Moneylife was the first to come up with a position paper addressing the issues facing investors in India, especially the decline in investor population. Position Paper on Issues faced by Retail Investors: an insight into declining participation of the retail investor

It may be remembered that the fund industry too was to blame for charging huge upfront costs to the unit holders including, foreign junkets, in order to sell funds. Instead of controlling these practices, SEBI has gone to the other extreme by banning upfront commissions and dozens of concomitant rules, which were hailed as pro-investor by the mainstream media, putting a halo around the head of CB Bhave when he retired. Will SEBI review the entry load ban now that Mr Sinor has spoken up, possibly with the tacit encouragement by the SEBI top brass? Or will it come up with another half-baked scheme as Mr UK Sinha did sometime last year?