Sebi's commission order to squeeze fund house margins

Last Updated: Wed, Apr 07, 2010 20:20 hrs

Investors may gain from a rise in net asset values.

Upfront commissions in the mutual fund industry may go down further.

The Securities and Exchange Board of India (Sebi) recently asked fund houses to pay upfront commissions from reserves of the AMC (asset management company) and not from scheme expenses. This will see upfront fees going down to as low as 10-25 basis points (bps) from 100-200 bps currently.

In a communication to AMCs, Sebi said fund houses could not adjust any portion of the upfront fees from the balance available after paying the scheme-recurring expenses.

AMCs can charge up to 2.25 per cent as scheme expenses. Some fund houses were charging 1.75-2 per cent and using the balance for pay upfront commissions to distributors. Now, MFs would have to pay upfront commissions from AMC reserves. While this will limit fund houses’ ability to pay higher commissions, it will also hurt the profitability of AMCs.

"Only mutual funds with deeper pockets can afford it. Smaller fund houses will continue to languish, as there will be lesser incentive to sell their products. MFs will have to look at significant ways and means to compensate distributors. After abolition of entry loads, most would have to pay out of the exit loads," said a distributor, who did not wish to be named.

The move will benefit investors, as money held in the scheme account will lead to NAVs (net asset values) going up. " We will have to rework the commission structure after the new Sebi guideline. Sebi has not left any room for the MF industry to grow. While they have been finding loopholes in the industry, the insurance industry’s Ulips (unit-linked insurance plans) are the biggest competition," said the chief executive officer of a foreign MF.

Distributors, on the other hand, have been waiting for MFs to announce the new brokerage structure. During the first week of every financial year, each MF house communicates the brokerage it would pay to distributors in the form of upfront and trail commissions.

Recently, Sebi pulled up fund houses for paying dividends from the unit premium reserve. In a slew of measures aimed at making the industry more transparent and investor-friendly, it cut the timeline for new fund offers to 30 days in case of close-ended schemes and 30 days for open-ended ones. It also extended the Asba (application supported by blocked amount) facility for NFO applications.

Sebi also tightened the role of MFs in corporate governance of listed companies. It asked MFs to disclose the actual exercise of their proxy votes in AGMs/EGMs of investee companies in terms of changes in capital structure in the company, stock option plans, social and corporate responsibility issues. Sebi barred fund houses from entering into any revenue-sharing arrangement with offshore funds, as these create conflict of interest.

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