SEBI BANS MALLYA FROM MARKET FOR THREE YEARS

The Securities and Exchange Board of India has asked fund houses to follow the 'best practices' guidelines issued by the Association of Mutual Funds in India (Amfi).

It has reiterated the need for sticking to guidelines that stipulate a cap on payment of upfront commission to distributors. Issued by Amfi to take effect from April 2015, this had capped upfront commission at 100 basis points (bps).

“The regulator has said it is high time the industry players followed the guidelines in both letter and spirit,” said the chief executive of a fund house.

To shore up assets in a rising market, funds resorted to high upfront commissions for distributors in the past financial year. The commissions paid for selling open-ended equity schemes went as high as 200 bps. Those for closed-end ones stood at 5 to 6 per cent, said experts.

The commission payout for distributors had dipped 22 per cent to ~36.6 billion in FY16 over the previous financial year, after the cap came into effect. However, in FY17, total payout rose 36 per cent to nearly ~49.9 bn. Those in FY18 are likely to be even higher. Sebi and Amfi have tried to make the sale of MF schemes more transparent in recent years. This was by mandating periodic commission disclosures and creating awareness about direct plans, which bypass distributors.

From October 2016, fund houses have to disclose the amount of commission paid to distributors in absolute terms, in the common account statement that goes to investors every six months. Direct plans were introduced in 2013 and now form nearly 40 per cent of sectoral assets.

High upfront commissions have been particularly instrumental in driving up sales of closed-end schemes. After two years of lull, launch of these funds had gained in the past financial year. In FY18, such schemes collectively mopped ~503 billion, an 80 per cent increase over FY17, shows data from MF tracker Value Research.

The Amfi guidelines also ask intermediaries to refrain from recommending inappropriate products solelyof a higher commission. Intermediaries are also asked to avoid churning of portfolios or splitting of applications to earn higher commissions.

MFs garnered a record high in assets over FY18, with monthly Systematic Investment Plans of ~50-60 billion. The total of assets was a little over ~23 trillion as of April, of which equity assets totalled about ~7 trillion.