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Sebi code on incentives alarms MFs

Janaki Krishnan

The Securities and Exchange Board of India's code of conduct for distributors of mutual funds, which bars them from offering rebates or incentives to investors, has triggered a storm of protest in the mutual funds industry.

An emergency meeting of the Association of Mutual Funds of India is scheduled to be held this week to discuss the issue of rebate of commissions in the case of large-ticket buyers.

According to industry circles, around 75 per cent of the money mobilised in the sector is driven by rebates and incentives. Retail and institutional customers are so used to receiving incentives from mutual fund distributors that funds fear they may run dry if incentives stop.

However, faced with the Sebi diktat, the mutual funds have decided to talk to distributors and stop rebates and incentives.

Mutual funds are also planning to raise brokerages (commissions) and the load structure so that some uniformity is introduced across the sector. Transparency in the case of rebates is also being strongly pitched for. "Let there be rebates but they should be all upfront so that they do not differ from investor to investor," said Krishnamurthy Vijayan, chief executive of J M Mutual Fund.

The asset management companies are partly responsible for the rebate because high commissions given to distributors (to mobilise funds for them) result in the latter offering rebates to investors.

Brokerage or commission rates average around 2 per cent. But some of the more aggressive funds offer as much as 3.5 per cent. With these incentives, distributors make their margins on "trails" - which is essentially what the AMCs pay distributors for retaining an account. Trails typically are at around 0.35 per cent to 0.40 per cent.

Some of the bigger and more popular distributors have drawn up detailed rate cards for incentives. Incentive rates vary from scheme to scheme and from fund to fund, depending on the brokerage rates and the exit loads.

For instance, investments in open-ended equity funds give incentives of 1 per cent. In the case of income funds, the incentive is around 0.25 per cent. Investments in tax savings schemes and children's schemes attract higher incentives - more than 1 per cent.

Sebi has put the onus of keeping the distributors in line on the mutual funds. However, the mutual fund sector is sceptical as to how this can be implemented because cash incentives never show up on an audit trail while sub-brokers are outside the pale of the current regulations.

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