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SEBI panel to discuss curbs on payouts
May, 31st 2010

Concerned at liberal payouts to distributors by mutual funds possibly at investors' cost, SEBI will consider imposing curbs on expenses that MFs charge from investors on Monday.

"The SEBI committee will meet tomorrow to take up the issue of expenses that mutual funds charge from investors annually," a key source told PTI.

The SEBI Mutual Fund Advisory Committee, comprising SEBI and MF industry people, is concerned that the fund houses are doling out lavish gifts to their distributors to encourage them bring in more business, the source said.

Currently, the MF industry keeps its expense ratio at 2.25 per cent, which it deducts annually from investors' net assets value (NAV).

"SEBI is of the view that the MFs should either bring down their expense ratio to 1.5 per cent and spend it as they want or cap its management expenses to 1.25 per cent and charge the remaining expenses at the rate of 1 per cent on actual basis," the source said.

The sources said that in the initial stages, the advertisement expenses of the fund houses are quite high which are recovered from the customers. Also, there are concerns that the MFs are spending too much on promotional expenses on products, which includes arranging foreign trips for distributors.

Further, the fund houses have come under the scanner of market regulator Securities and Exchange Board of India (SEBI) for allegedly lavishing their agents and distributors with incentives like cash payouts and foreign junkets in return for higher sales.

Instances of distributors of various fund houses being showered with cash incentives as also trips to exotic locations in India and abroad have come to light, especially since the scrapping of entry-load from investors last year.

A senior official at a leading fund house, however, defended the incentives saying such practices are prevalent across the various industries like pharmaceuticals and consumer goods where distributors are treated with much more expensive gifts and more frequent foreign trips.

"We do assure some gifts to distributors to incentivise products, but not to the extent of mis-selling any scheme. Such a practice is common in corporate parlance...I think SEBI is concerned about the probable mis-selling by some distributors," Axis MF managing director and CEO Rajiv Anand said.

The mutual fund distributors are said to be have been in a disarray ever since the fund houses were barred by SEBI from charging any entry-load from investors. Entry load is the commission that an investor has to pay while purchasing units of a mutual fund.

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