Distributors protest against disclosing fee

Some distributor associations have protested against a recent circular by Securities and Exchange Board of India (Sebi) that asked mutual funds to disclose distributor commissions in investor’s account statements. Kanpur-based Association of Mutual Fund Financial Advisory (AMFFA) have imposed a ‘no log-in day’ beginning 4 April.

They have stopped accepting mutual fund (MF) applications for purchase of units or switching. “We have not yet decided till when this will go on. But we will have a meeting this Friday to decide on the future course of action,” said Alok Khanna, a senior member of AMFFA.

In nearby Varanasi, on 2 April, the Mutual Fund Distributors’ Association–Varanasi (MFDAV), which has about 86 members, submitted a letter of protest to the Jansampark Karyalaya in the city, which is linked to the Prime Minister’s Office (PMO). “We met Mahesh Sharma (Minister of State, independent charge, Ministry of Tourism) and submitted a letter to him on why we think Sebi’s move has been unjust. We also requested him to set up a meeting with Jayant Sinha (Minister of State for Finance),” said Rajiv Shah, secretary, MFDAV.

Shah said that distributors associated with MFDAV have decided to not conduct any business for a few days as a mark of protest. “We are not stopping any investor from going to the MF offices directly and depositing their cheques there, but we are not soliciting any clients, currently,” he said.

On 18 March, Sebi had issued a circular that mandated additional disclosures in an investor’s common account statement (CAS). It said that, on a half-yearly basis, MFs must disclose distributor’s commission for the preceding half-yearly period in the CAS. MFs have also been told to give the scheme’s expense ratio under the direct and regular plan. Additionally, MFs will also now need to disclose the salaries of executives who earn Rs.60 lakh or more a year, on their websites.

The market regulators’ aim behind asking for distributor commissions to be disclosed is to ensure that investors are sold the right products. It may also want investors to know that the distributor has not earned anything out of the ordinary, like an expensive foreign holiday, to sell the MF scheme.

Khanna said that while they are not accepting applications, they are assisting clients who wish to redeem their units as “every investor has the right to redeem when she needs the money. We can’t stop that.”

However, not everyone is on board with the no log-in day. “If applications come in, we have to process them. We may choose to not do other things as part of our business, but we cannot stop applications,” said Shailesh Shivajirao Patil, an MF distributor based in Uran Islampur, a town in Sangli district in Maharashtra about 190 km from Pune.

“We need to first understand why this circular has come,” said Dhruv Mehta, chairman, Foundation of Independent Financial Advisors, one of India’s largest distributor associations.

“Is it because Sebi has some apprehension that something wrong is happening in the distribution industry or is it because some country internationally has done this and that’s why it feels India too should do it?” said Mehta.

The organisation is collecting various distributor associations’ views and then aims to speak to fund houses to decide their next course of action, he added.

But can MF distributors legally observe a no log-in day?

“Nothing in the law stops them from doing so. Distribution of MFs is not an ‘essential service’ so they can go on strike. If they wish to challenge (Sebi’s decision), they can go to court. But their chances wouldn’t be bright, as you can’t argue against transparency,” said Sandeep Parekh, founder, Finsec Law Advisors.

Moreover, not accepting investor applications could prove to be self-damaging as, ultimately, investors get inconvenienced. With direct plans gaining traction slowly but steadily, such protests might push some more investors towards direct plans.

A parallel may be drawn with the all-India jewellers strike that has been going on since March to protest against the government’s levy of 1% excise duty on gold.

According to a report in The Economic Times dated 4 April (http://bit.ly/25KCn0j), jewellers are considering opening outlets for Gudi Padwa, which falls on 8 April, because shutting shops have resulted in a loss of business.

“Our main worry is that passbacks might increase if investors come to know how much commission we earn. A small distributor might feel obliged to part with the commission if investors demand so,” said Khanna.