06 September, 2012
The impact of new changes by SEBI on MF industry
The new regulations for the MF industry are out. As usual, there are the routine platitudes on the fine job SEBI has done. Even three years back when they banned entry load, there was all-round jubilation that SEBI has done something revolutionary and path-breaking. It brought the industry to it's knees.
The changes suggested this time too cannot energize the industry as they are hoping to.
What have the investors got?
Investors have got a direct route to investments, where they can save on expense loads. It will be lower, but by how much is not clear. But that means these people are assumed to be savvy investors, who do not need any guidance from intermediaries. Elsewhere, the expenses have gone up for them. They will have to bear the Service tax for the Investment Management Fee, which was earlier a part of the overall expenses.
The exit loads will be credited back to the schemes, which is a positive for investors. The expense ratio will go up by 20 basis points (one basis point is one hundredth of a percent). But the 20 bps increase and the crediting back of exit loads are expected to more or less be neutral, in terms of implication for the investor.
Investors will now be paying 30 basis points if the AMCs are able to source 30% of the business beyond top 15 cities. If their mobilization from other than the top 15 cities is less than 30%, they can charge on a pro-rata basis. From an investor perspective, this is an unnecessary expense.
Investor protection: To avoid churn, the exit loads are being credited to the scheme. This could have been done in 2009, instead of accusing the entire distribution community of churning. To tackle mis-selling, SEBI is now suggesting a system of identifying sales personnel of distributors, evolve a system of product labeling and inclusion of misspelling as a fraudulent and unfair trade practice. These are good moves though coming in very late, which have put the black sheep among distributors on notice. These could have been done earlier and they could have spared the industry it's black eye.
Simple products: SEBI has proposed introduction of simple products, a tiered distribution system including different levels of certification & registration depending on the products & services offered. This a certainly a positive move as there would be many who want simple products, where the distributor may not have a real role to play. Also, this can increase the feet on the street for these plain vanilla products and increase MF penetration.
PAN India foot-print for MFs: The other aspect covered is to take the Mutual Funds beyond the top 15 cities. That is a laudable objective.
So is eradicating chronic-persistent hunger, access to potable water and a roof above the heads. But, how do we get there?
What is proposed is to allow AMCs to charge upto 30 basis points more, if their assets mobilized are 30% or more beyond top 15 cities. Tell me something... if 0.3% is going to entice AMCs to go to the hinterland, why was the penetration so poor before the entry load ban, when AMCs had collected entry loads of about 2.25% & distributors were getting about 2% upfront commission? If it was not possible then, why is it going to work now?
The awareness has gone up in the interim, I agree. The penetration which is evidenced today, is due to the education by the media and inspite of the crippling blows to the industry. But this will be a slow process. What is required is proper investor education. For that, SEBI has asked the industry to set aside a portion of the asset management fees. Fine. But, what is now going to be different, that had not been tried in the past and has spectacularly failed, so much so that, 83% of the entire Mutual fund assets are from just 15 cities?
Cash transactions... Allowing cash transactions ( even upto Rs.20,000/- ) is a retrograde step. In fact, everywhere, it is moving towards transactions through banking channels. This smacks of desperation to somehow prop-up the industry and does not come across as a well though-out step. Also, how this is going to be implemented is to be seen. Sometime back, there was another news that for upto Rs.50,000/-, PAN card is not required. If true, this is a retrograde step as Government of India is trying to bring all financial transactions into the mainstream and is trying to monitor financial transactions and bring more and more people under the tax regime.
AMCs &Distributors: Now, coming to the AMCs and distributors, there is nothing much for them. For AMCs, service tax has been taken out of the ambit of their expenses. Also, there are internal caps on using the Expenses collected. They get to charge 20 basis points more, if the investor exits within a year. But, they cannot use Exit loads any longer, which will be credited back to the scheme. If they are able to get more than 30% from beyond the top 15 cities, they get 30 basis points more.
Doing business across the country imposes huge costs. They will have to offer higher remuneration to the distributors working there, as it is much more difficult to mobilise business in those areas. They will need to set up offices across the country with their personnel, which is a costly affair. This means, the 30 basis points which they earn will hardly compensate their efforts. In fact, it may prove to be far more costly. Hence, this may not be incentive enough for them to spread out.
Now coming to the distributors, there is nothing much coming out of this regulation. Infact, for them, no major negative by itself, is positive. Many distributors have by now evolved a model to survive in the difficult times after the entry load ban. Direct investment route is a dampener for them. They may get 0.1-0.2% more from the AMC. But, that is not going to bring in the distributors who have left the system and it is not enough incentive for new distributors to enroll.
Life will go on. Expecting to energise the distribution network with these regulations is an illusion. With markets tanking, unenthusiastic distribution force, higher expenses to be paid by investors, it will be more of sideways movement for the MF industry.
Authored by Suresh Sadagopan www.ladder7.co.in Published in Moneycontrol.com on