Sebi seeking public comments on the same

The deadline for sending suggestions on variable entry load or fee for mutual fund agents is drawing closer and the responses so far are skewed toward one side.

Earlier, Securities and Exchange Board of India (Sebi), the country's capital markets regulator, had mooted a proposal to allow mutual fund investors to mention the commission or fee that they would like to pay the advisor or agent, thus trying to bring transparency.

For the same, Sebi has sought public comments till March 6, 2009, on whether the load/ fee should be mentioned on the mutual fund application form or paid through two cheques — one for investment amount and another for commission. "Most of the distributors have responded to the Sebi proposal stating that they want the commission to be mentioned on the form as opposed to the cheque," said a source.

The highest numbers of respondents come from the distributors and not retail investors. But the victims might turn out to be the latter. "The investors might still be cheated if the commission is mentioned on the form as not many investors fill the form themselves and just sign blindly. Only if a separate cheque is asked for will the investor question why. The cheque method is beneficial for the investors, while the form is for the distributors," the source said.

Apart from the variable load proposal, Sebi's concept paper also talks about mandatory disclosure of commision paid by the AMCs.

A section of mutual fund distributors is objecting to both the moves altogether. A mailer going around in the distributor community also states, "We object to both the proposals."

The rationale, they say, is that the Mutual Fund Advisory Committee has the investor community and MF houses well represented but not their own men on the board.

"Ultimately, the objection is because the customer doesn't want to pay. It is difficult to ask a customer to decide on variable load in the current situation, where an investor doesn't understand that the load comes out of his pocket. There are other products where the charge may be higher at about 10%, which is shrouded in secrecy. Considering that the competition is not fair, the move will hurt the consumer, who will opt for a higher fee product that hides the commission structure and not the lower fee, where he is informed about the fee," says Sandeep Sanbhag, director of Wonderland Consultants. The move would kill small distributors, where the retail investors check every bit, he adds.

Several distributors have approached Association of Mutual Funds in India (Amfi) suggesting that a minimum investment be prescribed, after which the variable load obligation should be applicable — say for investments above Rs 1 lakh etc — a distributor told DNA Money. "Amfi has not yet responded and said, 'We will present the case to Sebi,'" he added.

Amfi chairman AP Kurien said, "Distributors and the public will respond to Sebi and then Sebi will look into it. The only question is whether it's the right time to implement as the equity markets are down and investors are averse to investing."

Khyati Dharamsi & N Sundaresha Subramanian/ DNA-Daily News & Analysis Source: 3D Syndication