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‘AMCs must show lower costs’

A Securities and Exchange Board of India (Sebi) decision to end entry loads for investors buying mutual funds (MFs) has got the industry — Asset Management Companies (AMCs) and distributors — worried that investors will move away from transparent and low-cost mutual funds to opaque and high-cost insurance products. But SEBI chairman CB Bhave doesn’t think so.

business Updated: Jun 28, 2009 23:37 IST

A Securities and Exchange Board of India (Sebi) decision to end entry loads for investors buying mutual funds (MFs) has got the industry — Asset Management Companies (AMCs) and distributors — worried that investors will move away from transparent and low-cost mutual funds to opaque and high-cost insurance products. But SEBI chairman CB Bhave doesn’t think so. AMCs have to demonstrate their lower costs to investors, he told Gautam Chikermane and Sandeep Singh.

How will mutual funds (MFs) compete with insurance products where distributors for both remain the same and there is no incentive to sell mutual funds?

This is an issue we have been discussing with AMCs and our point is that if somebody is paying a higher commission, it goes from the investor’s pocket. In such a case, the returns on investment must show that in case where higher commissions exist the returns are low. The AMCs should be able to demonstrate this to investors.

AMCs are saying that there is no incentive left for the distributor to sell the MFs against an insurance product…

If an industry is charging lower commissions, it should be generating higher returns. If they manage money with equal efficiency then someone who deducts 40 per cent must show lesser returns.

Some clarifications need to be sought in the light of the recent decision. MF agents till now were deemed to be service providers to AMC for the purpose of service tax. The AMC paid commission to agents net of TDS of service tax. To that extent they remain agents of AMC only.

However, this disposition might change in the new scenario and requires clarification whether they will be agents of AMC or service providers to the investors exclusively.

Furthermore, we need to appreciate that MFs are not the only products in which the consumers invest. A level playing field is required to be established. While the regulators and the governments in most economies have established legislation towards regulating the financial services industry, SEBI’s step is certainly a good curtain raiser.

We hope that other steps will naturally follow.

Since the mutual fund industry has been there for a sufficiently long time and it should be possible for them to demonstrate this to the investor that what they are selling is in their interest. Even if the distributor is inclined to sell the other scheme the investor will make the choice where it gets a better return.

Do you think other regulators would be forced to move in a similar direction for larger public interest?

I can’t comment on what the other regulator will do but if they also think it is in the interest of investors, presumably they would do the same thing.

You have proposed that investors and distributors can sit and decide on the charges in a transparent manner but who will regulate the distributor?

How much an investor pays is entirely for the investor to decide but as far as the distributor community is concerned there is some restriction on the industry. They have to pass an exam. Also, the fact that disclosure of commission a distributor is getting from the MF on various schemes will also be enforced through this mechanism.

We have a committee under the chairmanship of D Swarup, chairman, Pension Fund Regulatory and Development Authority (PFRDA), which is looking into this whole issue of distribution because the distributor sells products that go across regulatory landscape.

Do you think there is a need for a separate regulator for advisors?

I do not want to pre-empt as to what the committee will come out with. I hope that it would be possible for all regulators to agree on a common mechanism and not subject this industry to multiple regulators or yet another regulator.