The Securities and Exchange Board of India (SEBI), in a simple but effective move, cut the roots of a nexus that kept small investors tied to distributors and given them a freedom of choice on who they would buy their investment products from.
But critics say investor power could also create unfair deals for distributors.
The market regulator’s direction to asset management companies (AMCs) not to ask investors for no-objection certificates (NoCs) from distributors when they want to switch to another distributor or trade directly, has far reaching consequences than what catches the eye.
Market players said that while the move makes customer the real king, it also poses new challenges to be addressed and new opportunities.
“It is a welcome move from investor point of view. Investors were concerned because no distributor would be giving the NoC or their consent for investors to go to another distributor,” said Rajesh Krishnamoorthy, managing director, iFast.
Investors want to change a distributor because he is unhappy with the services and when there is no route to switch, they would often leave the market.
“The regulator’s observation would be beneficial for the investor and help him switch from the present distributor to another without delay. The need for getting NoC only used to delay the entire process and this would be done away with.
{{/usCountry}}“The regulator’s observation would be beneficial for the investor and help him switch from the present distributor to another without delay. The need for getting NoC only used to delay the entire process and this would be done away with.
{{/usCountry}}With this power in hand, there would be more transparency and customer would truly be the king,” said Jagannadham Thunuguntla, Equity Head, SMC Capitals Limited.
However, there are other facets to the story, say critics.
With no need for NoC to switch between distributors, investors could pressure distributors and ask for rebates and free service and switch over once they get it.
If the SEBI directive gains momentum, relationship building would become the primary focus of distributors to retain and attract investors.
There also arises an issue over payment of commission by fund houses to distributors.
If an agent sold a mutual fund product to an investor, the fund house is obliged to pay him the commission, and also for subsequent purchases an investor makes because the distributor had secured the client for the AMC.