On Thursday, the battle took a ugly turn when the largest distributors’ association, the Financial Intermediaries Association of India (FIAI), which contributes around 50% of the non-direct assets under management of the mutual fund industry, issued a statement in the afternoon. The statement said that it was, in principle, not in favour of Amfi, fixing prices or mandating pricing formulas and/or getting into jointly deciding pricing matters for the distribution of mutual funds.
“Such initiatives are generally considered to be against free trade practices,” said the release.
There is serious money involved. In 2013-14, around 350 top distributors earned as much as Rs 2,582 crore, up 7% from Rs 2,388 crore in 2012-13. The average assets under management in March 2014 was Rs 9 lakh crore. Since then, the assets have soared by 25% to Rs 12 lakh crore and the distributor community is expected to earn significantly higher amount this year.
According to the circular, the trail commission in the first year will be based on the balance of the total expense ratio (TER), after deducting the upfront commission and the operating expenses. In addition, fund houses cannot give more trail commission than the percentage point that has been paid in the first year. For example, if trail commission is 50 bps in the first year, it cannot be more than that in the subsequent years.
But it may not be an easy ride for Amfi. Several fund houses, especially smaller ones, are unhappy with the circular. Said the head of a fund house: “There is no reason for Amfi to implement this guideline across schemes. If closed-end schemes are a problem, Amfi can impose this guideline only for them. This kind of high handedness leads to crisis in the industry,” According to reports, Sundaram Mutual Fund’s CEO has already written to the industry body, saying that the choice of 100 bps limit is arbitrary and the fund house will not adhere by it.
Heads of funds houses say that everything was running smooth in the industry till last year and fund houses were paying distributors as per their financial strength. “However, when the markets turned around, a number of fund houses started launching closed-end schemes and paying distributors 6-7% advance to promote them. Since the lock-in period was three years, the argument was that they were paying it in advance to push sales,” said the head of a fund house.
When this practice was brought to the notice of the market regulator, the Securities and Exchange Board of India (Sebi), it held a meeting with fund houses and asked them to ‘rein in’ the practice. And after deliberations over three months, Amfi issued the proposal in February.
No wonder, fund houses are up in arms. Says the head of a distributors’ association: “The constant reduction in commission has led to a sharp fall in the number of distributors because it is financially unviable. If this rule is implemented, it will be the final nail in the coffin.”
He argues that even unskilled labour are able to earn Rs 10,000 to Rs 12,000 a month in the metros whereas to earn that money, a mutual fund distributor has to raise as much as Rs 1.2 crore of assets annually. And this is just the revenues without accounting for the expenses that one has to make to raise the money. In 2007, there were as many as 100,000 distributors. These numbers have slipped sharply to less than 8,000.
Amfi had written to all the fund houses in the last week of February that all fund houses should cap the upfront commission at 100 basis points (bps). It had asked the sector not to upfront the trail commission, as was the case in many of the recent close-end equity-related schemes.
In response to Amfi’s letter in the last week of February about the cap in commision, FIAI in early March had said, marking Sebi too, that within the Sebi-mandated pricing norms, the pricing has to be decided between individual AMCs and Distribution entity. “We believe that status quo should exist on pricing freedom,” the letter had said.
Some heads of fund houses like Jimmy Patel, CEO, Quantum Mutual Fund believe that much of this has to do with unhealthy nexus between the distributors and many fund houses. “The race for assets under management led to unhealthy payouts. This led to things going out of control,” he said.