MF cos under Sebi scanner for cash payouts to agents

Instances of distributors of various fund houses being showered with cash incentives as also trips to exotic locations in India and abroad have come to light, especially since the scrapping of entry-load charges from investors putting their money in mutual funds, a top Sebi official said. Besides finding such practices as unethical, Sebi is also examining whether these incentives are being funded by investors’ money in the name of fund expenses, the official noted.

Remedial action
Strong remedial actions are said to be being contemplated for such practices and the market regulator might come out soon with appropriate guidelines in consultation with the industry body Association of Mutual Funds in India (AMFI) to tackle these issues, an industry official said. A senior official at a leading fund house, however, defended the incentives saying such practices are prevalent across the various industries like pharmaceuticals and consumer goods where distributors are treated with much more expensive gifts and more frequent foreign trips.

The mutual fund distributors are said to be have been in a disarray ever since the fund houses were barred by Sebi from charging any entry-load from investors. This is said to have driven the potential investors towards now-controversial unit linked insurance plans  (ULIP) of the insurance industry where agents get hefty commissions for selling policies.

However, now when investors’ responses are said to have turned lukewarm towards ULIPs, because of a soon-to-reach turf war between Sebi and insurance sector regulator Irda over the issue of jurisdiction of such products, fund houses have started devising ways to lure back the investors.

With the aim of winning over the investors at a time when the industry is facing high rate of redemptions despite positive sentiments in the stock market, the fund houses are doling out lavish gifts to their distributors to encourage them bring in more business, a senior official at a leading fund house said.

While there are allegations that such trips and incentives are funded by the investors’ money, the officials at fund houses said that the companies are themselves bearing the costs, ever since the entry-load was scrapped.
The MF industry has witnessed heavy redemption pressure since the ban on entry load on August 1, 2009, the month of March 2010 alone recorded a net outflow of Rs 1,62,165 crore.
Press Trust of India