SEBI asks AMCs to rein in churn-happy distributors

The Securities and Exchange Board of India (SEBI) has asked asset management companies (AMCs) to make additional disclosures regarding their distributors and conduct additional due diligence on distributors with high churn.

Now, AMCs will have to make disclosures regarding distributor-wise gross inflows including the distributor’s association with the AMC, net inflows, average assets under management and ratio of AUM to gross inflows on their respective website on a yearly basis.

The consolidated data would also have to be disclosed on the website of industry body, the Association of Mutual Funds in India.

They would also have to analyse the data to catch those who push investors to buy and sell funds in a bid to earn extra commissions from the churn.

“In case the data mentioned above suggests that a distributor has an excessive portfolio turnover ratio, i.e. more than two times the industry average, AMCs shall conduct additional due-diligence of such distributors,” said the Sebi circular dated September 13.

Dhirendra Kumar, CEO of fund tracker Value Research, said the move is a positive. “It is a very intelligent step and should help identify the churners amongst them,” he said.

V Ramesh, deputy chief executive at AMFI, agreed. “It will help monitor and control them.”

The circular follows an August 16 announcement of the Sebi board’s decision on steps to revive the mutual fund industry.

Interestingly, two key steps mentioned in the statement following the board meeting are missing in the circular.

A move to make the expense ratio fungible, which would allow fund houses the freedom to use the money collected as expenses in whichever manner they see fit, is missing.

The August 16 statement had also mentioned that the exit load would be credited to the scheme rather than go to the fund house. Sebi had stated that it would raise the expense ratio by 20 basis points to compensate.

While the latest circular mentions that the exit load is to be credited to the scheme, there is no mention of the 20 basis point increase in the expense ratio.

Experts suggest that the Sebi may clarify on these issues in coming days, and their ommission may only be due to operational issues or the need for changes in regulation before they are implemented.

Meanwhile mutual fund debt schemes are not to take more than 30% to any one sector.

A 30 basis point increase in the expense ratio for those who are reaching out beyond the top 15 cities has been allowed if these areas accounts for 30% of gross new inflows in the scheme or 15% of the average assets under management (year to date) of the scheme.

If it is less, then the additional charge can be on the percentage of new inflows from beyond the top 15 cities.

Sebi has also asked for a separate plan for direct investments, i.e., investments not routed through a distributor, in existing as well as new schemes with a lower expense ratio.

The provision for separate plans for direct investments will be effective from January 1,2013. The rest of the circular comes into effect from October 1, 2012.