Mutual Funds go against Amfi diktat, dole out higher fees to distributors

Mumbai, Apr 5: In a bid to shore up assets in a rising market, mutual funds resorted to doling out high upfront commissions to distributors in the past financial year, violating the best practices guidelines put out by industry body Association of Mutual Funds in India (Amfi).
Commissions paid for selling open-ended equity schemes went as high as 200 basis points (bps) while that for closed-ended ones stood at 5-6 per cent, said two people familiar with the matter.
“Virtually nobody is following the best practices guidelines and larger distributors with bargaining clout are pocketing higher commissions,” said a senior industry official, on condition of anonymity.
The best practices guidelines put out by Amfi capped upfront commission at 100 basis points from April 1, 2015.
The commission payout for distributors had dipped 22 per cent to Rs 36.6 billion in FY16 over the previous financial year after the cap came into effect. However, in FY17, total payout rose 36 per cent to Rs 49.87 billion. Total payouts in FY18 are likely to be even higher.
In January 2016, the mutual fund industry body had reportedly asked its members to cap their upfront commission payouts at 100 bps with immediate effect or face stringent checks by the capital market regulator. It is not clear if Amfi has resorted to similar warnings in the past few months or if it is taking up the matter with the regulator.
An email sent to Amfi and the Securities and Exchange Board of India (Sebi) did not get a response.
“The current guidelines on upfront commission are akin to mandating wearing of helmets for two-wheeler riders. Some cities enforce it, some do not,” said Dhirendra Kumar, chief executive, Value Research, a mutual fund tracker. “As long as both manufacturers and distributors benefit, the practice will continue.”
Kumar, however, added that the regulator and Amfi had done their bit to make the sale of mutual funds schemes more transparent in the past few years. This was by way of mandating periodic commission disclosures and creating awareness about direct plans, which bypasses distributors.