Exchange platform unattractive for MFs & investors: UK Sinha  

January 15, 2010

Sucheta Dalal (ML): You were among the first to join the effort to introduce exchange based trading, after the scrapping of entry loads on mutual fund schemes. In your view, how is it working?

UK Sinha (UKS): There is no alignment of interest. I don't see this move being successful. We were hopeful that it would succeed, but now we are discovering that the interests of the brokers, the stock exchanges, the depositories, the mutual funds and the investors are not aligned.

What is happening is that each broker who is a member of this system is participating in it, not because of the small income he gets from the investor but because he is negotiating a separate rate with the mutual fund. And that rate is the best possible rate that the mutual fund can offer. So to think that trading is happening because of the availability of the platform and is easy to access is not correct. What is also happening is that each large broker has his own mutual fund distribution platform where he has an arrangement with the mutual fund. So if he is charging, for example, 1.25% or even 1.5% in some cases on his distribution platform, why should he charge any less here? After all, it is part of the same family. So there is no compromise on fees or the commission that is paid by the AMC. What they are expecting is that they will also charge something from the investor in the bargain. They hope to charge around 50 basis points (which is the amount paid for delivery-based trades).

The whole culture in the secondary markets is to encourage trading and churning, but to encourage an investor to come to buy and hold is not the culture in a majority of the cases. So unless there is some incentive to the investor through this platform it will not work. There is no advisory service, because the broker has no time to even offer a choice of five or ten schemes which the investor can select.

ML: But many brokers have joined the platform; what persuaded them to do so?

UKS: What happened was that everybody decided to take a chance and join this bandwagon because if it succeeded, they would be left out. There is a gradual realisation that this is not going to work. There is also a worry about future fees. Stock exchanges are not charging any fee right now, but they have said that they will not charge a fee only for the first few months—they will start charging a fee sometime. Depositories too are not charging a fee today; they too will begin to charge some time. Then there is the issue of Securities Transaction Tax (STT). It is not clear if that is applicable or not.

ML: So an investor is not charged STT today, but may have to pay if it is charged later?

UKS: Yes, he could be asked to pay, because there are two different interpretations. The stamp duty implication is yet another issue. One view is that stamp duty could be charged because trading is on the secondary market platform. All this has led to a situation where nobody wants to push for exchange trading because there is no clarity on several issues.

ML: But when the exchange traded platform was created, should at least tax implications like STT and stamp duty have been clarified?

UKS: Yes, they should have been done, but it was not.

ML: We hear that the exit load of 1% that is still permitted may be an incentive to encourage investors to churn, is that a possibility?

UKS: Not really, because brokers are already negotiating 1.5% as an incentive from the AMC includes a trail commission, so that eliminates the incentive to an extent. It is very simple. Mutual funds today earn just 1%; if they pay more than that, they will make a loss. But they are promising 1.5% hoping that the money will stay with them. This means that the 1.5% will be paid, provided the money stays with them for a year or longer. If the money goes away earlier, the broker loses the trail commission and that is a disincentive of sorts.