Foot-dragging on trail commission raises stink of commercial interests
January 11, 2010
The larger mutual funds that effectively control the Association of Mutual Funds in India (AMFI) and have been instrumental in endlessly postponing the decision on trail commission, are making a last-ditch effort to preserve the status quo, presumably because large commercial interests are involved.
“For some reason unknown to us, AMFI has blocked all efforts to implement a clear-cut decision to discontinue paying trail commision to old distributors, after an investor has walked out. It is still not willing to give up this position easily because it is acting as a front for some large mutual funds,” a chief executive officer (CEO) of an asset management company (AMC) alleged.
Mutual funds ought to be gearing up to implement the decision to pay trail commission to the new distributor following the Securities and Exchange Board of India’s (SEBI) firm missive to AMFI on 30th December. But amazingly, some funds want to ensure that the decision is postponed again. This includes ensuring inspired articles in the media that raises the bizarre notion that distributors may use the cash from trail commisision to wean away investors!
Reacting to this, another CEO of an AMC told Moneylife, “Some funds themselves seem to be showing the way to illegal practices. In any case, all decisions will have some loopholes. What about the principle that the old distributor cannot continue to receive trail commission once he has lost an investor?”
It may be recalled that the decision that trail commission should go to the new distributor was taken by AMFI way back in September 2007. But this never got implemented because of the vested interests that contol AMFI. As a result, AMFI dragged its feet for over two years and has tried very hard not to implement the decision. “I wonder who are the beneficiaries of the status quo,” asks a CEO of another AMC.
As first reported by Moneylife, on 30th December, market watchdog SEBI came down heavily on AMFI asking it to implement a clear-cut decision taken more than two years ago. SEBI sent a stern email to AMFI ordering it to implement its own circular of 5 September 2007.
Interestingly, SEBI was forced to slam AMFI into following this course since the association had come up with another cunning manoeuvre to postpone the decision of implementing the trail commission. On 22nd December, AMFI had circulated a fresh vote by email to the chiefs of AMCs on the trail commission issue, first reported by Moneylife(see here).
In fact, as we had pointed out, the idea of a fresh vote by email was circulated barely three hours after SEBI had already asked AMFI to implement the September 2007 circular. This was a sneaky but audacious move to bypass the SEBI directive. Clearly, for an association to do this, in definace of the regulator’s directive, is outrageous.
The 5 September 2007 AMFI circular had categorically said: “On receipt of letter from the investor advising AMCs about his desire to change his distributor, AMCs will act on the instruction. Once the distributor (ARN code) has been changed, the trail commission thereafter for all business done by the old distributor (under old ARN code) may be payable to new distributor (under new ARN code) on a prospective basis subject to terms and conditions, if any, entered into by AMCs with such distributor.”
However, instead of implenting the directive, after waiting for two years, AMFI decided to vote on it again by a show of hands. Despite a majority of 17 funds voting against AMFI, the decision was not implemented.
In fact, a few months back, AMFI formed a committee with representatives from ICICI Prudential and Birla Sun Life to decide on the trail commission issue. The committee argued that that the original trail commission should be there for life even if the client has shifted. When SEBI pushed AMFI to implement the decision, it went in for a fresh vote by email within three hours of the SEBI directive.
Moneylife asked a bunch of questions to the board members of AMFI and and AP Kurian, chairman of AMFI, as to why did the entity go for a vote by show of hands a few months ago on the issue instead of implementing it. We also asked, when a majority of 17 funds voted in a clear-cut manner, why was the decision not implemented and why was another vote by email sought to be carried out on 22nd December? Neither AMFI nor the members who control it had any answers for us, leading to suspicions that there are serious entrenched interests in the fund industry. Since AMFI has deliberately dragged its feet for over two years and has tried to avoid implementing an old decision, there are suspicions of clear beneficiaries of the status quo. AMFI has also not so far explained its motivation in attempting to bypass SEBI’s clear directive of 22nd December, within hours of getting that directive.