Sucheta Dalal :Gouging Strategy
Sucheta Dalal

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Gouging Strategy  

February 25, 2010

The Securities and Exchange Board of India’s (SEBI) no-load decision is turning into a bonanza for banks. They are devising new ways of gouging money out of retail investors. Axis Bank’s newly launched equity mutual fund was unique in many ways, say large investors. Determined to make a successful offering, it set stiff subscription targets for branch managers and asked them to push their customers to subscribe to the fund. But, unknown to most customers, the Bank was quietly debiting a hefty Rs225 per application as ‘bank charges’. Many customers did not even realise that the mutual fund is a separate entity and they weren’t making a direct application which entails no load.

When SEBI scrapped entry-loads, ostensibly to protect investors, it didn’t put in place any mechanism to ensure they weren’t cheated. Instead, it said that investors must learn to pay for investment advice; if they subscribed to funds through independent financial advisors (IFAs), they must write them a separate cheque. While IFAs are struggling to collect such fees, banks have no such problems. They quickly contacted customers, offered to consolidate their mutual fund investments and began to debit a charge for the service. They also got them to sign a simple form to transfer their assets from their original distributor to the bank, allowing them to earn trail commission without doing any hard work. Axis Bank has gone a step further by debiting a charge for applying to its mutual fund as well. 

Now that SEBI knows about Axis Bank’s charges, it needs to do one of two things. Either act quickly to put an end to this practice or admit that protecting investors or reducing the commissions paid by them was never its aim. It must also demonstrate how it plans to enforce its new rule—that distributors must disclose to investors what they are charging and how.

-- Sucheta Dalal