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SEBI Makes Incentive Scheme Tougher

The actual notification recently announced changes has some new elements, making it tougher for AMCs to charge higher expenses

SEBI has released the actual notification that operationalises the recommendations that its board made in its August 16th meeting. The recommendations had covered a wide range of issues, which were expected to bring about sweeping changes in mutual funds' and distributors' operations.

The actual notification has by and large followed the recommendations albeit with one significant difference. The so-called incentive system for encouraging AMCs to expand their investor base to beyond the top-tier cities has been made tougher. Here are the highlights of the new rules:

  • Funds can charge an extra expense of 0.30 per cent if 30 per cent of their fresh inflows or 15 per cent of their average AUM, whichever is higher, comes from locations outside the top 15 cities.
  • Service tax can be charged from investors on investment and advisory fees, over and above the maximum permitted expenses. Service tax on any other service will have to be borne by the AMC.
  • Starting January 1, all funds shall have a direct plan which will be meant for investors who don't go through a distributor or other intermediary. This plan will have a lower expense ratio excluding distribution expenses and commissions. It will have a separate NAV. There will be no plans that are based on investment size (institutional, super institutional, retail etc.). In all existing funds, fresh investments will be accepted only in one normal plan and one direct plan.
  • A new class of distributors will be created which will include postal agents, retired government and semi-government officials with a service of at least 10 years, retired teachers with a service of at least 10 years, retired bank officers with a service of at least 10 years and such. They will be permitted to sell only a subset of funds that are specified as 'simple and performing mutual fund schemes'. These will include diversified funds, FMPs and index funds which have a three-year track record of beating their benchmark index.
  • Cash investments without quoting a PAN number will be permitted up to Rs 20,000 for each fund per financial year. However redemptions and dividend pay-outs will only be through a bank account.
  • AMCs shall release distributor-wise gross and net inflow data. This will enable a crackdown on excessive churning by distributors. Distributors whose gross-to-net ratio is significantly worse than industry averages will be subject to further scrutiny.

Except for the direct plan part, everything else is applicable from October 1.

The complete notification can be downloaded from www.sebi.gov.in/cms/sebi_data/attachdocs/1347547815927.pdf