Mumbai: Securities and Exchange Board of India (Sebi) chairman C.B. Bhave came down heavily on the mutual fund (MF) industry’s focus on short-term gains for poor returns to investors as he sought to defend the capital market regulator against complaints that new rules were hurting the industry.
In his first public appearance after an ordinance on the regulation of unit-linked insurance plans (Ulips) put an end to the spat between Sebi and the Insurance Regulatory and Development Authority, Bhave blamed the inability of the 3,000 MF schemes to match investor needs, and not regulation, for the industry’s state.
Combative mood: Sebi chairman C.B. Bhave. Ashesh Shah / Mint
He said 60% MF schemes gave sub-optimal returns.
“The investor is intelligent,” Bhave said at an MF summit in Mumbai on Wednesday, organized by the Confederation of Indian Industry. “If we have not been able to convince them, even with thousands of mutual fund schemes, there is some problem with the products. We are not getting to the heart of the matter.”
In August 2008, Sebi abolished entry loads, or fees charged to investors upfront for any investment in MFs, triggering a net outflow of Rs5,000 crore in equity funds and loss of at least 400,000 folios in the Rs8 trillion industry.
Fund managers and officials of the industry lobby, Association of Mutual Funds in India (Amfi), have been openly criticizing the regulator for the “abrupt and disruptive actions” without giving time for the industry to prepare for changes.
Sebi’s failed attempt to rein in Ulips has worsened the mood of the industry. Sebi wanted a say in the regulation of Ulips, a hybrid insurance product that has a substantial investment component. But Ulips continue to be solely regulated by the insurance regulator, following the ordinance.
Since agents selling Ulips enjoy hefty commissions, fund managers fear the hybrid product will further erode the popularity of MFs, since there is no incentive for them on such sales.
Bhave, however, was in a combative mood, not pulling any punches.
“You need to question what is the rationale for the industry,” he said. The two important selling points for attracting investors are that they will benefit from professional fund management and cost of such management would be minimal because you play the role of an aggregator.”
According to Bhave, most MF products are not real financial innovation, but just a result of skewed short-term incentives to both distributors and fund managers. These anomalies were addressed in the entry load ban, he explained.
“There is a perception that we have banned payment to distributors by banning entry load. The discussion paper, which was open for public feedback for a full six months, had clearly said distributors had a twin role of being an agent of the manufacturer as well as an adviser (to investors). All we have said is that investors have the right to decide how much they pay for the advisory services offered by the agents,” Bhave said.
Industry officials, however, alleged that the momentum created in the last 15 years was being killed by the changes, which were implemented too quickly.
Ashu Suyash, country head of Fidelity Investments India Ltd, said the industry was given just four weeks to adjust to the new rules. In comparison, countries such as the UK had followed a more gradual timetable. “They are moving to the zero-load structure over a period of three years,” he said.
U.K. Sinha, chairman and managing director of UTI Asset Management Co. Ltd, said that in addition to the gradual and calibrated approach, those regulators have been able to maintain a level-playing field among MFs, insurance and pension products.
While looking to expand beyond the metros as part of financial-inclusion initiatives, MFs should be mindful of who their target customers will be, Bhave said.
According to him, the term financial inclusion assumes a different connotation in the capital market. “In trying to expand the reach, one should not sell capital market products to a person whose lifetime savings is Rs50,000. Tomorrow, if the market falls and he comes to you for the money, you will say I am a pass-through vehicle, I can only give you what the NAV (net asset value) is. He cannot take that kind of risk.”
UTI’s Sinha, in his speech, referred to the industry as a shock absorber. Bhave countered, saying it was the industry’s practices that led to the shocks in the first place. “It is only because of the wrong practice of taking short-term money. If this is your worry, you have to find a way, either by yourselves or you have to come up to Sebi,” he said.
Amfi chief executive H.N. Sinor described the state of the industry as “comical”. He said the “manufacturers” are unable to manufacture trust among investors. “Sellers are not selling and buyers are not buying. Service providers are trying hard to keep up the level of services. Industry has lost four lakh folios in a couple of months and even the new fund offers are receiving lukewarm response,” he said.
Ulips will come back with a “double vengeance” and the industry is in for “rough weather” in the days to come, Sinor said. “Commission payouts are important for stickiness of the customers, and norms governing these commissions may need a fresh review now.”