Online distributors—or more commonly known as channel partners—of the Rs7.13 trillion Indian mutual fund (MF) industry have slowly started to receive their pending commission that was stuck with MFs for over a year. A large chunk of their commission (up to about Rs100 crore as per the industry’s estimates; upfront commission for getting fresh inflows plus trail commission or loyalty bonus for existing investors that have stayed invested so far) has been stuck with various fund houses thanks to a directive by the capital market regulator, the Securities and Exchange Board of India (Sebi). Not just pure online distributors, but even some of the foreign banks have seen their commissions blocked by asset management companies (AMCs). These banks upload their client’s transactions electronically (their clients fill in a bank-specific transaction slip) and are therefore classified as channel partners.
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In a circular issued by Sebi in December 2009, it had mandated that channel partners must provide a copy of every investor’s documents such as know-your-client (KYC), power of attorney to all the MFs for whom they procure investments. The circular had also instructed fund houses to withhold agent commission till the time agents submit all such relevant documents. As per industry sources, while about Rs40-45 crore is due to Hong Kong and Shanghai Banking Corp. (HSBC) and Citibank NA each, ICICI Direct still has to get about Rs15-20 crore since April 2010. “Almost 80-85% of the records have already been updated at registrar and transfer (R&T) agent’s end. We expect the full process to be over very soon, after which MFs will release the pending commission to channel partners”, says V. Ramesh, deputy chief executive officer, Association of Mutual Funds of India (Amfi)— MF industry’s trade body. Though banks such as HSBC and Citibank require their customers to sign a bank-specific form, they upload these transactions electronically. Industry sources claim that a majority of their transactions get submitted this way. “Majority of our commission has been stuck with AMCs for a long time. We won’t even get interest for this amount”, says a person from one of these banks who did not want to be named.
In 2008, when Sebi introduced KYC norms for MF investments, it put the onus on agents to ensure that the investor’s KYC was duly completed. Agents were also mandated to ensure that they possess all the relevant supporting documents only against which that investor would be allowed to invest in a MF scheme. KYC is done to prevent money laundering as key documents and details—such as bank details, permanent account number, residence proof—are captured by way of KYC process to ensure that the investor is genuine and s/he can be traced back.
As such, a copy of these documents were meant to be with the fund houses too but there was a tacit agreement between them and channel partners that these documents would remain with the latter unless the fund house wishes to see a copy here or there. It came to Sebi’s notice that some of these documents were missing and that fund houses had no way to trace them as the channel partners were meant to have these documents; some industry people say some of these documents were missing. It was then that Sebi decided to crack the whip; it mandated that fund houses would stop paying the commission to channel partners till all the supporting KYC documents are in place.
Sebi’s diktat couldn’t have come at a worse time. Barely four months after entry loads were abolished, Sebi put a stop to all sort of commissions that were due to channel partners, “for business that channel partners were continuously bringing in”, says the head of one of India’s largest online MF portals who too did not want to be named. MF trustees were given the responsibility to check whether the records—and accompanying documentation—are adequately updated. Amfi appointed two auditors—NM Raiji and Co. and Chitale and Co. Chartered Accountants—to check R&T’s records. Channel partners were asked to send updated records to the R&Ts keeping in mind Sebi’s direction to fund houses to assume responsibility of documentation. At present, there are four R&Ts, Computer Age Management Services Pvt. Ltd, Karvy Computershare, Franklin Templeton Trustee Services Ltd and Deutsche Investor Services Pvt. Ltd.
Amfi conducted an audit of the R&T’s records in October 2010 and observed that a chunk of records have been updated. MF trustees, then, unanimously decided to release commission between December 2009 and March 2010. Says Vishal Kapoor, general manager, wealth management, Standard Chartered Bank: “We are very close to seeing a 100% completion in record maintenance. Once this is done, MFs will release the pending commissions.” The head of a private banking unit of one of the channel partners, who did not want to be named as the issue involves the regulator, said that the main roadblock in this process has been of “dormant accounts” or MF investments made by an investor years back and the investor has changed his address and therefore cannot be traced. Kapoor adds that in a worst case scenario where such investors cannot be traced, “perhaps the industry can come to consensus to not allow any future transactions till KYC is complete”. Folios with marginal units (say an investor withdrew 1,000 units and only 11 units are left in this account) have proved to be another roadblock.
Despite pain, MFs observed that Sebi’s rule was a blessing in disguise. “Distributors are regulated throughout the world. In India, they aren’t. Hence, such client records weren’t taken as seriously as they should have been”, said the head of marketing of a fund house who did not want to be named as a big chunk of his fund’s business comes from these channel partners. Adds Ramesh: “Any regulation would have a momentary impact, especially those that require digging out past information. But such an action always helps in reorganizing things better.”
It remains to be seen how soon the pending documents are now arranged for.
PDF by Yogesh Kumar/Mint