Mumbai: Making it easier for mutual fund investors to switch their distributors, market regulator Sebi on Friday said it is doing away with the practice of obtaining a no objection certificate (NOC) from existing distributors.
In a circular to all mutual funds and asset management companies (AMCs) the market regulator said, “You are advised to ensure compliance with the instruction of the investor informing his desire to change his distributor and or go direct, without compelling that investor to obtain an NOC from the existing distributor.”
Securities and Exchange Board of India (Sebi) said that MF industry body Association of Mutual Funds of India (AMFI) in September 2007 mandated that AMCs will act on instruction of the investors if they desire to change their distributor.
“It appears that this mandate is not being followed by the mutual fund industry...Some AMCs are insisting on the investor procuring a no objection certificate from the existing distributor for this switch over,” Sebi said.
The market regulator said it has come to notice that unwarranted hardship was being caused to investors in mutual fund schemes.
Mutual fund tracking firm ValueResearch Online CEO Dhirendra Kumar said, “The decision is pro-consumer in spirit and will drive distributors to provide satisfactory after-sales services to investors. As investors would have the choice to switch their existing distributor if they are unsatisfied with its performance.”
The NOC clause had been introduced in the first place to curb practice of mostly high net worth investors constantly changing distributors based on pass-backs received or promised. However in 2003, Sebi prescribed a code for distributors whereby pass-backs to investors were prohibited.
In 2007, AMFI withdrew the NOC clause and a working group recommended that when an investor indicated his desire to change distributor, the AMC should act on the instruction. It also deemed that once the distributor was changed, the trail commission thereafter for all business done by old distributor maybe payable to new distributor on a prospective basis.
An industry official said that though the Sebi move was in favour of investor, it may lead to some aggressive distributor luring customers with some cash incentives among other things.