Sebi to weigh ban on payment of upfront commissions in mutual fund schemes

Sebi is expected to take a close look at a suggestion made by CEOs of leading fund houses to ban payment of upfront commission to distributors of mutual fund schemes. 

Battling redemptions, some MFs are luring distributors with high commission - a practice that breeds unfair competition and goes against the principle of the "no-entry load regime" that kicked off from April 2009.

The subject cropped up at a meeting between Sebi and heads of as many as 15 fund houses. Faced with a dismal market, MFs have also suggested that know-yourcustomer (KYC) norms be simplified and the period of exit load extended beyond a year to attract long-term investors.

"Sebi is keen to promote mutual funds as a 'savings' product as against an 'investment'. It will form a team to take up with the government to mandate retirement funds to invest in mutual funds.

This could be similar to 401K, the US retirement savings plan for employees," said a person present at the meeting. Such a move will push the growth of the mutual fund industry in a big way, said a Sebi source.

On the issue of upfront commission, an industry source said big fund houses, which introduced the practice, are now opposing it as they lose out to new funds. According to industry sources, fund houses are paying anywhere between 0.95% and 3% as upfront commission to distributors from their own pockets.

Between October and March, fund houses pay higher upfront commission to distributors to sell their tax-saver funds. During the two-hour meeting, the fund CEOs proposed that qualified foreign investors (QFIs) would be encouraged to put in money if KYC norms are streamlined. They also asked for introduction of share-class structure and valuation models of gold funds.

"Sebi wanted our views on key issues facing the industry. The regulator, it seems, is not happy about falling asset bases and investment outflows. We think Sebi will take quick decisions on KYC for QFIs, transaction charges and extension of exit load structure," said a CEO who attended the meeting.

According to sources, the regulator may take a decision not to make PAN (permanent account number) mandatory for QFIs who want to invest in Indian mutual funds. The regulator will look into rules laid down by overseas regulators for enabling individual foreign investors, particularly from countries with a strong regulatory framework, to put money in Indian MFs.

Offshore distributors, selling Indian MFs to QFI, may be entrusted with the responsibility of completing the KYC procedure. Industry representatives strongly backed the agenda on a possible extension of the exit load period from one year to two or three years.

This, they think, will arrest sudden outflows and distributor-induced fund portfolio churning. In order to make the marketing structure more flexible, the decision to charge a transaction fee should be left to the discretion of a distributor. At present, distributors recover a charge of Rs 150 from all investors, irrespective of the size of investment.

"This is not a good practice... If someone is investing Rs 1 lakh, the distributor should have the freedom not to levy a charge," said the head of another fund. The regulator may soon exempt independent financial advisors from disclosing their fees on the websites of fund houses, he felt.

Among other things, the regulator said it would also look into the valuation model of gold fund-of-funds which have gold prices as the benchmark but valued at closing net asset value (NAV). This, according to fund managers, is resulting in widen variance between performance of gold fund-of-funds and their NAVs.

The regulator, however, was also not comfortable with the idea of introducing differential share class in mutual funds. "Differential share class discriminates between investors and it cannot be implemented," the regulator told the MF executives.

source: ET

Government revamps small savings schemes

Investments in small savings instruments will now fetch investors more, with the Union government on Friday deciding to rationalize schemes in these and to align the rate of interest with government maturities. The rate of interest on the Public Provident Fund (PPF) is proposed to be increased to 8.6 per cent from the present eight per cent and the annual ceiling on investment under the scheme to be increased from Rs 70,000 to Rs 1 lakh. The decision take effect with effect from December 1. 

In line with deregulation of the rate of interest on banks’ savings deposits, the interest rate on post office savings accounts is top be be raised from the present 3.5 per cent to four per cent. The rates on time deposits, recurring deposits and National Savings Certificates (NSC) will also go up, with a new 10-year NSC offering as high as 8.7 per cent per annum. Kisan Vikas Patras are to be discontinued. 

“The rate of interest on small savings schemes will be aligned with G-sec rates of similar maturity, with a spread of 25 basis points (bps), with two exceptions. The spread on 10-year NSC will be 50 bps and on Senior Citizens Savings Scheme, 100 bps. The interest rates for every financial year will be notified before April 1,” the finance ministry said on Friday. 

The decisions were taken on the recommendation of a committee set up in July 2010 for a comprehensive review of the National Small Savings Fund (NSSF). The panel, headed by former Reserve Bank of India deputy governor Shyamala Gopinath, gave its report this June. 

The maturity period for Monthly Income Scheme (MIS) and NSC will be reduced from six years to five years. Interest on loans obtained from the PPF will be increased to two per cent per annum from the existing one per cent. Liquidity of the Post Office Time Deposit, with maturities of one year to five years, will be improved by allowing premature withdrawal at a rate of one per cent less than time deposits of comparable maturity. Payment of five per cent bonus on maturity of MIS will be discontinued. 

Payment of one per cent commission on PPF schemes and 0.5 per cent on the Senior Citizens Savings Scheme will be discontinued. Agency commission under all other schemes will be reduced from the existing one per cent to 0.5 per cent. 

The minimum share of states in net small savings collections in a year, for investment in state government securities, will be reduced from 80 per cent to 50 per cent. The remaining amount will be invested in central government securities or lent to other willing states or in securities issued by infrastructure companies/agencies wholly owned by the Centre. 

Yearly repayment of NSSF loans made by the Centre and the states are to be reinvested in central and state government securities in a 50:50 ratio. The period of repayment of NSSF loans by the Centre and states will be reduced to 10 years, with no moratorium. 

For the current financial year, the prevailing interest rate of 9.5 per cent will continue. From April 1, 2012, a revised interest rate will be notified. 

source: Business Standard

HAPPY DIWALI - 2011