India’s mutual fund industry was aghast when an asset management company recently showered exorbitant gifts on distributors who met its new fund offer (NFO) targets. The gifts, including Rs 5 lakh in cash, trips to Paris and Ukraine, iPhones and iPads, were handed out in disregard for the regulator’s rules on distributor commissions.
This was not an isolated incident, according to people aware of the matter. There have been several reports of kickbacks given to push schemes. Some insiders point to a popular modus operandi of AMC employees maxing out their entertainment expenses to buy Sodexo coupons that are handed over to distributors who reach their sales targets. Another way is to inflate payments to vendors, who would then issue cheques to distributors.
A shocked Securities and Exchange Board of India, the market regulator, is said to have held consultations with the Association of Mutual Funds in India (AMFI) and given the go-ahead for the formation of an ethics committee to enforce best practices for mutual funds.
The yet-to-be-formed committee will include representatives from AMFI and independent members, according to people aware of the matter. Its main agenda will be to enforce best practices and check the alleged abuse in the marketing of NFOs, the people said.
Sebi did not immediately respond to queries on the matter sent by Moneycontrol.
A senior MF veteran who did not want to be identified welcomed the move and said unfair practices would ultimately harm everyone in the ecosystem – big and small, existing and new. He added that a system of checks and balances would greatly augment Sebi’s efforts to protect investors from mis-selling.
Matter of trust
The committee will be empowered to issue advisories to erring AMCs and if it is still unable to rein them in, they will be reported to Sebi.
“The AMFI Code of Ethics sets the standards for AMCs in its dealings. The need for a new ethics committee to reorient them to make them relevant to changing regulatory and investor expectations is a step that will increase the trust of investors,” said Manoj Nagpal, MD and CEO of Outlook Asia Capital. “The Indian mutual fund industry has matured and has been a forerunner of evolving good sales practices, though some of the players have used some sharp sales practices, which could have been avoided.”
According to the AMFI Code of Ethics, members should not use any unethical practice to sell or market products and schemes.
“Considering that high levels of trust are the single largest factor for investors when they make decisions on investing in financial assets in our experience, we believe that a formalised process to ensure commitment to the highest code of ethical standards will go a long way in fuelling the enhanced exposure to financial assets and mutual funds,” said Vishal Dhawan, founder of Plan Ahead Wealth Advisors.
Some experts said the recent rise in regulatory approvals for new AMCs has spurred the aggression. In a scenario of shrinking margins, the race to accumulate assets is becoming fiercer.
However, Ananth Narayan, associate professor at SP Jain Institute of Management and Research and a member of Sebi’s Mutual Fund Advisory Committee, said the entry of new AMCs is a welcome and deeply needed move as it encourages healthy competition and checks cartelisation by larger entities.
On the recent aggressive marketing campaigns, Narayan admits that there are signs of excessiveness but said it is something best addressed by Sebi.
“Sebi should be handling such issues, which are squarely part of the regulator’s role,” Narayan said.
There were a record 140 NFOs that raised almost Rs 1 lakh crore in 2021 alone. Gross inflows via systematic investment plans hit a record high of Rs 11,517 crore in January.
According to AMFI data, individual assets are still primarily distributor-driven, where the scope for influence through kickbacks still exists in large part.
Sebi has been bringing in fresh regulations to increase transparency in mutual funds, already among the most regulated sectors. The latest step of forming the ethics committee is expected to help bridge the trust deficit with investors.