SEBI set to tweak MF norms to introduce variable entry load

ET 16/6/09

MUMBAI: The capital market regulator, the Securities and Exchange Board of India (SEBI) will shortly revise its rules to introduce variable entry loads for mutual funds

(MFs) and make disclosure of commissions mandatory for fund houses.
The SEBI board, which meets on Thursday, is also slated to discuss the introduction of a new entity called ‘anchor investor’ and minimum disclosures on rights issues.The proposed changes are aimed at bringing about greater transparency on commission payments made by an investor to the distributor.

“As far as investors are concerned, they can exercise discretion on how much to pay for the advice being rendered to them…this would call for smart negotiation on their part,” an official familiar with the details said.

SEBI had proposed two options in its recent discussion paper. First, a separate section within the application form itself wherein the investor would indicate the commission payable to the distributor. The fund house would deduct the same from the amount received from the investor and pay the distributor.

The second proposal suggested that an investor issued two cheques — one for investment and the other towards the commission agreed to be paid. Under this option, the investor would be directly paying the distributor. However, market players say that cutting two cheques would be extremely impractical.

Typically, distributors perform two functions. They act as agents of fund houses, helping them sell their schemes, for which the asset management company (AMC) compensates them. They also act as advisors, helping investors choose schemes and catering to their needs, for which a fixed charge (i.e. entry load) is deducted from the investment amount by the fund house and paid to them.

Entry load is a charge levied by the MF, when an investor steps in. Equity schemes currently attract around 2.25% of the invested amount as entry load to meet MFs’ marketing costs, distribution commissions, etc.

The practice of deducting a certain percentage from the investment amount had given rise to criticism that investors had no control over what they paid for the advice rendered to them. This had prompted SEBI to undertake a review of MFs’ load structure. Early last year, SEBI mandated a zero-entry load for investors who applied directly to MF schemes. The regulator is also likely to make it mandatory for distributors to disclose the commissions received for various schemes, as commissions vary from scheme to scheme and one fund house to another.

Recently, the Primary Market Advisory Committee had recommended that the anchor investor be allotted 25% of the shares out of the 60% reserved for institutional investors in a public offer.

This anchor investor can be defined as “a strategic investor with a longer-term view compared with others”. According to officials familiar with the proposals, merchant bankers will be allowed to bid for anchor investors a day ahead of the issue opening. This will be a closed bidding process and the discovered price will be disclosed later to the public. In case the IPO price is higher, they will be asked to pay the final price discovered through the book building process. On rights issues, SEBI may do away with disclosures related to promoter holding, capital structure and financial details.

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