Mumbai: Sebi’s decision to abolish entry loads in mutual fund (MF) schemes can have at least three unintended outcomes. While there could be huge slippages of service tax paid by the fund industry, it could also lead to proliferation of bogus independent financial advisors (IFAs) and misselling of MF schemes, industry officials said. They also believe that in the long run, the decision could lead to cartelisation in the MF industry with just a handful of large funds houses and distributors ruling the market.
Currently, when an investor opts for a scheme, the fund house directly deducts service tax from the commission it pays to the distributor or IFA. In turn, the fund house deposits this with the government. But very soon, fund houses will not have anything to do with the service tax over distribution commission, since under the new structure, investors will pay the commission directly to the distributor/IFA. So the onus of paying service tax will now be on the distributor/IFA.
Industry officials say that under the changed system, the onus will be on the advisor to pay the service tax on advisory commission. “Chances are there will be substantial leakage of revenue for government through under-reporting or non-reporting of advisory commission,’’ said a top fund industry official at an AMC.
Industry estimates that in the last financial year total service tax paid by the fund houses was about Rs 160 crore. The year before, when markets were doing better, it was much higher, at over Rs 250 crore. “A large chunk of this could remain with advisors now. And if we take a modest 20% annual growth of the MF industry, the cumulative loss to the exchequer could be substantial,’’ the official pointed out.
Another fallout of the changed fee structure could be proliferation of advisors without proper training and registration in the fund industry. “At present we (AMCs) pay commission only to the AMFI registered distributors and IFAs. After the change, anyone can become an advisor and charge the investor for advice,’’ a fund official said. “There is high chance that some bogus advisors will join the industry who will not serve the cause of common investors.’’
Another fallout could be squeezing out of AMCs and distributors with limited financial resources and growth of larger players. In the changed scenario of no entry load, AMCs will have lesser funds at their disposal for marketing and business expansion. Likewise only distributors with deep pockets can spend money to expand their business.
“In such a situation AMCs and distributors with deep pockets will survive while the smaller ones will exit the business,’’ a top official at a financial services company said. “The incentive to serve small investors is just gone,’’ a fund manager said.
The fund industry suggests a way to get out of this situation: Increase annual expense fees that AMCs charge on investors, which at present, is graded. For managing assets of up to Rs 100 crore, AMCs can charge up to 2.5% of the assets. This comes down to 2.25% for the next Rs 300 crore of AUM and 2% for the next Rs 300 crore. And for AUM of over Rs 700 crore, a flat 1.75% of the assets is charged annually. “Make this expense ratio uniform at 2.5% and we will take care of all the costs,’’ said a director at a large AMC.