NOC not required to Change MF Distributor: SEBI

ET 10/8/09

The Securities and Exchange Board of India (Sebi) has directed mutual fund (MF) industry body Association of Mutual Funds in India (Amfi) to ensure that MF investors wanting to switch distributors are not asked to get a no-objection certificate (NOC) from his existing distributor. The regulator feels such a requirement tantamount to restrictive trade practice, an official familiar with the development told ET.

Amfi had written to distributors and asset management companies (AMCs) two years ago, asking them to withdraw the NOC clause. However, this practice is still rampant, say many distributors. Some of them approached the regulator last week, requesting that the requirement be scrapped, as it is against investor’s interest. When contacted Amfi chairman AP Kurien told ET that the mutual fund body was examining the issue.

Way back in 2002, while framing the guidelines for changing agent-distributors during the tenure of an investment, Amfi had introduced the NOC clause. All distributors have an Amfi registration number (ARN). An investor wanting to change his distributor has to notify the MF of the ARN code of the new distributor. This ensures that the trail commissions (the fee paid by a MF house to the distributor, linked to the period that an investor stays invested in the scheme) are paid to the new distributor.

But the MF will change the ARN code only after the investor obtains a no-objection certificate from the existing distributor. The NOC clause had been introduced to curb the rampant practice of mostly high net worth investors constantly changing distributors based on pass-backs received or promised. In 2003, Sebi prescribed a code of conduct of 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 distributors, 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 the old distributor maybe payable to new distributor (under new ARN code) on a prospective basis.

“Despite this circular, which is explicit, most AMCs insist on going back to the previous distributor for getting NOC,” said the head of a leading retail distributor. “It is easy to understand that there is no incentive for the first distributor to give NOC. In the current context of zero entry load, the passback will reduce drastically, as there is nothing to pass back. Our view is that this is a restrictive trade practice,” he said.

On his part, Abhay Aima, country head of private banking and third-party products at HDFC Bank, believes that a customer is well within his rights to change his/her distributor, if they so desire. On the NOC issue, he is of the view that “either it should be done completely or else distributors should give an NOC, when asked for. If they don’t, there should be a valid reason and it should be stated,” he told ET.

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