The Hindu Business Line : Mutual fund pass-backs: Everyone gets a cut!

"PASS-BACKS," the bad word in the mutual fund industry, has reared its head again, this time with distributors accusing asset management companies (AMCs) of initiating the practice.

Distributors claim that while most of them are not in favour of squeezing their bottomline any further, by passing back some of their commission to investors as an incentive, AMCs often promise this incentive to the clients and force them (distributors) to share their earnings.

"In many cases, especially with institutional and large investors, the sales team of the AMC is more than likely to point to us and say `we will ensure that they give you some incentive, if you give us the business'," said Mr Sanjiv Roy, Chief Executive Officer, Birla Sun Life Distribution Services.

Other distributors feel that even in cases where the AMC does not actively offer the pass-back, they do encourage the practice by turning a blind eye to it.

"Earlier, institutional investors in Delhi and Hyderabad were the ones demanding pass-backs the most. Now the practice has spread even to `professional' cities such as Mumbai. Distributors are continuously getting squeezed out of their commission because AMCs are unduly focussed on assets under management," said the sales head of a distribution house that primarily caters to institutional investors.

Pass-backs, the practice of sharing a part of the distributors' commission with the investor, have been made illegal under the code of conduct issued to distributors. The Association of Mutual Funds in India (AMFI) is aware that the code of conduct is being flouted.

"There is nothing we can do until someone gives us a written complaint saying that distributors are offering pass-backs or that AMCs are encouraging the practice," said Mr A.P. Kurien, Chairman, AMFI.

Distributors also say that in cases where they refuse to part with their commissions, AMCs permit institutional investors to avail themselves of a direct broker code and "earn" the commission.

"Corporate investors open phantom finance companies and invest through these. Even though the guidelines mention that they have to have 200 employees etc., these are not audited," said a distributor.

AMC CEOs admit that they are aware of the practice of initiating pass-backs. "This suits everybody. The client is happy, we are happy, the distributor is also happy — he keeps some percentage of the commission," said the head of sales of an AMC.

The AMFI standing committee, headed by Mr Krishnamurthy Vijayan, has put in place a sub-committee of compliance officers to conduct "mystery shopping" exercises.

"Like any regulation, it is taking time to be fully implemented. The instances (of pass-backs) should diminish with time," he said. Until then, the whodunit would continue.

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