The Hindu Business Line : MF distributors' new code: Still more can be done

Certain sections within distribution circles follow practices that are sometimes in their own interest and not necessarily in the interest of their clients

Not every one associated with mutual funds would like the Securities and Exchange Board of India's recent suggestion that it would consider regulating the behaviour of distributors.

Certain influential sections, beginning with the distributor community, would loathe it to the hilt. They would have a little choice in the matter, though. After all, the suggestion was made, quite emphatically at a meeting organised by a leading chamber of commerce, by none other than the SEBI chief.

This is not the first time when the market regulator has voiced concern over the manner in which some distributors tend to behave. Its views on the subject have been made clear time and again - certain sections within distribution circles follow practices that are sometimes in their own interest and not necessarily in the interest of their clients.

So, if this is a concern that has been already expressed more than once, why are we still writing about it? The answer is obvious: some of the practices we have referred to earlier continue unchallenged.

Before we go any further, let us quickly turn to what Mr M Damodaran, Chairman of SEBI, said the other day. The market watchdog, he said, is aware that distributors are not within the ambit of any regulation. They are free to sell whatever they wish to unsuspecting clients - products that may barely meet their actual requirement. (In the past we have had many cases of investors accustomed only to fixed deposits being proffered high-risk sectoral funds).

Clearly, the attempt in many cases is not to satisfy investors' need fully but to fill their own pockets by way of commissions. The situation worsens in the backdrop of the many competing NFOs that fund houses tend to launch. As all of us know, many of these NFOs have raised huge amounts of money. In fact, Mr Damodaran himself underlined this trend at the chamber of commerce meeting.

Talking of NFOs, it may be mentioned here that there are not too many proposed equity offerings at the moment. It seems the flow on the equity side has slowed down somewhat. On the debt side, however, a few interesting products are waiting to be introduced, say fund circles which are close to the latest development.

New norms

Coming back to our original issue, as things stand, it is possible for an entity to sell mutual funds once the barrier set up by AMFI, the body established by asset management companies, is cleared. Now, this organisation has already stated that it has closely examined the issues relating to payment of commissions. It has also said fund houses should not empanel any entity as its distributor without a valid registration number. Further, certain minimum criteria have been set for empanelment of both individual and corporate distributors.

The question is, do such standards completely eliminate practices that cannot be strictly called ethical? The answer is for you to deduce. We only wish to point out that investors would like to see the regulator take a clear stand on the matter. It has tackled a few things well in the recent past. Witness its initiative on rationalisation of issue expenses and dividend distribution systems. This time too the ball is in its court.

Related Stories:
MF distributors face regulation

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