After scathing remarks by the market regulator SEBI last week, the Association of Mutual Funds in India is all set to crack down on distributors who have churned investors’ investments and split bulk investments from small cities to below ₹2 lakh to earn extra commission.

In a bid to attract investments from beyond top 30 cities and promote financial inclusion, SEBI had allowed mutual funds to charge an additional expense of 0.30 per cent for retail inflows (up to ₹2 lakh) from smaller cities and this was suspended last week after misuse of the incentives.

In a letter written to the AMFI late last month, SEBI had pointed out that few large investments from smaller cities were split by distributors to make the investment amount below ₹2 lakh for availing the B-30 incentives. These investments have gone through without any check by mutual funds.

The industry body AMFI plans to take strict action including suspension of few distributors who are not able to give proper reasons for splitting investments.

In a communication, AMFI said “all MFDs (mutual fund distributors) are strictly advised to ensure that they do not collude or undertake any malpractices such as splitting of applications, churning of mutual fund investments or any other activities to circumvent the guidelines to earn higher transaction charges and/or to earn higher B-30 incentive commissions.

Warning issued

Any violation in this regard shall be viewed seriously, and shall be liable for strict disciplinary action against the errant MFD, which may include suspension of ARN or permanent debarment and cancellation of ARN, it said.

AMFI also wants mutual funds to ascertain the reason for splitting and churning of investments by distributors before taking action.

SEBI has found multiple transactions of the same investor were carried out on the same day in the same scheme by the same distributor instead of executing it in a single transaction for earning the incentive.

A few distributors have said that investors preferred to split investments as they do not want to rattle their entire investment in time of emergency and wanted distinction between long and short-term funds, said a top MF executive.

Though splitting of investment is not an offence, he added that indulging in such an activity for extra incentive is a criminal offence. A repeat of such activity often leads to suspicion and it will be dealt with strictly, he said.  

AMFI has directed its members to strengthen the process and put in place a system to detect misuse of B-30 incentive and confirm compliance with it by March 24.

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