Capital market regulator SEBI has put on hold the incentive provided to mutual funds for attracting inflows from smaller cities due to misuse and lack of uniformity on its applicability.
SEBI has directed mutual funds to arrive at a system-driven mechanism to check misuse of the incentive structure. The inconsistencies detected by SEBI include splitting of transactions by distributors to earn the incentive, churning of investments, and calculation of the incentive.
In a bid to attract investments from beyond the 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.
In a letter written to the Association of Mutual Funds in India, the regulator observed that there are certain deficiencies in implementation of charging an additional expense ratio of 0.30 per cent on new inflows from B-30 locations.
Subsequently, 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.
SEBI has pointed out few large investments from smaller cities were split below ₹2 lakh by distributors for availing the B-30 incentives. These investments have gone through without any check by mutual funds.
Also, it said 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.
Interestingly, mutual funds are charging B-30 incentives only on specific schemes rather than applying it across schemes. Some of the AMCs were also found not charging the incentive for a particular period. This practice is arbitrary and may lead to anti-competitive practices through cross-subsidising of the total expense ratio across schemes, said SEBI in its letter.
Also read: SEBI plans forensic audit of all mutual funds
On churning of investments, SEBI said that for FY2019-20, about 2,000 instances of churning were identified by its algorithms across 19 mutual funds involving an amount of ₹3.32 crore.
Mutual fund units from B-30 cities held for more than one year were redeemed and re-invested in the same schemes within five days of redemption with an intention to earn the incentive, it said.
It is desirable to keep the B-30 incentive structure in abeyance till AMCs put in place effective controls to address the concerns, said SEBI in its letter.
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