Stocks

SEBI raps mutual funds for doing business with suspended distributors

Suresh P Iyengar Mumbai | Updated on September 25, 2019

Capital market regulator SEBI has hauled up mutual funds for getting new business and distributing the commission to suspended distributors breaching the Association of Mutual Funds (AMFI) best practice guidelines.

During the course of inspection of mutual funds, SEBI has taken an adverse view on instances where asset management companies had continued to accept business from distributors who were suspended by AMFI and failed to ensure that no commission is paid to such distributors during the period of suspension, said a source.

Following SEBI stricture, AMFI has come out with a standard process for treatment of various transactions through suspended distributors. It has directed AMCs not to distribute commission on business canvassed by suspended distributors even before the date of suspension. This will apply to both the main distributor and his sub-distributors.

All purchases and switch transaction received from investors through suspended distributors should be processed through direct plan option, and it should be continued perpetually with suitable intimation to investors that his distributor has been suspended for doing mutual fund business, said AMFI.

Mutual funds can consider the request of an investor's wish to switch back to regular through the same distributor after the suspension is revoked.

Mutual funds have been directed to reject all transaction entered by suspended brokers through the exchange platform since the money and units about such transactions move through the brokers’ pool account, it said.

To ensure that the commission withheld from permanently debarred brokers does not accrue to AMCs' profit, AMFI has provided investors with an option of switching their existing investments under regular to direct plan. However, investors have to take a hit on capital gain tax due to the switch from regular to direct plan.

To avoid capital gain tax, investors can continue in the regular plan by opting for another distributor of their choice. AMFI has directed mutual funds to implement the new guidelines before the end of next month.

Published on September 25, 2019

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