Market watchdog Securities and Exchange Board of India (SEBI) is working to stop the unethical practice of mutual fund houses lavishing distributors with expensive incentives such as cash payouts and expensive foreign junkets in return for peddling their products. Besides finding such rewards unethical, SEBI is also examining whether these incentives are being funded by investors’ money in the name of fund expenses, a top SEBI official told PTI. SEBI is apparently contemplating strong remedial measures to keep such practices in check.
Moneylife was among the first to have highlighted how fund companies were in competition to organise lavish junkets for their distributors, unable to incentivise distributors through entry loads, post the ban. As SEBI has rightly pointed out, the bigger question is who ultimately paid for these fancy trips and cash emoluments? Deducting such expenses from investors’ money was a common practice earlier, till the regulator came down heavily on AMCs and prevented the fund industry from making investors pay for such extravaganzas. So, AMCs were supposed to bear the expenses on their own, but suspicions still abound whether fund houses are draining the investors’ kitty through some subverted measures.
There have been several instances of such dole-outs, ranging from the subtle to the outrageously lavish. For those distributors who had raked in the maximum moolah, HDFC Mutual Fund had organised a trip to Italy for four days. Earlier, Reliance Mutual Fund took some of its distributors to Kashmir while HSBC took them to Kerala for a long weekend. According to distributors, Templeton was running a scheme wherein any distributor who achieves his target was entitled to a foreign trip.
Others have been offering cash incentives to distributors. As an ‘early bird incentive’ to proactive distributors, Religare offered cash emoluments for certain number of applications received before a certain date for its Religare Monthly Income Plan (MIP) Plus. The same product had another incentive structure in place depending on the volumes gathered by the distributor. For single applications up to Rs99,999, distributors were offered 0.75% as commission. For mobilising applications worth Rs1,00,000-Rs4,99,999, the commission offered was 1% and so forth.
However, as we have pointed out earlier, while extravagant incentivisation of distributors is unethical, offering innovative incentives is an unavoidable outcome of the current regime. Small incentives to distributors are necessary for the survival of the mutual fund industry. In the absence of such incentives, the industry may well come to a virtual standstill.
The CEO of a prominent fund advisory agreed, “Incentives should not be the whole and soul of selling a product. I think that SEBI’s concern is whether they (fund companies) are charging it to the scheme or not. I don’t think they are saying whether they should do it or not. If AMCs feel that they want to reward their agents, it is entirely at their discretion. As long as they are not charging it to the scheme, it is alright. SEBI’s intent is to draw a line between what is exorbitant and what is okay—which is perfect. There has to be some leeway for allowing AMCs to reward distributors.”— Moneylife Digital Team
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Market watchdog Securities and Exchange Board of India (SEBI) is working to stop the unethical practice of mutual fund houses lavishing distributors with expensive incentives such as cash payouts and expensive foreign junkets in return for peddling their products. Besides finding such rewards unethical, SEBI is also examining whether these incentives are being funded by investors’ money in the name of fund expenses, a top SEBI official told PTI. SEBI is apparently contemplating strong remedial measures to keep such practices in check.
