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Commentary

SEBI: MF Commissions Back, Takeover Norms Changed and More…

SEBI has made some dramatic new announcements in its board meeting today. Details are sketchy (we only have a basic press release) so there is no way of knowing what this really means until the final, detailed changes are available.

Mutual Fund Commissions Reintroduced

Distributors can charge Rs. 100 per investment transaction, with an additional Rs. 50 for a first time investor. SIPs are considered one transaction, for which charges get distributed across 3-4 installments. No commissions on exit (thank goodness). No commissions on transactions less than Rs. 10,000.

This amounts to a 1% charge if you invest Rs. 10,000, and lesser as you invest more.

My take: isn’t too bad, but for people like me who invest only in debt funds nowadays (I manage my equity exposure myself) it sucks, so I’ll go direct instead. I can guarantee the mis-selling will start again with distributors forcing investors to put in Rs. 10,000 as a minimum. (I don’t grudge them that – if anything, this will help people put money in)

The Infrastructure Debt Scheme

There’s a new concept called Infrastructure Debt Funds (IDFs) which will invest in debt of infra companies. Investors need to put in Rs. 1 crore as a minimum, with incremental amounts of 10 lakh going forward. The fund will be locked in for five years, and listed on a stock exchange.

We need more details; it’s too early to make a judgement. But 1 crore ticket size is enough for me to say "not interested".

UID good for KYC, Broker Documentation Simplified

The Know Your Customer guidelines have been modified to include the Aadhar UID. Plus, there will be rationalization of KYC across SEBI Regulated Entities like Mutual Funds, Brokers, DPs and so on. The idea is that each KYC Registration Agency will do all the KYC documentation. Currently voluntary, it’s a good step forward in making sure the process is made less cumbersome.

Brokers had complained that the SEBI requirements were too much; too many signatures were required. SEBI has now decided that broker agreements will be modified to reduce the signatures to ONE (in most cases) and to have a single common Rights and Obligations document.

Other Mutual Fund Regulations

  • Funds must reveal point-to-point returns for a standard sum of Rs. 10,000 in advertisements.
  • AUM figures must also reveal geography wise statistics
  • Funds must reveal performance relative to the Nifty/Sensex or GoI securities apart from the fund’s benchmark (Good move. Easier to compare)
  • New due diligence process for large distributors (Details are absent)
  • No foreign operations: All MF operations need to be located inside India, within a year.
  • AMCs can offer advisory services to offshore and pension funds.
  • Annual reports to be sent by email where possible, and accounts once a year.

Takeover Norms: Big Changes

And if you’re looking to acquire a company, here’s your new list:

  • Instead of 15% the takeover norms kick in at 25%. A whole host of companies who currently own 14.95% must be feeling good.
  • Acquirers will not pay promoters non-compete fees Same price for all shareholders.
  • If there are multiple acquirers with multiple open offers (GE Shipping types?) one can buy out the other one’s shares after an offer without triggering further norms.
  • The target company’s board must now provide an opinion on each offer, so you know the board position.
  • Minimum offer size was 20% – it has been pushed up to 26%.

These are good changes, even if they increase the cost to potential acquirers. There is nothing about slump sales, so where they can, companies might choose to go down the slump sale route (that is, a company selling assets rather than the buyer having to make an open offer).

IPO and Disclosure Changes

The Prospectus and Application Form will now be abridged and contain only materially relevant disclosures. Generic information goes into a General Info Document (GID). Reduces the size of the application, and standardizes ASBA/Non-ASBA applciations.

Track record of profit for three of the last five years needs to be on both stand-alone and consolidated basis. (There is currently an exception for certain types of issues though, with QIPs; that probably continues to apply, but we need the final regulations)

Voting results for all voted proposals needs to be disclosed, including category of voters. So it’s no longer enough to say 65% of votes went through; they need to reveal how voting went within the promoters, retail and institutional shareholders also.

Quarterly results must include the previous quarter. But not consolidated results, or balance sheets, unfortunately – that regulation isn’t in.

Those companies doing only annual results must do the last quarter as well – a lot of companies skip the Q4 results because they produce the annual picture. This is a pain because now you have to go do the subtraction of first three quarters to know what happened in the fourth quarter. Well, SEBI’s plugged that.

******

Let’s see how the eventual changes come through.

  • Kamlesh says:

    Hi,
    Any idea what happens in case of say an SIP of 1,000 per month for 12 months?
    The per transaction amount is only 1,000 (Less than 10,000) but the total amount is 12,000. So is load of 100 chargeable or not?
    I think SEBI need to clarify this in black & white, else AMCs will charge the commission
    They are still charging people entry load for SIPs registered before entry load was banned

  • Sriknth says:

    Kamlesh,
    Per the press release, the max total commission that CAN be charged by your advisor/distributor is Rs. 100 on this entire SIP schedule. And it would have to be divided between the first 3-4 installments. So, you would pay Rs. 25 for the first four months and that’s it.
    Deepak,
    It’s a bit harsh to say that MF commissions are back with this move. One, it is an optional charge and two, it is not incurred if you go direct to the fund house or an online channel like FundsIndia. Unlike this, previously, the 2.25% load was mandatorily imposed on everyone who went non-direct. So, the investor would have plenty of options to avoid this charge. Very likely, AMCs cannot charge this commission willy nilly on any transaction unless there is explicit sanction in the application form.
    My guess is that the distributor/advisor community is not going to welcome this as well.
    Srikanth
    FundsIndia.com

    • Srikanth, you may be right, we’ll know after the regulations are modified. But the reason I say commissions are back is that the charge is reduced from the investor’s invested amount rather than a separate cheque. I’m sure online folks might also find a way to charge, eventually. We’ll know only when more detail is available….

  • The 100-150 thingy looks like a compromise. Either you bring it back to the earlier structure or let the distributors charge what they want to. The no load structure was the right move and I believe had led to few things 1. It forced the low skilled agents (who were here to just push products) to move out which is fine. 2. It suddenly made everyone realize that money cannot be made so easy. You have to earn it. Hence the importance of advice (whatever little it may be). I believe we all had just got in the groove to accept the new model and 3. It had started seeing a paradigm shift with more and more people opting for skill enhancements (like CFP, workshops etc.).
    This fee amount is such a tactical one that it forces the advisors to think tactically which is not good if one wants to see a paradigm shift.

  • Umesh says:

    Hi
    What about the case where customers buy MFs from their online Demat Account Broker, In this case charges or levied or not? If so from when these charges are imposed? Any date announcement?