Fund houses in a tizzy over transaction fee

Difficult to ascertain whether a person is a first-time investor or has invested in a mutual fund earlier

Almost a month after the capital market regulator, the Securities and Exchange Board of India (Sebi), allowed mutual fund (MF) distributors to charge a transaction fee from investors, the Indian MF industry faces a dilemma: How to ascertain whether a person is a first-time investor or has been with some MF scheme in the past.

As per a circular issued by Sebi on 22 August, MF distributors will now be able to charge Rs. 100 from existing investors (those that have already invested in some MF scheme earlier) and Rs. 150 from first-time MF investors. Both the charges kick in if the investment is Rs. 10,000 or above per subscription.

Joining the dots

In a meeting between all the registrar and transfer agents (RTAs) held over the phone early Thursday morning, they contemplated on three key issues.

According to data provided by Value Research , an MF tracking firm, there are eight RTAs apart from three fund houses that manage their RTA activities in-house through their sister companies.

Primarily, to make the distributor charge a reality, RTAs will need to share their data among one another. Industry sources indicate that they will mostly engage an outside firm with whom the RTAs would share their data. This firm will then run a check against all the RTAs to ascertain whether the investor has bought an MF scheme before or not. “The firm needs to run a check through the investor’s permanent account number (PAN) across data available with all RTAs,” said an MF’s chief executive officer, who refused to comment saying the issue is still being debated.

However, the confusion arises over investments made before July 2007 when PAN wasn’t compulsory for all. PAN was made compulsory for all MF investments of Rs. 50,000 and above, effective December 2004, and subsequently for all investments, effective July 2007. “So we still have a few investors who had invested in MFs prior to 2007 without submitting their PAN details,” adds a senior official of one of the leading RTAs, on condition of anonymity. He cannot be quoted as he is not the official spokesperson of the firm.

During the Thursday meeting among RTAs, they tentatively decided to refer to other investor details such as email addresses, postal addresses and bank mandates with those provided by investors who would invest henceforth to determine whether the said investor is already present in the database.

“This could also be tricky as bank mandates were also not compulsory once upon a time. Further, the investor would have changed his or her address, so there the problem arises as to how to map the details provided afresh vis-a-vis what’s already there in the system,” said the RTA official we spoke to.

Already the quantum of the distributor charge is a matter of heartburn among many distributors, who claim that the charge is too low. In a recent survey conducted across 755 distributors by Cafe Mutual, a Mumbai-based independent website that disseminate news and information on the Indian MF industry, 73.68% of distributors felt that these transaction charges will not impact the independent financial advisors’ decision to push MFs more aggressively than before.

What the MF industry appears to have decided is to maintain the no-transaction charge as status quo. Distributors will be allowed to “opt out” of accepting transaction charge, an option given by Sebi. Those distributors who wish to subscribe to the transaction charge will need to write to the Association of Mutual Funds in India (Amfi), the MF industry body, separately and Amfi will then pass on this list to all fund houses.

A uniform charge

Coming back to the quandary, another alternative that some fund houses are contemplating is to do away with the Rs. 150 charge for fresh investors and charge just Rs. 100 across investors. “This will eliminate the confusion of having to find out whether the investor has invested for the first time or has invested before,” says another chief executive of a government-owned fund house we spoke to. He too did not want to be quoted as he claims the matter is controversial.

However, not many feel this is a viable option. Says V. Ramesh, deputy chief executive officer, Amfi: “I don’t think eliminating the Rs. 150 charge is an option. If Sebi has come up with Rs. 100 and Rs. 150 charge structure, it will need to be followed.”

The RTA official also said that since Sebi has made this mandatory, the onus is on the RTAs and the industry to find out a solution.

Source: http://www.livemint.com/2011/09/22222024/Fund-houses-in-a-tizzy-over-tr.html?h=B