We need to review entry load ban decision again: Amfi CEO HN Sinor

Shailesh Menon, ET Bureau Apr 25, 2012, 04.02AM IST

Capital market regulator Sebi and industry players will have to review some of its past decisions, including the ban on entry load, if they want mutual funds to have larger retail participation and deeper geographical reach, said HN Sinor, chief executive of the Association of Mutual Funds in India or Amfi. In an interview with ET, Sinor said Fidelity Mutual Fund's move to exit India and the recent exit of chief executives of four asset management companies are worrisome. Edited excerpts:

Not many are hopeful about the health of the Indian mutual fund industry. What's your view?

Unlike banks, the AMC business has a fragmented structure - it's like a three-legged stool. You have manufacturers on one side, distributors on the second and transfer agents on the third. And on top of this three-legged stool sits the investor. You've to create a 'win-win' situation for all the three legs of the stool. There has to be something for everybody in this business. If you need mutual funds to reach out to larger geographies, we will have to review the cost structure. And if there's some push there, perhaps, we may again see some good days.

By cost structure, do you mean entry load?

One mistake Sebi made was to implement the entry load ban in a cut-and-dry manner. They should have implemented it in a slow, phased manner. The decision to ban the entry load was seen very positively by many; many said it was an investor- friendly move... many also complained about it. In those days Sebi and Amfi felt, the Indian enterprise was very smart and would find a way to come around it.

But today, after two years, I realise, we've not been able to adjust our business model to the entry load ban. We need to dispassionately review the (entry load ban) decision once again. I am not taking any sides here... I am just taking a view from the top. We've to expand this industry, and for doing that if we have to bite the bullet, we should bite the bullet.

Are you suggesting a roll-back of entry load?

We should at least initiate a discussion on that. Saying an emphatic 'no' to this, to my mind, is not a solution today. Any business settles down after 6-8 months of policy changes, but it has not happened here.

Distributors are not seeing it worthwhile to sell mutual funds. Manufacturers are finding it difficult to expand or penetrate beyond 20 cities. It does not make a business case for manufacturers to go and sell the product in Timbuktu to collect just Rs 5 - 10 lakh of investments. In such cases their costs would be very high. Why will manufacturers go to far-flung towns when they can garner a much larger amount at a lower cost from Ghatkopar? It doesn't make sense for fund houses to go beyond the top-20 cities within the current expense ratio.

But Sebi officials say distributors are still making money selling funds.

If you look at the commission pay-outs of distributors, there are just about 200 distributors who draw a gross revenue of over Rs 1 crore. Of the 200, the top-20 are institutions and banks. At an individual level, there are only 185 IFAs whose gross revenue exceeds Rs 1 crore. Of the 16,000-odd active distributors, only 185 are earning a reasonable sum of money selling funds. What will others do? They will resort to tricks like deliberate churning of portfolios or mis-selling of funds. It's this environment which is pushing them to do something which is not right. Globally, there's a cost attached to this business and it is borne by investors.

Are you talking to the regulator for a roll-back?

Sebi has been very receptive to any kind of ideas. But then it's difficult for any regulator to undo something. We need to kick-off the debate once again. We've to discuss it in a dispassionate manner.

How are mutual funds sold in other countries?

Frontloading in Singapore is about 3%; their expense ratio works out to about 2.5%. Investors there pay in excess of 5% to asset managers. Asset management business in India is the cheapest in the world. Cost to investors is lower than anywhere else in the world. We need to look at this aspect with a little open mind. My counterparts in other countries, who have plans to ban frontloading, are closely watching the impact of entry load ban in India. They're not very confident after seeing the India experience. UK came out with a consultative paper in 2009, but now I hear they have postponed their plans.

Fidelity's exit too has not gone well with the fund management industry.

Confidence level is very low in the industry. After Fidelity's decision to move out and the quick exit of four CEOs, even we're a little worried. If officials desert the industry like this, we have a big problem at hand.