15th November 2011

In its Aug 22nd circular on mutual funds (http://www.sebi.gov.in/cms/sebi_data/attachdocs/1314009686727.pdf), SEBI had directed all AMCs to publish on their websites details of all commissions paid to all "large" distributors (large are defined as ARN holders who either have a non-institutional AuM in excess of Rs. 100 crores or earn more than Rs. 1 crore in commission or have more than 20 branches). AMFI has been directed to consolidate all these disclosures and publish total commissions paid on its website.

Among the first to comply with this regulation was HDFC MF, which has put up details on its website. AMFI has created a provision on its website, but is presumably waiting to receive data from all AMCs. I went through the data put up on HDFC MF'a website and must admit, that I was very troubled with the kind of disclosures that SEBI has asked for.

Commission disclosure must be supported

The rationale for regulators seeking commission disclosures worldwide is that investors have a right to know how much commission an intermediary is making on an investment that he / she is proposing to make in a product. This can enable an investor to ascertain whether the advice is being motivated by high commissions. While several advisors have complained against this form of disclosure, we have always maintained that commission disclosure is a reality that intermediaries worldwide have to accept as the "new normal" - the faster they fall in line and comply, the better it is for them. Way back in April 2010, we wrote an article called Disclosure : there is no running away from it ! (http://wealthforumezine.net/Industrytrends280410.html ).

But this one just doesn't make any sense at all

But, the latest missive from SEBI is completely off the mark on this principle. On going through HDFC MF's website, you will be able to ascertain that it has paid for example Rs. 4.86 crs to Bajaj Capital and Rs. 32.16 crs to HSBC, Rs. 33.86 lakhs to Mr.Rajbir Singh and Rs. 0.02 lakhs to KarurVysya Bank. How does this information help any investor take a better informed decision? Does this mean that KarurVysya Bank's commission rate is far lower than most others? Is an investor supposed to choose KarurVysya Bank over HSBC based on total commissions paid out? Commissions are linked to gross sales volumes and AuMs - as we all know. Absolute commission amounts paid out are meaningless and can be misleading.

If an investor is making an investment in an equity fund, he has a right to know that his distributor is making say 0.75% upfront commission and 0.5% trail - on his investment. But, what insight does he get by knowing that his distributor earned sayRs. 75 lakhs in the year as commissions from all AMCs? How does this help him make a well informed investment decision?

Invasion of privacy

The bigger issue that comes up here is one of invasion of one's privacy. AMFI will shortly publish on its website the total commissions earned by the top 550 distributors in the country. Why should a Roopa Venkatakrishnan or a Ganesh Shanbhag or a Hanoz Patel want information of their earnings to be made publicly available to one and all? In an increasingly unsafe world, is SEBI going to take responsibility to ensure that not a single extortion call reaches any of the large distributors whose earnings it is making public, against their wishes?

Another angle to this : if an ARN holder is operating his business in a private limited company or a partnership firm or as a sole proprietor, he is allowed under the laws of this land, privacy of his financial information. He only needs to disclose it to his income tax officer - not to the public at large. Under what constitutional authority has SEBI decided to invade this fundamental right to privacy and enforce disclosure of total commission earnings? It appears that SEBI has clearly, and perhaps unwittingly overstepped its brief on this one.

SEBI has directed disclosure for the "large" distributors at this stage. Unless this is checked, don't be surprised to see this progressing beyond just the top 550 into a much wider set of distributors.

I would dare say that if any of the impacted distributors decides to seek relief from a court of law against this decision, there is a very good chance of him winning the case.

We have taken this up with SEBI - have you?

Wealth Forum has taken this matter up with SEBI. SEBI officials understand our point of view and also acknowledge that this is perhaps a case of unintended consequences of some of their actions. If you feel strongly about this issue, please post your comments and we will forward your messages to the regulator. Post your comments in the box below - its YOUR forum !