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Last week, SEBI has asked AMFI to temporarily bar fund houses from charging additional expenses in lieu of B30 retail assets for a month. This suspension will be lifted once fund houses put in place a mechanism to monitor and track misuse of B30 incentive norms.
In a letter to AMFI, SEBI said that it has found inconsistencies in implementation of B30 norms by both – AMCs and distributors. Let us look at both:
AMCs
Inconsistency in calculating B30 incentives: SEBI has found that a few AMCs did not calculate B30 expenses in line with SEBI guidance. While these AMCs calculated B30 expenses on daily basis, they reconciliated the accrued expenses on weekly, monthly, quarterly and annual basis, which is not in compliance with the AMFI best practices guidelines. This has a major impact on NAVs, said SEBI. AMFI norms say that AMCs must reconcile accrued B30 expenses every week.
Including switch transactions to charge B30 expenses: A few AMCs considered switch transaction of up to Rs.2 lakh to charge B30 expenses. SEBI said it is not in the spirit of regulations as the market regulator has specified that B30 expenses can be charged only for new inflows.
Charging B30 expenses at AMC's discretion: A few AMCs charged B30 expenses based on their discretion. They did not charge B30 expenses despite B30 inflows in a few schemes. Also, there were instances in which a few AMCs charged B30 expenses for a particular period. SEBI said, “This practice is arbitrary in nature and may lead to anti-competitive practices through cross subsidizing of the TER across schemes.”
Distributors
Splitting of transaction: SEBI has found instances of splitting of transaction by a few MFDs to keep the investment amount less than Rs.2 lakh to earn higher B30 incentive. SEBI’s internal algorithm found close to 6000 such instances amounting to Rs.92 crore between FY 2019 and 2022.
Churning of investments: There were 2000 instances of churning across 19 fund houses involving an amount of Rs.3.32 crore. The churning happened after one year of investment. A few MFDs made redemption request on behalf of their clients and reinvested in the same scheme after 5 days to avail B30 incentives.
Currently, AMCs can charge an additional 30 bps for bringing retail application of up to Rs.2 lakh from B30 cities. Fund houses use this additional TER to incentivize distributors for bringing retail investors from B30 cities.
