H N Sinor, Chief Executive Officer, AMFI talks to Cafemutual about AMFI initiatives, commissions, net worth hike and more.
Can you please take us through the various initiatives undertaken by AMFI last year?
There were lot of initiatives but I recall one major initiative taken by us. We were in talks with SEBI to have a long term policy for mutual funds. For instance, the RBI has an annual policy which helps the industry know in what direction it is headed. This was discussed two years back and SEBI also felt that there was a need for this policy for MFs. I must give credit to SEBI for coming out with a comprehensive long term policy for mutual funds. Now, the MF industry knows in what direction they are heading. The policy covered both tax and non-tax related issues. The tax related matter was proposed to make capital markets more vibrant. In order to make capital markets vibrant, you need retail participation in MFs to eventually act as a counterbalance against FIIs. AMFI played a part in initiating this long term policy for MFs.
AMFI had waived off ARN fee for distributors last year. How was the response?
The response was lukewarm. We got around 8,000 new registrations but it was not up to our expectations. We were hoping to get at least 2 lakh new registrations.
Do you think AMFI could have done more to attract distributors?
We try to work closely with NISM. People have to register, give examination and get certification from NISM and then get ARN license from AMFI. So there’s a gap. We started to compress this gap to see how we can make the registration process easier. We wanted a system wherein everything is done under one roof. We have been able to make some progress in this area. Now we have better coordination with NISM.
How many active distributors does the industry currently have?
There are around 1 lakh ARN holders registered with AMFI. Out of this, I believe only 15,000 would be active. If we add employees of national distributors and IFAs, the number would be around 30,000-35,000.
Is AMFI looking to simplify KYC norms? Many distributors have demanded that bank KYC should suffice to invest in MFs...
Even AMFI believes that if bank KYC is done and the fact that we only deal in cheque (although SEBI has permitted cash in a limited way) this should suffice to invest in mutual funds. Now, this recognition has come at the regulatory and government level. They are working on creating a common KYC for the entire financial markets. Nothing concrete has emerged so far but we are hopeful that some consensus would emerge soon. Today, 60 crore people have got Aadhar card. This could prove helpful for KYC also.
Do you think the net worth hike by SEBI will deter new players to enter the industry?
We looked at it in two ways. If you purely look at the inflation cost when the Rs. 10 crore net worth was stipulated, the number works out to around Rs. 40 crore now. Today, technology also plays a major role and AMCs need to invest in infrastructure, for which capital is required. The Rs. 50 crore net worth in today’s time is not a big number. Many AMCs which do not have Rs. 50 crore net worth have given a roadmap to AMFI to raise their net worth in the time stipulated by SEBI. Some have already complied with this rule.
Not many players are looking to set up AMC business in India. In fact, some of them are folding up. Your comments.
SEBI has laid out its broad objectives on how this industry should function. The original idea was to attract retail investors, who can’t participate in equity markets directly, towards mutual funds. Like any other industry, AMCs went for the low hanging fruit first. Thus, the institutional business has become much larger today. Since banks don’t pay any interest on current account and liquid funds can offer some returns to investors, the idle money lying with institutions has moved to mutual funds. AMCs found this business interesting as they started getting volumes. But retail investors were ignored. Retail business requires at least three to five years of gestation period. Many AMCs felt that they can’t wait so long. There was some dichotomy. AMCs need to spend money to build their franchise. Once retail franchise is built there is no looking back. Till then, AMCs need to invest in technology and infrastructure. Many AMCs believe that this is not their game. Some AMCs don’t look at business this way but the regulator is very clear on bringing more retail investors in the industry.
Some small AMCs have called it quits. Do you see more consolidation happening in the industry?
There will be some consolidation. Those who do not want to make fresh investment in their business may not want to continue.
What are your views on the current commission structure? Should commissions be regulated by SEBI?
We have been debating on this issue for the past five to six months. The industry could not voluntarily come to a consensus on this issue. AMCs felt that there should be some regulatory intervention to bring sanity in the market. We are expecting SEBI to come up with some guidelines on this.
Will upfront commissions be banned?
No, they won’t be banned. We were looking at whether we can adopt an all trail model. However, it would have disrupted the industry. An all trail model can be implemented in a calibrated manner over a period of time. As a first step, SEBI might cap upfront commissions. But the long term perspective is clear. Over a period of time, manufacturers should not be paying any commission to distributors. However, it is at a philosophical level right now. As we move forward we will be going in that direction.
Such model has not worked in UK. Do you think it will work in India where investors are not used to paying a fee?
It will not happen overnight. You have to give time to the system to adjust. We can go in that direction step by step. First, by promoting direct and simultaneously creating wealth advisors who only work on fee based model. Those who fall in between, we will try to gradually move them to all trail model and then perhaps full advisory. Neither the regulator nor the industry want to create any disruption at the moment.
Rather than banning commissions would you consider adopting share class structure which is prevalent in US?
We had suggested this idea to SEBI but it was turned down by SEBI. So I don’t see anything like share class structure being introduced in India.
What are your views on the concerns raised by a section of industry experts that there is a conflict of interest in getting AMFI to promote IMFI as a self-regulatory organization for regulating distributors?
We don’t see a conflict of interest. From 2002 onwards, SEBI had mandated AMFI to come out with a code of conduct for distributors. If you go through the code of conduct, it more or less runs like a SRO. If there was no conflict of interest for the last 12 years then I don’t think there will be any conflict now. The SRO will be an independent body and will have five SEBI nominated members on the board and two each from the distribution community and AMCs. AMFI is merely helping to create a market infrastructure for SRO. AMFI will not control the SRO. Except for two board representations, AMFI will not have any role to play in SRO. The SRO will have an independent chairman nominated by SEBI. It will be a completely independent body. I think there is some misunderstanding around this issue of conflict of interest.
What are AMFI's plans for 2015?
We are working on an agenda which has not been finalized yet. It will be put before AMFI board first. Our focus is to create greater trust among investors for mutual funds.
