In its audit carried out between April 1, 2016 and March 31, 2017, SEBI has found instances where a few AMCs had charged distributors commission to investors but not paid to any distributor. This was due to non-allotment of direct plan to investors in absence of ARN in the application form.
In a letter sent to AMFI, SEBI said, “Instances of non-allotment of direct plan to investors within 30 days wherein correct ARN/complete ARN was not received which leads to unreasonable gain to the AMC as distribution commission is charged to the investor but not paid to any distributor.”
SEBI norms say that AMCs will have to treat an application as under direct plan if ARN is not furnished within 30 days.
A CEO requesting anonymity said that SEBI gives 30 days window to fund houses to remediate this issue. “In the first place, AMCs could not allocate units without ARN in regular plan. If ARN is not available in the application form, AMCs are required to obtain ARN within 30 days. The intention of SEBI is simple: If fund houses are not paying commission to their distributors then why are they charging investors.”
He, however, said that a few AMCs have written to SEBI on this issue to seek clarification, as such a switch may not be possible in the MF industry after units are allocated. Firstly, fund houses will have to take a consent from an investor to switch his folio from regular plan to direct plan. Finally, such a switch is considered as redemption and reinvestment and it would incur capital gain tax, he said.
Among other irregularities found by SEBI were:
- A few distributors who opted in for transaction charges split investments of investors to qualify for such a fee. Distributors can levy a transaction charge of Rs.150 for getting a new investor and Rs.100 from existing investors if they mobilize Rs 10,000 or above. SEBI found that AMCs have failed to take action against such distributors including recommendations to AMFI to take appropriate action
- AMCs did not maintain the difference between expense ratio of direct plan and regular plan to the extent of distribution commission
- AMCs continued to accept business from distributors who were suspended by AMFI. In fact, a few AMCs paid commission to such distributors
- Distributors empanelment remained active with AMCs despite expired ARN
- Inappropriate utilization of IAP for distributor training by a few AMCs
SEBI has asked AMFI to take corrective action and ensure strict compliance with SEBI regulations.
