The Securities & Exchange Board of India (Sebi) has been bringing in stricture after stricture to protect "investor interests". First, it disallowed the amortisation of marketing expenses for new fund offers. Then, the direct route was created. After that, the no entry load regime was brought in compulsorily from August 1, 2009, slashing distributors' margin. Latest in the salvo is the circular stating MFs cannot dip into exit load/ entry load accounts for paying upfront commission to distributors. All these have been hailed all around as investor protection.

But is Sebi really acting in the interest of investors?

The Sebi preamble describes the basic functions of the board as: "To protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto."

The point to note is that it is supposed to protect investor interests and promote and regulate the securities markets. By focusing only on investor interests and making the business an unviable proposition for fund houses and distributors, Sebi is actually harming investor interest in the long run. As per estimates, only the top 10 MFs or so will be profitable as their margins shrink. Compounding this, distributors deserting mutual funds for greener pastures, moving on to insurance, debt products and real estate. AUMs are not growing; equity AUM has actually declined since August 2009.

What went wrong?

Sebi has been focusing on the charges aspect alone and has been trying to whittle that down. That is a very lopsided approach. For example: The latest move to curb any payouts except from expenses has got the MF industry pinned against a wall. The fund houses now can only pay out of their own pocket, which means the must suffer losses or pay out what is possible from the recurring expenses account.

Also, while distributors cannot hope to earn in MFs, all other spaces in financial services were not similarly hamstrung. Distributors of debt products including Public Provident Fund, National Saving Certificates and fixed deposits, etc, get about 1%. Commission on insurance products can be in double digits. This is what caused distributors to beat a retreat from MFs. The media has played a largely negative role throughout Sebi's moves. Blinded by their so-called 'responsibility for taking cudgels on behalf of the investor', the distributor has been vilified. Sure, there are those who deserve that opprobrium; but it has surely poisoned the minds of the public at large, into thinking that all distributors are crooks out to part them of their money. Like Sebi, the media too just wanted to look good in the eyes of the investors.

And how about the spat with Irda, the insurance sector regulator?

Sebi found that the amount of money collected by Ulips was many times higher than the MF industry. Also, Ulips were essentially MF schemes masquerading as insurance products. So, it felt they should also follow the same rules as MFs, and issued its circular to 14 companies that they need to get its clearance before selling Ulips. Questions linger - why did Sebi issued this fiat when it's salience over insurance companies and their policies has not been established? Also, why now? Ulips have been around for about a decade. Also, Sebi missed out on LIC and several private insurers. This last piece is significant.

How can a rule be made to apply to a few in the industry?

Intermediation has a role to play in reaching a product or service to the end-consumer. It is intuitive to understand this. Every industry depends on intermediation. Take retail. The size of the retail industry is about $450 billion. Retailers make margins of anything from 10-70%. Assuming the average is about 20%, the intermediation cost is $90 billion, or about Rs 4.2 lakh crore!

It would be great if we didn't have to incur this cost, right? After all, we all have to pay this price. Still, we pay it. Thus, intermediation is a value-add; not just a cost. It is a service and any service needs to be paid. Vilification of the service provider and making it unviable to operate will only create an undesirable vacuum.

Source : http://digital.dnaindia.com/