MFs: SEBI's exit load redefinition raises hopes of more flexible commission regime

MUMBAI: Less than a month after UK Sinha took charge as Sebi chief, the capital market regulator has taken the first step to liven up hopes among fund houses, which have been hit by a flight of investors following severe restrictions on broker commission.
In an innocuously-worded circular issued Wednesday, Sebi redefined the use of exit load by mutual funds, which will now have a little more liberty in the way they remunerate distributors. During former Sebi chairman CB Bhave’s tenure, the regulator had banned entry load—the up-front fee MFs charged investors to pay distributors—and restricted the use of exit load—another fee collected from investors who sell out prematurely. The rules were put into effect from August 1, 2009, amid bitter resistance from MFs and distributors.

The new circular gives funds more flexibility in the use of accumulated exit load corpus, known as load balance. Exit loads are normally charged when investors redeem before one year. While this will not make a dramatic impact on MFs, fund officials are hoping this may well be a beginning towards a more flexible commission regime. They, however, feel the entry load system—under which a generous commission structure helped MFs mop up money—will not return in a hurry.

Sebi, in the latest circular, said mutual funds should segregate the load balance into two accounts—one to reflect the balance on July 31, 2009, and the other to reflect accumulation since August 1, 2009. It said funds can use the exit load accumulated after July 31 to pay fees to distributors. The regulator, in an order on June 2009, had placed restrictions on the use of exit load proceeds.

Move to Improve Balance Sheets

We were allowed to use the load amount only for marketing expenses. But now Sebi has given fund houses the flexibility to use it for paying agent commission,” said the chief executive of a mutual fund, requesting anonymity. Sebi has also allowed use of a portion of the load balance till July 31, 2009. The regulator said mutual funds can use up to one-third of the load balance as on July 31, 2009, in any financial year to pay distributors.

“It is clarified that though the unutilised balances can be carried forward, yet in no financial year, the total spending can be more than one-third of the load balances on July 31, 2009,” the circular said. Mutual fund industry officials said the move would improve the balance sheets of asset management companies as they would not need to dip into their pockets to remunerate distributors. The financial impact of the revised rule would not be significant, but the circular has raised expectations of Sinha, who was previously the chief of UTI Mutual Fund, announcing more steps to allow funds remunerate distributors better.

The regulator had drawn flak from the mutual fund industry following the move to ban entry load. After this ban, the industry said distributors were no longer willing to sell equity funds, and blamed the slowdown in sales to this move.