The primary objective of SEBI is investor protection but it is a moot point to debate whether and to what extent SEBI has been successful in protecting the investors. From the time in early nineties when SEBI was set-up till now numerous situations can be recited where SEBI could have taken steps to protect the investors but miserably failed to do so. Those situations were of market mis-use and SEBI either failed to spot the situation or unsuccessful in proving the charge.
However, the stand of SEBI with mutual fund industry is totally different. In this case, SEBI has clearly shown with its recent decisions that the primary objective of SEBI is to safeguard the interest of the highly paid executives of the mutual fund industry. For protecting their interest, SEBI is willing to go to any extent by allowing them to extract money from the poorest of the poor investor. Let us examine each of the decisions taken by the SEBI board in their recently concluded meeting.
Lack of penetration of mutual fund products and inadequate distribution network is due to the self-fulfilling modus operandi of the mutual fund industry during the last decade. The industry has been short-sighted and in the past has only milked the easy cow to earn a fast buck instead of developing long-term strategy. Now, it appears that the Regulator has taken it upon itself to protect the industry at the cost of investors, although it is not at all clear why should the Regulator weep for such an industry. The whole initiative is to ensure that the industry gets adequate protection at the cost of the investors.
The fungibility of the Total Expense Ratio (TER) would ensure that the maximum allowed expense is always charged to the scheme. Earlier, the sub-caps of expense ratios (i.e. asset management charges, recurring expenses like annual trail fees, auditor and registrar charges, transaction charges etc.) ensured that low expense under a particular heading will benefit the investors since the balance amount cannot be charged to the scheme. With fungibility in place, the fund houses will ensure that any lower expense under one heading gets neutralized by a higher expense under some other heading.
The Regulator wants more people to invest in mutual funds from cities other than the top 15 cities as well. To entice investors from these centers, the mutual funds are now allowed to charge additional cost on the investors and thereby reduce overall return for investors. What is novel about selling something but at a higher cost and lower returns? The Regulator and the mutual fund industry is making it out as if investors from other cities are craving to invest but are unable to as there are no distributors and therefore these investors will settle for lower returns. Naturally, the intention is to allow the mutual funds to charge more to the assets under management so that the highly paid executives of the mutual fund industry can earn even more. The directive of SEBI that the mutual funds will disclose the amount collected from smaller towns and the efforts made by the industry to make people invest in mutual funds does not hold any meaning. We all know the usefulness or not of disclosures. Shareholding patterns are disclosed for last 10 years but no efforts have been made to rein in the violators. What will be the benefit to the investors if the mutual fund industry discloses the details of their efforts to sell in other towns is not clear to an average investor.
It is not clear how the six policy decisions align the interest of investors, distributors and AMC. All the six points are for the benefit of the industry and their distributors leaving out the investor as an orphan. For example, no definitive amount / percentage is outlined by SEBI which can be expensed by the mutual fund for investor education. This means this expense has been left to the whims and fancy of the AMC management. Secondly, why would an investor use a distributor if there will be an additional charge year on year on the money he puts in with the mutual fund? A onetime fee collected by the distributor from an investor is a more open and transparent mechanism for compensating the distributors than a hidden charge. Thirdly, on one hand TER is being made fungible while on the other hand the transaction cost is being capped. It is not clear what direction the policy makers are taking. Further, the transaction cost allowed is very high. Some of the brokers at the retail level charge at the comparable level. Passing of the service tax on the investors and the discretion given to the AMC / distributor to opt-out again is not in the interest of the investors.
It is clear that SEBI is not adhering to the mandate given to it by the Parliament as per the SEBI ACT. When a regulator stops functioning for the interest of the larger public and starts protecting the private interest in such blatant fashion, marginalization of the investors starts.
Yogesh Kumar, LLB, MBA (SUNY at Buffalo). Views are personal. Reach at Yogesh_ub@hotmail.com