Mutual fund distribution may undergo a shift as pooling is moving out
Last week, SEBI announced potentially far-reaching changes in the way mutual funds are distributed in India. A full 7 years after Direct Plans were launched in India; regular plans of mutual funds continue to dominate the wallet share of customers. In a direct plan, the investor directly submits the application to the AMC or to the registrar without a broker code. However, in regular plans the client submits the payment to the broker. That money remains in the pool account of broker before it’s credited to the individual bank account. That is where SEBI was uncomfortable as there is a window of 2-3 days when neither the AMC nor the registrar has control over the funds. This move will also impact digital MF platforms.
No more pooling by brokers
The problems in the Karvy case arose in the equity pool accounts of the broker but SEBI apprehends that such a situation could arise in the case of mutual funds too. After all, nothing stops a broker from misusing the mutual fund float of a client. It is in this light that SEBI wants to ban the concept of pooling accounts altogether. The set up will have to be such that any investment would mean a debit to the investor account and a seamless credit to the AMC bank account. The reverse case will apply in case of sale of fund units as the money will directly move from the AMC account into the client account. The broker pool is totally skipped.
Brokers have a problem
When the proposed ban on pooling was announced, many brokers were up in arms. Their argument was that the entire broking industry was being penalized for the actions of just one broker. The current set up is convenient for brokers for a number of reasons. Firstly, they control the process and don’t need to share client details with the AMC or the registrar. Secondly, there is a more practical issue. We are aware that entry loads are banned by SEBI since 2009. However, brokers are free to agree upon a service charge payable by the client, based on the service provided. Such charges are deducted by the broker before paying out of the pool to the customer. This is something, SEBI may have to address.
Clearing Corp route is open
There are different ways of investing in mutual funds. Today nearly 52% of the MF investments are through the pooled route while the balance 48% is through the non-pooled route. An important way of non-pool investing is to use the stock exchange platform (like BSE STAR-MF). Here the funds are routed through the clearing corporation affiliated to the stock exchange and there is no broker pool account involved anywhere. Hence the clearing corporation route will still be valid even after broker pooling is banned. It may create hiccups but will be good for MF investors overall!