Mumbai: In what could be his final board meeting as chairman of the Securities and Exchange Board of India (Sebi), M Damodaran on Wednesday clamped down on mutual funds, saying that from hereon, they will be prohibited from charging and amortising initial issue expenses on closed-ended schemes.

The move will take away the firepower from fund houses, which had been launching closed-ended schemes one after another after a Sebi ruling on April 4, 2006, that prohibited them from charging and amortising issue expenses on open-ended schemes.

The same ruling had said that closed-ended schemes could continue to amortise the initial issue expenses till they remained closed, but could not charge an entry load.

This had meant AMCs could continue to charge 6% as the initial issue expense in closed-ended schemes, and, therefore, afford to give the distributor a higher commission for selling the scheme. In many ways, this leeway provided to closed-ended funds made many AMCs make a mockery of the Sebi directive, which was meant to curtail new fund launches and protect investor interest.

As such, there were a barrage of closed-ended schemes launched since, raising more than Rs 20,000 crore from investors.

However, the new directive from Sebi, again in the interest of investors, could sound the death knell for closed-ended funds. With both initial issue expenses and entry loads gone now, it will be difficult for fund houses to pay commissions to their distributors.

“The industry, including the fund houses and distributors will have to brainstorm on if and how they could profitably sell equity funds in the future,” said Sameer Kamdar, national head of mutual funds at Mata Securities.

“Coming on the back of the option for investors to invest directly thus eliminating brokers, this new directive will put a severe strain on the industry’s profitability and viability,” said Kamdar.

Fund house officials, who did not want to come on record, were also caught offguard by Sebi’s new diktat. “It will restrict our ability to pay brokerage to our distributors. They have anyway been selling more insurance products, in which commissions up to 50% of first premium are granted. This move will restrict mutual fund sales and give an added impetus to insurance sales,” said an official.

Clarifying, Damodaran, whose tenure as Sebi chairman ends on February 17, 2008, said he’s open for dialogue with the industry, on alternative expense structures that could be worked out.
Closed-ended schemes allow entry only at the time of the new fund offer, while open-ended schemes allow purchase at investor’s discretion.

 

Source : Dna