With over 80 per cent of India’s mutual fund investments originating from the top 30 cities, the Securities and Exchange Board of India’s decision to suspend incentives to promote incremental investment from other places may come as a surprise. B-30 or Beyond-30 incentives, allowed Asset Management Companies (AMCs) to charge 30 basis points in extra fees on individual schemes if they sourced incremental retail assets from outside the top 30 cities.
The fund industry claims that the incentives have expanded geographical penetration, with investors from these locations now accounting for over ₹6.8-lakh crore of assets compared to about ₹3-lakh crore in early 2018. But with instances of AMCs and their intermediaries indulging in sharp practices to claim such incentives surfacing, SEBI is right in suspending this giveaway. Investigations by the regulator have unearthed quite a few doubtful practices relating to B-30 claims by AMCs and their distributors. To ensure that the extra incentive is restricted to retail applications, SEBI laid down that only applications up to a value of ₹2 lakh would be eligible. But there are reports of intermediaries splitting larger applications from high-net worth investors into smaller ones to get them classified as ‘retail’ in a bid to pocket the extra commission. Some intermediaries seem to be urging clients from smaller towns to churn their holdings frequently to bump up their incentive payouts even though this hurts the investor by way of tax implications and transaction costs. To decide whether an application qualifies as B-30 worthy, AMCs rely on the mapping of pin codes to the top 30 cities by the Association of Mutual Funds of India, but SEBI has found defects in this mapping exercise.
Apart from being prone to misuse, the B-30 system of driving mutual fund penetration is unfair to existing investors in funds. There is no good reason why an investor in a specific scheme should bear 30 basis points in extra costs over comparable schemes, just because the AMC chooses to have a higher proportion of small-town investors in the scheme’s mix. As the charges are levied on top of SEBI’s mandated Total Expense Ratio limits, varying fees make it tricky for investors to gauge if a scheme is indeed complying with regulatory expense ratios for its size and category.
While SEBI has mooted only temporary suspension of the B-30 system, it must consider replacing the current pin-code driven system for good, with a more efficient alternative to measure mutual fund expansion. Irrespective of his or her geographical location, the industry expands every time a new retail investor buys his or her first mutual fund. SEBI can therefore consider the addition of new PAN/Aadhaar numbers as a measure of AMCs’ success in reaching out to new customers. Efforts associated with bringing in such new clients can be incentivised but this should be subsumed into overall expense ratio limits so that investors in a few schemes are not unfairly charged for the industry’s business development imperatives.