At the Morningstar Investment Conference 2014, Abhay Aima, Group Head - Equities & Private Banking Group, Third Party Products, NRI and International Consumer Business at HDFC Bank, shared his views in a discussion on the fund industry. Below is an excerpt.
Over the past few years we have seen a lot of regulatory emphasis on investor protection. Do you think the pace of reform has been too fast?
At the risk of upsetting the regulator, I think it took an absolutely wrong approach when it started with the entry load business. There were clearly things that were wrong in the setup. There were clearly people from the distributor community who were misusing it. But the full industry wasn't doing that and in every industry there will be 10-15% who will misuse the system or take the system for a ride.
To me, the job of the regulator is to identify that 10%. But I think they threw out the baby with the bathtub. To give a more practical example, if there is a crime in a particular area in the evenings, the task of the police or the people monitoring that area is to get on to the street in the evening and catch the culprits. If the police decides that after 7 o'clock no one can go out, the result is fantastic – there will be no crime. I don't think that is the job of the regulator.
The entry load was being misused, so they did away with it. Everyone, including the media, was happy. In the short term, it looked like a win-win situation. But I don't think it was a very sensible step because in the process you created a lot of damage, which to some extent is irreversible. To some extent people like us from the large institutions were probably the biggest beneficiaries because lot of competition was cut off – those competing with me in that business. From the industry point of view, from a growth point of view, I don't think it was a very sensible thing to do.
I give this example often. There is a chemist and a doctor. The chemist displays various products from various companies on his shelves. When you buy from him, there is an inbuilt commission into the price that the manufacturer pays for any product on the display. When you go to the doctor, depending upon who the doctor is, his area of expertise, how good he is and his credibility, his fees can be Rs 100 to Rs 500 or even Rs 5,000. But you choose the doctor.
So, if I was to correlate to the industry, the doctor is the adviser and the chemist is the distributor. The doctor can charge his fees. But try and test the chemist in the distribution business and they will all shut down tomorrow. No customer can tell the chemist 'apka davai ka 100 rupiah aur 12 paisa apka commission yeh alag se ek check lelo'. It’s as simple as that. Try doing that to the distributor in any industry and see the result.
I think the regulator somewhere mixed the two and forgot that they were two different segments. And it was too early and in too nascent a stage. You cannot compare what is happening internationally where the business has been there for ages. Where the manufacturers and distributors have spread across the board and the percentage of investments into GDP is five times probably what is in India.
So I am in total disagreement with how the business is being handled. I don’t think the representation is right either in terms of the manufacturer or the distributor community.
