The latest Securities and Exchange Board of India (SEBI) move to restrict the additional incentive to beyond 30 cities has not gone down well with a section of distributors who will no longer be entitled to the benefit of these additional commissions. The distributors who will be impacted with this rule are located in cities ranking 16 to 30 as per AMFI. While the inflows from these cities have grown, distributors are worried that it will create entry barriers in attracting new talent in the industry.
We spoke to distributors who are impacted by this diktat. The consensus is that it is too early to impose this rule.
Pradeep Jain (Ranchi)
The government is focused on financial inclusion and the market regulator is taking away the incentive. It will impact the penetration of mutual funds. Distributors need to be incentivized for the high cost of client acquisition in semi-urban cities. While the assets under management (AUM) in some of these cities has gone up it is not the correct barometer to judge. To decide the incentive, SEBI should rather look at mutual fund penetration to the population level state wise and not city wise.
Rajesh Kulwal (Indore)
Due to the additional incentive in beyond 15 cities, there has been a good traction in terms of inflows. Having said that, the awareness about mutual funds is still low in these cities. We were seeing new distributors entering the industry from smaller towns. With the pressure on margins, it will be difficult to attract new distributors. The regulator should have continued the incentive at least for a few more years for the market to mature.
Sachin Kharate (Nashik)
Distributors who have built decent assets under advisory (AUA) can sustain even if the additional incentive goes away. However, smaller and new distributors will face challenges. Distributors in smaller towns have been hit with a slew of headwinds like the 2008 market crash, entry load ban and Goods and Services Tax (GST). The latest diktat from SEBI will only make things harder. Nevertheless, we are optimistic about the growth prospects of our business.
We also spoke to a few fund officials to understand the implications of this rule which comes into effect from April 2018. Here’s what they have to say.
D. P. Singh, Executive Director & Chief Marketing Officer (Domestic Business), SBI Mutual Fund
It will impact the margins of distributors but they can compensate for this by increasing their volumes by adopting technology. The incentive was brought to re-energize the industry and it has helped expand these markets. We believe it won’t impact the inflows from these cities in a big way.
Kailash Kulkarni, Chief Executive Officer, L&T Mutual Fund
The regulator wants to penetrate the market which is why it has restricted the incentive to beyond 30 cities. The additional incentive has benefitted these markets. The earnings of distributors from these cities has also gone up significantly. Further, additional incentive is not the only driving force for the inflows that we have seen from these cities. The awareness about mutual funds has gone up and I feel people will continue to invest in mutual funds. So my advice to distributors is that they should focus on growing their AUA rather than looking at the payouts.
The growth so far
Morningstar analyzed the AUM of cities ranking 16 to 30 which shows that their share in the overall industry AUM has marginally increased from 4.88% in December 2011 to 5.37% in December 2017.
In fact, the growth has been higher in cities beyond 30 locations. AMFI data shows that the AUM from beyond 30 cities has increased from 9% to 12% during the same period. This could be primarily due to addition of new cities which are categorized as ‘other cities’. The data shows that other cities (beyond 75 cities) share in the overall industry AUM has jumped from 2.68% to 4.09% the in the last six years.
