Expressing concerns, Sebi has asked the AMCs to keep the B-30 incentive structure in abeyance till they put in place effective controls to identify and address the issues.
The Association of Mutual Funds in India (AMFI), in an advisory on Thursday, asked the mutual fund houses to stop paying an additional incentives on new inflows from B-30 locations after the capital market regulator, the Securities and Exchange Board of India (Sebi), lambasted the industry body over misuse of its directives on B-30 incentives by the asset management companies.
In a letter to AMFI on February 24, 2023, Sebi highlighted various inconsistencies in implementing its directives concerning charging an additional expense ratio of 30 basis points (bps) to help boost the penetration of mutual funds and investors’ interest in B-30 locations.
The regulator noted that the fund houses poorly implemented its B-30 incentive mechanism. It observed several “inconsistencies and deficiencies,” such as “splitting of transactions”, “churning of investments”, and the manner of calculation of incentives, including switch transactions for calculation of B-30 incentive and charging of B-30 incentive only in specific schemes instead of all schemes.
“Sebi has also observed a lack of a system-driven mechanism to check the misuse of incentives structure” and advised the asset management companies (AMCs) to detect and prevent splitting, the churning of investments, and other misuses, AMFI said in a statement.
To strengthen the mechanism, it has directed the AMCs to take action against any wrongdoing, whether internal or external such as mutual fund distributors (MFDs).
Expressing its concerns, Sebi has asked the AMCs to keep the B-30 incentive structure in abeyance till they put in place effective controls to identify and address the issues.
The regulator has also advised the industry body to revert to Sebi “after ascertaining the compliance by the AMCs, within one month from the date of its letter.
It further stated that based on the review of the action taken by the AMCs, it would decide on the reinstatement of the incentive mechanism with necessary safeguards.
The AMFI advisory includes:
1. Strengthen the B-30 incentive mechanism process on a priority basis to detect and prevent splitting, the churning of investments, and other misuse of modalities.
2. AMFI to confirm compliance by March 24, 2023.
3. Keep the B-30 incentive structure in abeyance from the date of Sebi’s letter on February 24, 2023, till the incentive structure is appropriately re-instated with the necessary safeguards.
4. Meanwhile, AMCs can continue to make the payment of the B-30 incentive on inflows in B-30 cities already received prior to the letter.
5. Send a copy of the advisory to the board of directors of the AMCs and the Trustees for information.