SEBI bars mutual funds from paying transaction charges to distributors

The Securities and Exchange Board of India (SEBI) has barred mutual funds from paying transaction charges to distributors in cases where the distributors bring a minimum subscription of Rs 10,000 – a practice that was permitted by the regulatory framework governing mutual funds.

In a circular issued on Friday, the capital market regulator said that such transaction charges cannot be paid to distributors as they are entitled to remuneration by the asset management companies (AMCs).

“Based on the feedback received from the industry and considering that distributors as an agents of AMCs are entitled to be remunerated by the AMCs, the charges or commission, as prescribed under the paragraph 10.4.1.b and paragraph 10.5 of Master Circular, shall be done away with,” stated the SEBI circular highlighting the fact that a public consultation was done in May 2023 followed by an industry consultation in June this year.

Paragraph 10.4.1.b states, “The scheme application forms shall carry a suitable disclosure to the effect that the upfront commission to distributors will be paid by the investor directly to the distributor, based on his assessment of various factors including the service rendered by the distributor.”

Further, as per paragraph 10.5 of the Master Circular for mutual funds, AMCs were allowed to pay the distributors a transaction charge of Rs 100 per Rs 10,000 that the distributors brought from existing investors.

Further, as an incentive to attract new investors, AMCs were allowed to pay Rs 150 as transaction charge to the distributors for every Rs 10,000 worth of subscription.

The new rules have come into force with immediate effect.