MF Distributors Open to SEBI's Units in Lieu of Trail Commission Proposal, But Voluntary Participation Key

SEBI's Proposal to Pay Trail Commissions in Mutual Fund Units Faces Mixed Response from Industry

The Securities and Exchange Board of India (SEBI) has proposed allowing asset management companies (AMCs) to pay part of their trail commissions in mutual fund units instead of cash. However, this proposal has received a mixed response from mutual fund distributors, with some expressing concerns over operational complexity and potential impact on cash flow.

Currently, AMCs pay trail commissions entirely in cash, with payouts linked to investor assets retained in schemes over time. For many distributors, this recurring income is their primary monthly revenue stream. Industry participants say allocations up to 10 percent may be workable, but anything higher, particularly for smaller distributors, could strain cash flows.

According to Amit Joshi, founder at PlanRupee Investment Services, the first and most important aspect of the proposal should be that participation remains voluntary. Many new mutual fund distributors (MFDs) make very small trail commission amounts in the initial years, and a voluntary approach would allow them to opt out if necessary. The choice to decide the quantum of commission to be routed into investments should also remain with the distributor, Joshi added.

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Operational complexity is another concern. Managing Partner at Scripbox, Sachin Jain, pointed out that adding another layer to the whole complicated structure of brokerage reconciliation would be challenging. For the longest time, they have struggled to reconcile brokerage because of different timings, applicable rates, and reconciliation requirements.

Another concern is the impact on cash flow. As a distributor, Jain has to pay salaries, office expenses, and many other costs. He cannot pay all of that in units and needs hard cash for those expenses. However, he added that distributors could still get on board if flexibility is retained.

Pravin Kulkarni, mutual fund distributor and founder of UPInevst, expressed a similar sentiment. MFDs with modest Assets Under Advisory (AUAs) will probably find it difficult to accept the proposal if the trail commission in the form of units is more than 5%. In their case, they may opt for units in lieu of cash, although the exact percentage is still under consideration.

Not everyone is skeptical. Aditya Agarwal, co-founder of Wealthy.in, believes that holding units could better align distributors with their investors. Receiving commissions in units builds institutional 'skin in the game,' bridging a psychological alignment between the distributor and the investor. However, he agreed that the framework may not work uniformly and could be challenging for smaller MF distributors that depend on steady, predictable cash income.

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The consultation paper has also sought views on whether paying commissions in units of an AMC's own schemes could create conflicts of interest or increase the risk of mis-selling. Public comments are open until June 10.

SEBI said the framework was originally introduced to mitigate risks linked to third-party payments and ensure transaction traceability. However, following requests from the mutual fund industry, the regulator is now considering relaxations in specific cases.