SEBI Mandates Direct Option For Alternative Investment Funds, Trail Model For Distributors
The markets regulator moves to bring parity between AIFs, PMS and Mutual Funds with respect to distribution charges.
Moving to bring parity between multiple modes of investment, the Securities and Exchange Board of India on Monday announced new rules that will affect the distribution fees charged for selling alternative investment funds. These rules will be implemented on May 1.
In a circular, SEBI said schemes of AIFs would now be required to have a ‘direct plan’ for investors. This is akin to that offered by mutual funds for investors that buy schemes without the aid of an intermediary. Intermediaries who execute transactions on behalf of an investor usually route investments into ‘regular plans’, which include a distribution fee in the total expense ratio of the scheme.
"AIFs shall ensure that investors who approach the AIF through a SEBI-registered intermediary, which is separately charging the investor any fee (such as an advisory fee or a portfolio management fee), are onboarded only via the direct plan," the markets regulator said.
The SEBI also moved to change the model of collection of distribution fees by intermediaries. Starting May 1, Category III AIFs will be required to charge distribution or placement fees only on an equal-trail basis. Currently, these funds charge an upfront fee. Category I and Category II AIFs will be allowed to pay up to a third of the fee to distributors upfront, with the remainder paid on an equal-trail basis over the tenure of the fund.
Category I and II AIFs are closed-ended funds with a minimum tenure of three years, while Category III AIFs are open-ended. These investments have an entry barrier in the form of a minimum threshold, which currently stands at Rs 1 crore.
An upfront fee, as the name suggests, is an upfront payment of fees to a distributor for the sale of a product. A trail model splits the distribution fee equally over the holding period of an investment.
"The upfront nature of fees was proving to be a big incentive for distributors to sell AIFs," said Mohit Gang, co-founder and chief executive officer of Moneyfront. "This was proving detrimental for other products, like portfolio management services. There was also some misselling taking place and some instances of premature selling of investments."
The new regulations will level the playing field between mutual funds, portfolio management services, and alternative investment funds, he said.