Proposed fee structure for the AIF Industry to level playing field

Direct plans, trail model for distribution of commission in Sebi's line of sight

The Securities and Exchange Board of India (Sebi) has trained its sights on the mis-selling in the alternative investment fund (AIF) industry. The capital markets regulator has proposed mandating service providers to offer direct plans and the trail model for the distribution of commission.

Sebi has already done away with the upfront commission and introduced direct plans for mutual funds (MFs). The upfront commission has been banned for the portfolio management services industry as well.

The latest proposals for the AIF industry will level the playing field and remove potential arbitrage opportunities distributors enjoyed by pushing one segment over the other, say industry players.

Presently, the upfront commission for AIF distribution is as high as 5 per cent of the amount committed. By comparison, the commission paid to MF distributors is just a fraction of it.

“Such a high upfront commission, particularly in sharp contrast to the trail commission for other products, increases the chances of mis-selling of AIF schemes,” Sebi said in a discussion paper released on Friday inviting public comments. The watchdog proposed adopting the trail model of commission.

Under the proposed norms, all investors for categories of AIFs will be charged a distribution fee on trail basis. Category I and II AIFs will, however, be allowed to levy a slightly higher fee. This could still be one-third of the current value of the total fee paid upfront in the first year.

An area of concern for the regulator is the upfront commission fee on the total amount committed that distributors impose on investors.

“Even though investments move in tranches, the full commission on the total amount committed is paid upfront currently since distributors prefer this to the trail method which comes over many years,” says Mohit Gang, co-founder and chief executive officer, Moneyfront.

At a recent event, Sebi whole-time member Ananth Narayan Gopalakrishnan said there “might be vulnerabilities in the sector”, including valuation shocks and mis-selling, which could slow the pace of growth for the AIF industry.

Additionally, Sebi has proposed doing away with the practice of multiple fee layers for investors, especially those coming through financial advisors.

These investors were being charged twice — once in the form of an advisory fee or portfolio management fee, and unconnectedly via an AIF distribution fee.

“AIFs to ensure that any investor approaching it through an intermediary, that is separately charging the investor a fee (such as advisory or portfolio management fee), invests in the AIF via the direct plan route only,” said Sebi.

The regulator has also recommended that investors on-boarded through direct plans should be provided for an adjusted higher number of units since lower distribution charges apply to them.

“Since the subscription to units of AIF is on a private-placement basis, Sebi does not regulate the fee payable by unitholders. However, Sebi expects the fund manager to maintain transparency on the fee it proposes to charge. If there is any mis-selling and the interests of investors are compromised, Sebi has the right to step in and regulate activities to protect investor interest,” says Hemang Parekh, partner, DSK Legal.

More tightening on the anvil

To avoid a conflict situation, Sebi has also proposed that for any investment done from or to an associate of the AIF or sponsors, approval must be taken from 75 per cent of investors by value. 

In another discussion paper, the regulator has proposed mandating the dematerialisation of units of AIFs. As part of the first phase of this mandate, all schemes of AIFs with a corpus of more than Rs 500 crore will compulsorily have to dematerialise their units by April 1, 2024.