The Securities and Exchange Board of India (Sebi) has given mutual fund (MF) distributors some more time to comply with its latest rules on the know-your-client (KYC) requirement.  The regulator has also verbally directed registrars and transfer agents to pay distributors their arrears, wherever the KYC rules have been complied with.
On Monday, at a meeting with select mutual fund industry officials, including those from foreign banks, the regulator said that it would allow distributors some flexibility to become KYC-compliant. A working group constituted by Sebi has mooted a phased approach towards KYC compliance for accounts of the earlier period.

“The April 1 deadline is no longer sacrosanct. Fund houses have been given time to become fully compliant,” said a person familiar with the development.

In December 2009, Sebi had made it mandatory for all AMCs to maintain a copy of full investor documentation, including KYC details. Currently, all such documentation is maintained by the respective mutual fund distributors. The distributors were set a deadline of April 1 to provide fund houses with the KYC details, and told that non-compliance would result in their commissions being withheld.

Because of some ambiguity over the Sebi diktat, many fund houses stopped paying trail and upfront commission to distributors. ET has learnt from a few distributors that their trail fee for the October-December quarter and brokerage commission for December have not been paid. Trail fee is the commission that mutual funds pay to distributors, depending on the period for which unitholders stay invested in a scheme.

Sebi’s fiat has impacted foreign banks and private sector banks —among large mutual fund distributors — more severely on the execution front. Many of the banks witnessed a disruption in their cash flow.

Already distributors have seen a sharp fall in their earnings, after a Sebi rule banning entry load in mutual fund schemes became effective from August 1 last year. With the year end approaching, many distributors have had to set aside funds or make provisioning for losses incurred on account of non payment.

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