SEBI stops small-town linked incentives for Mutual Funds

Capital markets regulator SEBI is concerned with the misuse of an incentive structure to bring in new mutual fund inflows from small towns or B-30 cities. Keeping this in mind, SEBI has asked mutual funds to put this B-30 incentive structure on hold until asset management companies are able to put in place a mechanism to stop its misuse.

SEBI had permitted mutual funds an additional component of expense ratio of 30 bps or 0.3% on new inflows from non-metros or B-30 cities. B-30 means 'beyond 30' or cities other than the top 30. Mutual funds then pass this additional amount on to distributors who bring in these flows. This was done to incentivise mutual fund flows from smaller towns.

The markets regulator observed that this incentive structure was being exploited by splitting transactions, churning investments and the method of calculating B-30 incentives. SEBI also pointed out that there is no proper mechanism in place to check the misuse of this structure.

However, SEBI has said that either the incentive structure will be restored with the necessary safeguards or a new mechanism will be put into place to incentivise flows from smaller towns.