Ajit Ranade: A spat swallows RBI's autonomy Downgrading RBI's standing is an unwitting collateral damage of the ordinance

A year ago, the capital markets regulator, Securities and Exchange Board of India (Sebi), asked that mutual funds not charge any entry load for investments by their subscribers. This was quite a revolutionary regulation, since it changed the incentive structure of the way mutual funds were sold to investors. Sebi was guided by two things: the cost of brokerage and distribution were anyway declining due to technology; and investors could now pay directly to distributors for services rendered, rather than have a commission sliced off their investments by the mutual fund. Prima facie this new regulation would discourage selling funds simply because they paid high brokerage or commissions to the distributor. Distributors would henceforth have to “earn their keep” by not merely pushing high-commission products as in the past, but also by becoming financial advisers to their clients. Distributors and, to some extent, mutual funds protested against this diktat, since it upset their business model. The Sebi view was that the mutual fund industry was now mature enough to be able to separate the “manufacturer” (the mutual fund itself) and the “distributor”, and there was no need to keep the cost structure opaque and clubbed together. Before the dust could settle down on this no-load rule, the rules of financial “physics” had started working.