Why mutual fund distributors are giving up multiple licences
Asset management companies (AMCs) have begun receiving requests from mutual fund distributors to consolidate their assets under a single registration, following a regulatory change that has removed the incentive to operate through multiple registrations, three AMC executives told Mint.
Each mutual fund distributor is assigned a unique AMFI Registration Number (ARN) to sell mutual funds. Some distributors, however, have obtained multiple ARNs in the names of family members, including spouses, parents and siblings, to keep their individual turnovers below the goods and services tax (GST) registration threshold and avoid paying GST on commissions.
Mutual fund distributors generally need to register under GST if their aggregate annual turnover exceeds ₹20 lakh, subject to certain exemptions. Registered distributors must pay GST on their taxable commissions. Distributors earn commissions from AMCs for mobilizing investments and servicing investors. These payouts are funded from the expenses charged to mutual fund schemes, which are borne by investors.
Effective 1 April, the Securities and Exchange Board of India (Sebi) introduced a revised mutual fund expense framework that separates the base expense ratio (BER) from statutory levies and transaction costs. These statutory levies were earlier included in the total expense ratio (TER). Under the corresponding change in commission payouts, AMCs pay distributors a base commission excluding GST, while the GST component is paid when the distributor submits a valid tax invoice to the AMC. Unregistered distributors receive only the base commission, removing the financial incentive to split commissions across multiple registrations to avoid GST.
“The change is positive for the mutual fund industry, as it encourages distributors to simplify their business structures and focus on growing their operations, understanding their needs and recommending suitable products, rather than spending time managing multiple registrations and fulfilling its compliance," said Pallav Bagaria, managing director at Equirus Wealth.
The number of active mutual fund distributors could decline over the next six to eight months as multiple ARNs held by the same individuals are consolidated under single registrations, Bagaria said. However, the overall number of distributors is expected to grow over the longer term, he added.
Queries emailed to the Association of Mutual Funds in India (AMFI) remained unanswered till press time.
The total expense ratio is the annual fee charged by a mutual fund to manage and operate a scheme, expressed as a percentage of its assets. Sebi has now split it into the base expense ratio, which covers the fund's operating and management costs and statutory levies such as GST, securities transaction tax, and stamp duty that are levied over and above the BER. This makes the actual cost of managing a scheme more transparent for investors.
Distributors with multiple ARNs used the earlier structure to avoid paying GST on their commissions. Since GST registration is mandatory once annual turnover exceeds ₹20 lakh, a distributor earning ₹1 crore could split the income across five ARNs, keeping the turnover under each ARN at ₹20 lakh and avoid paying GST.
A senior executive at a large mutual fund distribution company explained how the arrangement worked earlier.
If an AMC paid a distributor a commission of 100 basis points, the distributor had to pay 18 basis points (18% GST) to the government, retaining 82 basis points as earnings after tax. However, distributors using multiple ARNs to stay below the GST registration threshold could retain the entire 100 basis points without paying GST, the distributor said on condition of anonymity.
Under the revised structure, AMCs pay the base commission separately from GST. Thus, of every 100 basis points of commission, a distributor who is below the GST threshold receives only 82 basis points.
The GST component is paid separately by the AMC when a GST-registered distributor submits a valid tax invoice to the AMC. This makes the net earnings of all the distributors as 82 basis points.
Experts say the new framework not only removes the financial incentive to maintain multiple ARNs but also increases the operational burden on distributors who choose to retain them.
"We are seeing many distributors submit the multiple ARNs they had as there is no longer an incentive to keep them. If a distributor has four ARNs, there is no longer any incentive to maintain all of them just to save on GST. They still have to communicate separately with customers under each ARN, file separate tax returns and account for expenses across all four registrations,” said Anuj Mittal, a Delhi-based distributor.
To consolidate multiple ARNs, a distributor must first obtain consent from the mutual fund investors serviced under those registrations, giving them 15 days to raise objections. If no investor objects, the distributor must approach the AMFI-ARN Committee for approval. Once cleared, the distributor must write to each AMC they work with, requesting it to consolidate the registrations so that future commission payments are routed through a single ARN.