All steamed up

The market regulator, the post office and the Reserve Bank of India (RBI) are apparently all steamed up about Prudential ICICI Mutual Funds’ new marketing gimmick. Its latest scheme, Fusion Fund-II offered its agents an extra 0.5 per cent commission if they specifically targeted investors of RBI bonds or Post Office savings and attached proof of the same along with the application form. One doesn’t know whether Fusion Fund was looking to expand the mutual fund investor base by incentivising agents to reach a new set of investors or merely believed that people who put their money in Post Office savings schemes have a long-term investment horizon. Anyway, the Post Office decided that its investors were being poached and terminated its arrangement to sell the scheme. Sebi was also outraged enough to order that the incentive scheme be scrapped. But one is not quite clear why Sebi is angry.

Does the regulator object to commission incentives for agents? After all, there is neither incentive nor inducement for investors to switch from RBI bonds/ post office savings to mutual funds; only the agent is rewarded. It is, however, unlikely that investors would part with a photocopy of unrelated investments, unless the agents offered a kickback from the extra commission they earn. While Sebi appears to have raised issues of ethics, it is not clear if a potential kickback to investors is the issue here. At a time when interest rates on safer instruments like bank fixed deposits have risen swiftly in the last couple of months, it seems a little far-fetched to worry that a 0.5 per cent commission would be incentive enough for investors to switch investments from RBI bonds and post offices to mutual funds.