This circular is going to kill mutual funds. Really?

They are all right but only because they’re holding the circular too close to their eyes. Since the PAN requirement is applicable only to mutual funds and not to insurance companies selling investment products, new investment in the short term is going to move from equity funds to ULIPs. This requirement will end up strengthening the regulatory arbitrage that already exists between the two, in favour of insurance companies.

While a mutual fund agent’s commission is restricted to around 2 per cent, that of an insurance agent selling essentially the same product can be as high as 40 per cent in an overall upfront cost to investor that could go as high as 70 per cent. You don’t need to be Freud to know which product an agent who works for both, mutual funds and insurance, will push. If indeed PAN is the salvation for ensuring a “sound audit trail of all transactions”, as the circular rightly notes, why should similar insurance products be treated differently?

Moreover, by making PAN mandatory for mutual fund investors and not for products from other competing vehicles like insurance or even real estate (the venue for maximum cash deals), we get a strange signal — that mutual funds are not the vehicle for financial inclusion, only banks are; that if it is equity exposure they seek they either have to pay prohibitive costs or go without it. Worse, maybe financial assets should be given the go-by in favour of real assets like houses and gold. As one mutual fund head said, “How many people file taxes? Say 30 million? What about the rest? Are we going to exclude them?”

Now, hold the circular at a distance. It was born in finance minister P Chidambaram’s Budget speech of 2007-08, where he announced that PAN should be the sole identification number for all participants in the securities market. What he should have added then, but may add now, is to broaden the expression ‘securities market’ to ‘financial markets’, that would include banks, insurance and of course securities. All three come under the same ministry and when the three regulators sit together with ministry officials, the scope of PAN will broaden.

We have seen similar objections when Voter Identity Cards were issued. But the scale and scope of that operation was humongous. If Sebi’s April 27 circular has to deliver the goods demanded – a cleaner financial system – that exercise, that magnitude needs to be repeated. What we see instead is a disconnected madness but no method.

Meanwhile, the market, in its own interest, is doing what the government should be doing. In a letter will be going to all its investors shortly, a distribution house has made a one-page presentation, which in itself is a telling tale about the fear citizens face while getting PANs. Among other bulleted points, in bold, the letter says: “IT people are not going to harass you just because you have got a PAN card.” Another: “IT officer is not going to come to your home (sic) just because you have got PAN number (sic).” Yet another: “There is no compulsion to file IT return if your income is not taxable.” And so on. Shouldn’t this be the government’s campaign?

The government and Sebi may think that mutual funds are whining before regulators and dining with the wealthy at the cost of delivering services to small investors. True, but only partly — just when the industry is bracing itself to reach investors beyond the big cities, offering systematic investment plans of as low as Rs 50 per month, the PAN attachment is a selective restriction on that penetration. But stopping it is not the answer, broadening it is.