WF : Ajay, can you briefly take us through the business lines of Sumedha Fiscal? How relevant is fund distribution in the overall business?

Ajay Laddha: Our primary business is investment banking and consulting. Our origins are in Chartered Accountancy. Our Kolkata based CA firm is part of the BDO Haribhakti network.

Sumedha Fiscal has a strong stock broking and distribution business - apart from the investment banking business. The distribution business comprising wealth management, MF and insurance distribution - which I head - has an MF AuM of around Rs. 250 crores. We are present primarily in Kolkata and Bangalore.

We have a mix of HNI and corporate clients - who invest in debt as well as equity funds. Ours is an advisory model - even for our corporate clients. We believe in working with a few companies and their promoters and serving their needs in a holistic manner. We nurture long term relationships with our clients. We started this advisory business 10 years ago - and even today, the clients we began this business with, are still with us.

We are not in the volumes game. Even in liquid funds - which we invest for our corporate clients - our average holding period is 250 days - which is phenomenal in this market.

Out of the total firm's revenues of around Rs. 15 crores, the distribution business currently contributes about 10% - with the balance coming from investment banking and broking businesses.

WF : Have you made any changes to your distribution business model post the entry load ban in Aug 09?

Ajay Laddha : Having a background in Chartered Accountancy and investment banking, we understand a fee model very well. We also understand the difficulties in implementing it. I think a fee based model is a good long term solution - but it will take time to put into practice.

What I am seeing is that there are going to be different models in different cities. In Kolkata, for example, we are not introducing a fee based model - I don't think it will work in this market. Whereas in our Bangalore unit, we have already put in place a fee structure.

In Kolkata, clients have a lot of experience in markets, they are very commercially oriented, and resist paying fees for services. In Bangalore however, clients are keen on advice, they may be less experienced with markets, and don't mind paying for good advice. It depends on the profile of clients that you are targeting or catering to.

We've started with a token fee in Bangalore - not very substantial - but more to get the practice of charging in place. We have seen in our main business lines - which are primarily fee driven - that you cannot have a single fee structure which is uniformly applied. It has to be variable, it will depend on client to client and it will also depend on the total relationship with each client - and not just MF transactions based.

More than fees, I think the big mindset change for everybody in the distribution business should be to focus on building trail income to run this business. Since we have a fairly large corporate book, we have always had a much higher share of trail than upfront commissions in our business. When markets rise, your trail rises too - and when it falls, your income falls too - my money is also in the market - just as my client's money is.

If the distributor builds his business around trail income, he will be fully aligned with the interests of his clients as well as his AMCs - since all will benefit in a rising market and suffer in a falling market. Your income should be linked to how well your client's money is doing. If a client's mutual funds are doing well, he is happy - and so are you - because your income also rises with a rising NAV.

I have been telling all our AMC friends to focus less and less on the upfront and instead give higher trails. That is the best business model for all of us. If my interests are aligned with my client's, my advice will be good.

WF: Have you considered focusing more on other product categories after your revenues in fund distribution were hit by the entry load ban?

Ajay Laddha: No, how it happens basically is everything is getting synchronised now. We are members of NSE, we are ARN holders, we are agents to good insurance companies, we are into commodities broking etc. So, ours is a full service offering - and products will depend on individual client needs.

But, I think that one big benefit for our funds distribution business will be the MFSS platform launched by NSE. I can have a single team servicing my clients equity, commodities and mutual fund needs - with a single KYC. This will be a big benefit for us - we can use our teams more effectively and serve our clients also much better.

WF: Do you find it a challenge for an equity dealer to also become a mutual fund advisor?

Ajay Laddha: It is a challenge - but I think dealers will have to upgrade and upskill themselves to cater to a wider range of client needs. See, even for a dealer, instead of just executing equity orders for clients, if he is able to learn more and advice clients across products, it will be motivating for him also, it gives him a growth path.

Once you understand equities, it is not difficult to understand equity funds. The key is to ensure that he is giving proper advice.

WF: The other issue that some people have raised about the MFSS is that you are exposed to credit risk because units are allotted in the client's name directly - and therefore if his cheque bounces, you have no recourse - unlike in shares, where the shares are delivered into your pool account. Is that a valid concern?

Ajay Laddha: I think it depends on what kind of risk management systems you put in place in your own firms and also frankly on what kind of clientele you have and what is your relationship with them. We don't do retail business, we don't have sub-brokers, we know our clients very well - it is not a significant risk issue for us.

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