Commission Disclosure: What the Investor Is Told
Commission disclosure is the machinery that tells a household what the distribution arrangement on their scheme pays for. The Securities and Exchange Board of India (SEBI) sets what must be told, to whom and how often, and those requirements move. One figure underneath all of it does not move, and a reader can compute it unaided: 0.80 percentage points a year between two plans of one scheme.
Three things are already settled elsewhere, and none of them is rebuilt here. The expense ratio runs against a scheme's own assets every day and never arrives as a bill. The distribution componentThe part of a scheme's running charge that pays for bringing an investment in and servicing it afterwards. is the part of that running charge which pays for that work. And one scheme can be held through two plans at two different ratios on one identical portfolio. All three are covered separately. The narrower question starts where those three stop: what is a household actually told about any of it?
One scheme carries the whole of this guide. Girnar Asset Management Limited, an invented asset manager, runs the Girnar Large Cap Equity Fund, an open ended equity scheme with net assets of Rs 4,200 crore held across 3,80,000 folios. Kalyani Bhagat manages the portfolio and Sohail Merchant heads operations. The scheme is available through two plans, one at an invented 0.85 per cent a year and one at an invented 1.65 per cent a year, and the securities, the weights, the manager and the daily valuation are identical on both sides.
Two boundaries, worth stating at the outset. Disclosure requirements, commission rules and caps are all set by SEBI and they move; a requirement copied out here does not merely go stale, it goes wrong. No commission rate is fixed here either, and a plausible wrong rate would be believed and repeated long after anybody could trace where it came from. Enough survives both boundaries to carry the whole subject.
What is the purpose of disclosure in a triangular arrangement?
Start with who knows what. Girnar Asset Management engages the distributor, and the terms between them are terms both parties agreed to, so both parties can see them. The unit holder, who is the person the whole arrangement exists to serve, is the one who cannot. The asymmetry is not a flaw somebody introduced into the design. The asymmetry is the design. Somebody has to agree the terms, and the person being served was not in the room when they were agreed.
Naming that gap is a description of the arrangement, not an accusation against anybody standing inside it. Think about a wedding. A household books a caterer, and the caterer brings along a tent contractor he has worked with for years. The household pays one bill to the caterer. The term between the caterer and the tent contractor is one the household never sees, and nobody in that story has done anything wrong. Almost every service a household buys has a layer like this folded into it, and disclosure is the ordinary, unexciting response to it.
So the machinery has one job. The machinery moves a defined quantity of what the two informed parties know across to the third party who does not. Not all of it, and not continuously. A defined quantity, at defined moments, in a defined form. SEBI at sebi.gov.in sets the quantity, the moments and the form, with the industry level material sitting at the Association of Mutual Funds in India (AMFI) at amfiindia.com. The current position on all three is read at the source on the day it is needed.
What are the three moments in how mutual fund distribution compensation is disclosed?
Documents are named differently in different places and the moments are not, so it helps to hold the three as moments rather than as documents.
The first moment is when the arrangement is entered into, and it carries point of sale disclosureWhatever a household is told at the time an arrangement is being entered into, rather than later.: the scheme is being explained, an application is being made, and identifiers written as the AMFI Registration Number (ARN), the Employee Unique Identification Number (EUIN) and the distributor code attach that transaction to somebody. The identifiers are how a transaction is later traced to a party. SEBI and AMFI set what each identifier is for and when each is called for, and how a transaction is attributed through them is covered separately.
The second moment is periodic, and it concerns the holder's own folio and nothing else. A periodic disclosureSomething a holder receives at intervals about their own holding, rather than once at the start. tells a holder what has happened on the holding they actually have. Where units are held in dematerialised form the record sits with a depository instead, the National Securities Depository Limited (NSDL) at nsdl.co.in or Central Depository Services Limited (CDSL) at cdslindia.com, and what reaches the holder travels through that channel rather than through the registrar and transfer agent.
The third moment is not about any one holder at all. The third moment produces aggregateAdded together across many parties, so that the total is visible and no single party inside it is. material about distribution published at industry level for anybody to read, and AMFI at amfiindia.com is where publication of that kind lives. AMFI publishes it. AMFI does not make the rule that requires it.
Each of the three answers a different question, so a reader holding one of them and wanting another's answer will search it forever and find nothing. What is actually required at each moment, in what form, at what interval and by when, is set by SEBI at sebi.gov.in and by AMFI at amfiindia.com. A text that printed an interval, a format, a number of days or a rate would be circulating a wrong instruction the morning after it changed, so every one of those belongs at the source.
What question does each kind of disclosure actually answer?
Readers routinely put a question to a document that was never built to take it, then read the silence as evasion. So spell it out.
The disclosure made when the arrangement is entered answers one thing: what am I entering, and who is attached to it. The disclosure is a snapshot at a moment. At that moment nobody knows how long the holding will last, so the snapshot is not a projection and was never designed to tell a household what an arrangement will come to across two decades of holding.
The periodic disclosure about a holder's own folio answers a different thing: what has happened there since. Units, value per unit, transactions, the identifiers attached to them. The statement is the record of one holding. The same statement is silent about every other holding and about every arrangement outside it, again by construction rather than by omission.
The industry level aggregate answers a third thing: how does distribution work across the whole market. An aggregate exists so that no single party inside it can be picked out, and the industry level answer is deliberately built that way. The answer to what am I paying is not in the same place as the answer to what does this industry pay, and no amount of careful reading will move it there.
The failure looks like this. A household reads an industry level publication, finds it interesting, then hunts through it for its own number, does not find it, and concludes that something is being kept from them. Nothing is being kept from them. The household is holding the wrong document for the question, in exactly the way that a train timetable does not carry the fare.
A holder wants to know what has actually happened on their own folio in the Girnar Large Cap Equity Fund. Which kind of disclosure answers that?
What can a disclosure never answer, however complete it is?
Three questions, and not one of them is a gap in anybody's paperwork.
Whether the service was actually delivered. A document can record that an arrangement exists and that a party is attached to it. A document cannot record whether that party picked up the phone in a bad week, sat with a household through a frightening month, or did nothing whatsoever for four years. Delivery is an event in the world, not an entry in a register.
Whether it was worth what it cost to that particular household. Worth is a judgement, and a judgement needs somebody to make it. One household needed the help and the other did not, so two households paying the identical 0.80 percentage points a year on identical holdings reach opposite and equally defensible answers.
Whether the scheme was a sensible thing for that household to hold at all. Suitability is a question about the household, its circumstances, and what else it owed and expected, and none of that is anywhere inside a disclosure document.
The three questions are not omissions in the disclosure machinery; they are questions of an entirely different kind, and the last two are covered separately under wealth and advice. An electricity bill is a good model. The bill states the units consumed and the rate applied, and it is complete and correct on both. No electricity bill has ever once said whether the second refrigerator was worth buying.
A disclosure received does not say whether the advice given alongside it was any good. Is that a gap in the disclosure?
What is the observable gap, and why does it carry so much weight?
Because it is the one figure on this whole subject that a reader can produce without anybody disclosing anything at all. The Girnar Large Cap Equity Fund publishes two ratios: an invented 0.85 per cent a year on one plan and an invented 1.65 per cent a year on the other. Subtract them. The difference is 0.80 percentage points a year. The subtraction produces the observable handleA quantity a reader can compute directly from published figures, without needing anybody to tell them anything. the rest of the arithmetic runs on.
Nothing else differs between the two sides, and that is what makes the subtraction clean. Kalyani Bhagat runs one portfolio, and both plans hold it. The securities are the same securities, the weights are the same weights, the valuation happens once a day for both, and the scheme's name is the same on both. Strip out everything identical and one difference remains, so the whole of the 0.80 percentage points is the distribution component and nothing else can be hiding inside it.
Percentages float free until they are landed, so put the gap in rupees. On a holding of Rs 1,00,000/-, 0.80 per cent a year is Rs 800/- a year. The scheme's average folio is Rs 4,200 crore spread across 3,80,000 folios, or about Rs 1,10,526/-, and on that folio the gap is about Rs 884/- a year, or about Rs 74/- a month. All three rupee figures are illustrative, computed here from invented ratios rather than quoted.
Two published ratios and one subtraction, done by the reader: the handle needs no document, no request and no disclosure from anybody. The gap therefore carries the argument, rather than any commission rate somebody would have to hand over. A figure a reader can rebuild unaided is worth more than a figure somebody has to hand over.
Where does the 0.80 percentage points a year on the Girnar Large Cap Equity Fund come from?
Is what a holder pays the same quantity as what a distributor receives?
No, and this distinction is what keeps the rest of the arithmetic honest.
The 0.80 percentage points a year is a cost to a holder. The cost is computable, it is checkable, and it is settled the moment the subtraction is done. A distributor's own receipt out of the arrangement is something else entirely: a term inside an agreement between Girnar Asset Management and the distributor, negotiated between them and published nowhere.
The two quantities need not be equal, and there is no general reason to expect them to be. A component inside a running charge funds work that has to be done and paid for however it is arranged, and how much of it lands where is a commercial matter that varies. The relationship between the two is not guessed at here, and the reason has some force behind it: a plausible invented rate would be quoted back with confidence for years, and a wrong number travels further than a missing one ever does.
The shape is familiar from ordinary life. A passenger pays a fare on a taxi application. The driver's share of that fare is a term between the driver and the operator, and it is not printed on the passenger's receipt. A passenger who assumes the fare and the driver's receipt are the same figure has not discovered anything; they have invented the difference and then believed themselves.
Is what a holder pays on the Girnar Large Cap Equity Fund the same quantity as what a distributor receives?
Worth a prediction before reading on. A gap of 0.80 percentage points a year sounds small. Compounded at a factor of 1.008 a year, what does twenty years of it come to?
How large is the gap once it is held for twenty years, and measured against what?
Twenty years is where the annual figure stops sounding trivial, and it is also where a percentage becomes dangerous unless what it is a percentage of is said out loud. Both halves matter, and the second half matters more than most readers expect.
Start with the compoundingThe effect of a difference repeating on a growing amount year after year, rather than being added up once for each year.. The convention used here is a factor of 1.008 a year. The factor is the 0.80 percentage points expressed as a multiplier, and raised to five, ten and twenty years it gives 1.040645, 1.082942 and 1.172764. The three factors are the whole of the arithmetic; everything after them is a matter of which denominator the division uses.
Now the terminal valueWhat a holding is worth at the end of the period being considered, rather than at the start. of each plan, and the baseThe amount a percentage is measured against. Change it and the same money produces a different percentage. the gap is struck against. Measured against the terminal value of the plan carrying the distribution component, the gap reads 4.065 per cent at five years, 8.294 at ten and 17.276 at twenty. Measured against the terminal value of the plan that does not carry it, the same three gaps read 3.906, 7.659 and 14.731 per cent. On that route 1 less 1 divided by 1.172764 is 0.147314.
One quantity, two denominators, two correct answers, and a percentage without its base named out loud is not yet a figure. The 17.276 and the 14.731 are the identical money read two ways. Neither is wrong and neither is complete on its own, and a reader who is handed one of them without its base has been handed half a sentence.
| Years held | Factor at 1.008 a year | Against the plan with the component | Against the plan without it |
|---|---|---|---|
| Five | 1.008 raised to five | 1.040645 | 1.040645 |
| Five, as a gap | Factor less one, then one less its reciprocal | 4.065 per cent | 3.906 per cent |
| Ten | 1.008 raised to ten | 1.082942 | 1.082942 |
| Ten, as a gap | Factor less one, then one less its reciprocal | 8.294 per cent | 7.659 per cent |
| Twenty | 1.008 raised to twenty | 1.172764 | 1.172764 |
| Twenty, as a gap | Factor less one, then one less its reciprocal | 17.276 per cent | 14.731 per cent |
A modelling note. A factor of 1.008 a year is a convention, not a derivation. Treated strictly multiplicatively instead, at 0.9915 over 0.9835, the annual factor is about 1.008134. Over twenty years that comes to about 1.175891, or about 17.589 per cent against the first base. No exact bridge exists on either route. Both routes leave the same finding: twenty years of the gap is worth roughly a sixth of a terminal value.
Half of what the worked instance teaches is what it cannot reach. State that too. The arithmetic does not say what any distributor receives, and no rate stated anywhere fixes it. The arithmetic also does not say how the scheme's Rs 4,200 crore divides between the two plans. The scheme wide figure of Rs 33.60 crore is 0.80 per cent of Rs 4,200 crore, and it computes as though every rupee sat in the plan carrying the component. Nothing establishes that split, so the scheme wide figure may only ever be quoted with the missing split named in the same breath. And the arithmetic says nothing whatsoever about what the household received for the money.
A twenty year gap on the Girnar Large Cap Equity Fund is quoted as 17.276 per cent. Against what?
Worth committing to an answer before touching the control below. Of the 0.80 percentage points a year, how much of it reaches the distributor?
One bar is arithmetic. The other bar is an assumption.
The control below moves one bar and leaves the other where it is. The top bar is the observable gap on the Girnar Large Cap Equity Fund, fixed at 0.800 percentage points a year because 1.65 less 0.85 is 0.80 whatever anybody assumes. The lower band is the share of that gap assumed to reach the distributor. The lower band starts unset, and the whole range stays shaded at every setting.
Nothing is set. The observable gap on the Girnar Large Cap Equity Fund is 0.800 percentage points a year, which is Rs 800/- a year on Rs 1,00,000/- held, and the share of that reaching any distributor is not in this platform's record. The whole range stays shaded because that is the honest picture.
Assumptions on screen. Both plan ratios on screen, 0.85 per cent and 1.65 per cent, are illustrative. The 0.80 percentage point gap is computed from them and is a cost to a holder, not a receipt to anybody. No commission rate is fixed anywhere, so every position of the control is an assumption rather than a finding. Commission rules, and any cap on them, are set by SEBI at sebi.gov.in.
What can a household actually do with all of this?
Three questions are worth asking, and they are questions rather than tests. Nobody marks the answers.
First, what service is actually received, specifically, in a normal year rather than in the year the arrangement was signed? The answer is worth writing down: the calls, the paperwork, the reviews, the times somebody stopped a rash decision. If the honest answer is blank, that is information. If it fills half a sheet, that is information too.
Second, what would the same help cost bought some other way? Not whether it is available free. It usually is not. The question is what the nearest substitute would run to. A substitute price gives the 0.80 percentage points a year something to sit beside.
Third, how long is the holding expected to last? The whole of the compounding block depends on that single number and on nothing else. Four years and twenty four years are different questions wearing the same clothes.
A household answering those three honestly can land anywhere, and nothing in the arithmetic here points at where. The figures give the size of one side of a trade. The figures are silent on the other side by construction, and the block below sets out why.
Who reaches for this arithmetic on a working day, and how?
Three people use it, and they use it in three different directions. A household reads it forwards. The household holds the plan at 1.65 per cent, subtracts, gets Rs 800/- a year on every Rs 1,00,000/- held, and puts that figure beside the service actually received. The subtraction converts a vague unease into one number the household can raise with the person serving them, a far better conversation than the one that begins with a suspicion.
An analyst uses it sideways, to put two things on one basis. Any comparison between a plan carrying the distribution component and one that does not has to name which side each figure sits on before the comparison means anything, exactly as any comparison of returns has to say gross or net before it means anything. The 17.276 and the 14.731 are the same discipline applied to a gap rather than to a return.
Sohail Merchant, who heads operations at Girnar Asset Management, works it backwards from the scheme's own books, and he runs into the limit named throughout. Rs 4,200 crore at 0.80 per cent is Rs 33.60 crore, but that computes as though every rupee sat in the plan carrying the component, and how the Rs 4,200 crore actually divides between the two plans is not in the record available here. So the figure travels only with that absence attached to it. Naming a missing split is not fussiness; it is the difference between a number and a number-shaped guess.
The error that gets made, in both directions at once
The first reader treats the gap as evidence of something hidden. Nobody sat them down and told them, the statement shows no such row, so something is being concealed and somebody is quietly taking it. The arithmetic does not support that reading. A component sitting inside a published ratio, computable by subtracting two published numbers on one identical portfolio, is not concealed. The component is simply not billed, and nothing a scheme charges a holder for anything is ever billed.
The second reader treats the absence of a bill as the absence of a cost. No invoice ever arrived, so nothing is being paid, so there is nothing to disclose and nothing to think about. The second reading fails on the same arithmetic from the other side. The 0.80 percentage points a year is genuinely being paid, every single day, and across twenty years it is worth roughly a sixth of a terminal value depending on which terminal value it is measured against.
Both readers have made the identical mistake about the identical number, one by inflating it into a wrong and the other by deflating it into nothing. The cost of the first is a household that walks away from a service it actually uses, angry at a person who did the thing they were engaged to do. The cost of the second is a household that does not believe it is buying anything and therefore never once asks what it is getting.
Say the correction once, in a form that repairs both. The gap is a stated price for a stated service. The price is real, it is findable by subtraction, and what it is worth is the household's call alone.
Why is the question of whether the arrangement is worth it left to the household?
Because the arithmetic holds one side of the trade with complete precision and does not hold the other side at all, and pretending otherwise would be the only genuinely dishonest move available.
The cost side is here in full. Two published ratios, one subtraction, 0.80 percentage points a year, Rs 800/- on every Rs 1,00,000/- held, and 17.276 per cent or 14.731 per cent across twenty years depending on the base named. Every one of those is computed here from figures stated to be invented, and every step can be checked.
The value side is not here, and it cannot be put here. The worth of the advice and the service is not a property of the scheme; it is a property of a particular household in a particular decade with a particular distributor, and it differs across every one of those. The thing being measured is not the same thing twice, so no record could ever contain it.
Settling that trade would mean deciding for a household what only the household can decide. The arithmetic is set out so a household can hold the cost side steady while it makes its own judgement about the other. Holding one side still is what makes the other side answerable at all.
Who sets the disclosure requirements, and where are they read?
SEBI sets what must be disclosed about distribution compensation, to whom, in what form and at what times, along with any cap that applies to such compensation, the registration conditions for the distributor role, the identifier and declaration requirements attached to a transaction, the turnaround periods for service requests, the grievance route available to a holder, and the line between distribution and advice. Every one of those, together with any number of days, interval, format, minimum and rate, is read at sebi.gov.in on the day it is needed.
AMFI at amfiindia.com is where the industry level material and the distributor registration and identifier framework are published. AMFI publishes; it does not make the rule. Where units are held in dematerialised form the record sits with a depository, NSDL at nsdl.co.in or CDSL at cdslindia.com, named here only for where such a holding is recorded.
After all that arithmetic, which plan is the sensible one to hold?
References
| Source | Document | Where |
|---|---|---|
| Securities and Exchange Board of India | The rules setting what must be disclosed about distribution compensation, to whom, in what form and at what times, and any cap that applies to it. Named here for the existence of those rules | sebi.gov.in |
| Association of Mutual Funds in India | The industry level disclosure material on distribution, and the distributor registration and identifier framework in which ARN, EUIN and the distributor code sit. Named here for where that material is published | amfiindia.com |
| National Securities Depository Limited and Central Depository Services Limited | Named only as the two depositories where a holding in dematerialised form is recorded. No process, period or requirement is stated | nsdl.co.in, cdslindia.com |
Girnar Asset Management Limited, the Girnar Large Cap Equity Fund, Kalyani Bhagat and Sohail Merchant are invented.
Educational material. Not advice on any investment, tax, budget or market position.