The Securities and Exchange Board of India (SEBI) has released a consultation paper inviting comment from public on proposed changes to the SEBI (Mutual Funds) Regulations, 1996. The objective is to seek public comments on a redrafted set of regulations aimed at simplifying language, removing redundancies, and enhancing clarity, driven by the significant growth and complexity of the Indian mutual fund industry over the past three decades. Key proposed changes include simplifying eligibility criteria and roles, streamlining expense ratio limits and disclosures for greater transparency and investor protection, and making adjustments for ease of compliance by digitalizing communications.
One of the key changes proposed therein, which will directly benefit the unitholders if implemented, is the streamlining of the expense ratio framework for MF schemes to increase transparency, rationalize costs for unitholders, and protect investor interests. We have discussed the major proposals below:
1. Rationalizing / removing the additional 5 bps Charge:
The provision allowing MF schemes to charge an additional 5 bps (0.05%) on the whole Assets Under Management (AUM) for schemes where an exit load is applicable / levied is proposed to be removed considering this expense was deemed "transitory in nature," and its removal is intended to rationalize costs for unitholders.
2. Excluding statutory levies from expense ratio limits:
It is proposed to exclude all statutory levies (i.e., Securities Transaction Tax (STT), Goods and Services Tax (GST), Commodities Transaction Tax (CTT), and Stamp duty) from the existing expense ratio limits. This change is intended to facilitate greater clarity and transparency. Currently, only GST on management fees is permitted over and above the Total Expense Ratio (TER) limit, while all other statutory charges are included within the specified TER limit. Making the expense ratio limits exclusive of statutory levy ensures that any future changes in statutory levies can be passed on to the investors (like the recent reduction in GST rates). As a result of this exclusion, the expense ratio limits are proposed to be revised downward to the extent of GST on all expenses other than management fees.
3. Revising brokerage and transaction charge limits:
The limits for brokerage charges are proposed to be significantly reduced to ensure expenses are charged fairly only once to investors, addressing concerns over bundled services (like research). For cash market transactions, the brokerage charge limit is revised from the existing 12 bps (0.12%) of trade value down to 2 bps (0.02%). For derivative transactions, the brokerage charge limit is revised from the existing 5 bps (0.05%) of trade value down to 1 bps (0.01%).
4. Defining and disclosing total expense ratio:
A new definition for "Total Expense Ratio (TER)" is proposed to be incorporated into the regulations for transparency and clarity, covering all scheme expenses charged to investors. The proposed 'Total Expense Ratio' is clarified to include the expense ratio (as per the specified limits) plus brokerage, exchange and regulatory fee, and plus statutory levy. New disclosure requirements for the TER, detailing all relevant heads, have also been mandated to enhance transparency.
5. Introducing Performance-Based Expense Ratio:
A new provision is introduced that enables the expense ratio to be charged based on the performance of a scheme. This differential expense ratio structure shall be voluntary for AMCs, and a detailed framework regarding this proposal will be finalized separately after consultation with stakeholders.
If implemented, the above changes could bring down the costs to unitholders by 12-15%, thereby allowing more room to reap benefits of long-term compounding.