Sebi mulls overhaul of mutual fund rules to curb costs, boost transparency

New Delhi: Markets regulator Sebi has proposed a comprehensive overhaul of mutual fund regulations, introducing clearer definition of Total Expense Ratio (TER) and revising limits on brokerage charges.

The proposals are aimed at bringing regulatory clarity, reducing redundancies, and promoting ease of compliance, the Securities and Exchange Board of India (Sebi) said in its consultation paper.

Under the proposed framework, Sebi plans to eliminate the additional 5 basis points (bps) that asset management companies (AMCs) were previously allowed to charge across mutual fund schemes.

This additional expense, introduced to offset the impact of crediting exit loads back to schemes, was first set at 20 bps in 2012 and later reduced to 5 bps in 2018. The additional expense of 5 bps that mutual fund schemes were allowed to charge was transitory in nature, Sebi noted.

Accordingly, with the objective of rationalizing costs for unitholders, this expense has been proposed to be removed. "However, to mitigate the impact of this change on the operations of AMCs, the first two slabs of the expense ratio for open-ended active schemes have been revised upward by 5 bps," it added.

To protect interest of investors and to ensure that expenses are charged fairly only once to the investors, the brokerage charge has been revised from 12 bps to 2 bps for cash market transactions and 5 bps to 1 bps for derivative transactions to bring clarity and transparency, the regulator proposed.

To facilitate greater clarity and transparency, Sebi has proposed to exclude all statutory levy -- STT (Securities Transaction Tax), GST (Goods and Services Tax), CTT (Commodity Transaction Tax) and Stamp duty-- from the expense ratio limits along with the present permissible expenses for brokerage, exchange and regulatory fees.

Presently, GST on management fees is permitted over and above the TER limit.

However, all other statutory charges are part of the overall TER limit specified for mutual fund schemes.

"The expense ratio limits are proposed to be exclusive of statutory levy, so that any change in statutory levy in future are passed on to the investors," Sebi proposed.

It said that provision enabling expense ratio to be charged based on performance of a scheme has been introduced and same would be voluntary for AMCs.

A detailed framework in this regard shall be finalised separately in consultation with stakeholders, it added.

Sebi noted that mutual fund industry, which began in 1963, now manages over Rs 75.6 lakh crore in assets with 25 crore investor accounts.

Also, Sebi has proposed simplifying eligibility norms for fund sponsors, digitizing investor communications such as annual reports, and removing outdated provisions like those on capital protection and real estate mutual funds.

Additionally, the regulator has suggested easing compliance by reducing the frequency of mandatory trustee meetings, eliminating newspaper advertisements for scheme changes replacing them with online disclosures and removing duplicative reporting.

Sebi has sought public comments on proposals until November 17.