Wide-ranging reforms: Sebi overhauls MF cost framework, stockbroking rules

Sebi has renamed expense ratio limits as the base expense ratio and moved statutory levies outside the cap, while approving a rewrite of MF regulations to tighten transparency and governance

The Securities and Exchange Board of India (Sebi) on Wednesday overhauled the cost framework for the ₹80 trillion domestic mutual fund (MF) industry, introducing a simplified structure aimed at improving transparency for investors while balancing the impact on asset managers. 

The revised framework, which will come into effect from April 1, introduces the concept of a base expense ratio (BER), representing only the fee charged by an asset management company (AMC) for managing investors’ money. 

This replaces the current total expense ratio (TER), which also includes pass-through costs such as brokerage, securities transaction tax (STT), stamp duty, and exchange fees. 

Under the new regime, such levies will be excluded from the BER and will be disclosed separately. The BER will vary by scheme category and corpus. 

For open-ended equity-oriented schemes, the revised BER will range from 2.10 per cent for schemes with assets up to ₹500 crore to 0.95 per cent for schemes with assets exceeding ₹50,000 crore. In the case of non-equity schemes, the limits have been set between 1.85 per cent and 0.70 per cent across similar asset slabs. 

Base expense ratios for close-ended schemes have also been reduced. AMCs will be allowed to charge a lower BER to attract customers.

 

When Sebi had initially floated the proposal to revamp the MF cost structure, shares of listed AMCs had declined amid concerns that the changes could compress profit margins.

 

Addressing these concerns, Sebi Chairman Tuhin Kanta Pandey said the final framework strikes a middle ground, ensuring that asset managers are not unduly impacted while investors benefit from greater clarity and lower costs.

 

Importantly, Sebi dropped its proposal to unbundle research and broking charges, citing the failure of a similar experiment in Europe.

 

However, the regulator has rationalised brokerage caps. In cash market transactions, the brokerage ceiling, excluding statutory levies, has been reduced to 6 basis points (bps) from an effective 8.59 bps earlier. For derivatives, the net brokerage cap has been lowered to 2 bps from 3.89 bps.

 

Separately, Sebi approved a comprehensive overhaul of the nearly three-decade-old mutual fund and stock broker regulations, which put more onus on stock exchanges as first-level regulators. Obsolete provisions will be deleted or merged, significantly slimming down the regulatory rulebook.

 

The regulator also deferred a decision on implementing the recommendations of a high-level committee on conflicts of interest, citing privacy concerns raised by Sebi employees regarding the public disclosure of their assets.

 

On the debate around the rising share of secondary components in initial public offerings (IPOs), Pandey said India’s capital markets have matured to cater to diverse investor needs. Companies now raise capital at an earlier stage, he said, and it is reasonable to allow promoters and early investors an exit during the IPO process.

 

“Capital formation has different models. India is now very mature and to achieve the goal of achieving $5 trillion economy we should encourage different kind of investors,” he said.

 

Other key decisions include a new framework for managing shares that are locked in or pledged at the IPO stage, and measures to make IPO disclosures more retail-friendly, including easier access through QR codes and more upfront visibility of important information through an abridged prospectus.

 

Sebi has also allowed incentives for retail investors in public issues of debt securities to boost participation.

 

In addition, the regulator raised the threshold for classification as high-value debt-listed entities (HVDLEs) to ₹5,000 crore from ₹1,000 crore earlier, in a move to ease corporate bond issuances by NBFCs, HFCs, REITs, and insurance companies.

 

Sebi has also allowed credit rating agencies to rate unlisted debt securities and a wider range of financial instruments, which was not possible earlier due to the lack of explicit rating guidelines.

 

The regulator also announced relaxations in the transfer of securities held in physical mode. 

Wide-ranging reforms

• No final call yet on conflict of interest disclosures, addressing concerns raised by employees
• MF brokerage caps tightened: Cash market ceiling at 6 bps (from 8.59 bps), derivatives 2 bps (from 3.89 bps); no extra 5 bps for exit loads
• New framework to manage IPO shares locked in, pledged
• More retail-friendly IPO disclosures
• Incentives for retail investors in debt public issues
• High-value debt-listed entities threshold up from ₹1,000 crore to ₹5,000 crore