In a landmark move aimed at bolstering investor protection and market transparency, the Securities and Exchange Board of India (SEBI) announced a comprehensive overhaul of mutual fund regulations on Wednesday, December 18, 2025. The sweeping reforms, approved during the regulator's board meeting, include significant reductions in the fees mutual funds can charge investors and a revamp of how these costs are disclosed.
Core Reforms: Redefining and Reducing Costs
The cornerstone of SEBI's new framework is a revised structure for the Total Expense Ratio (TER). The regulator has introduced a clear definition, stating that the Total Expense Ratio shall now be the sum of Base Expense Ratio (BER), brokerage, and all regulatory and statutory levies. This move is designed to bring greater clarity for investors.
Under the new rules, the Base Expense Ratio will exclude statutory charges like Securities Transaction Tax (STT), Goods and Services Tax (GST), stamp duty, and SEBI fees. These will be charged separately on an actual basis. Simultaneously, SEBI has slashed the BER limits across various fund categories.
For open-ended equity-oriented schemes, the BER limits across different Asset Under Management (AUM) slabs have been reduced by up to 15 basis points. The limit for index funds and Exchange Traded Funds (ETFs) has been revised down to 0.9% from the earlier 1%. In a more substantial cut for close-ended equity schemes, the BER limit now stands at 1%, down from 1.25%.
Brokerage Caps Halved and Other Key Changes
In a parallel move to reduce costs further, SEBI has drastically cut the maximum brokerage fees mutual funds can pay. For cash market transactions, the permissible brokerage has been halved to 6 basis points from 12 basis points. For derivative transactions, the cap is now 2 basis points, reduced from 5 basis points.
The regulator has also eliminated an additional expense allowance. The extra 5 basis points that schemes with exit loads were previously allowed to charge has been removed as a transitory measure. SEBI stated that this revised framework will strengthen investor protection, transparency, and governance standards within the mutual fund industry.
Streamlining IPO and Debt Market Processes
Beyond mutual funds, the SEBI board approved several other key regulatory changes. To address practical challenges in Initial Public Offerings (IPOs), it amended the Issue of Capital and Disclosure Requirements (ICDR). Now, if lock-in requirements for pre-IPO shares held by non-promoters cannot be enforced due to existing pledges, depositories will mark those securities as "non-transferable" for the lock-in period.
To boost retail investor participation, SEBI has mandated that a concise, standardized summary of offer documents—a draft abridged prospectus—must be made available at the Draft Red Herring Prospectus (DRHP) stage itself. The board also approved rationalizing disclosures in the final abridged prospectus.
Furthermore, to encourage the corporate debt market, SEBI has now permitted debt issuers to offer incentives to specific investor categories.
Governance and Future Deliberations
The board meeting, chaired by Tuhin Kanta Pandey, also reviewed recommendations from a high-level committee on conflicts of interest. However, due to concerns raised by employees regarding public asset disclosures, the board decided these suggestions required more detailed deliberation. SEBI Chairman Pandey confirmed that these recommendations would be taken up again at the next board meeting.
These wide-ranging reforms mark one of SEBI's most significant interventions in the mutual fund space in recent years, directly targeting cost structures to ensure a fairer deal for the common investor in Mumbai and across India.
