The Securities and Exchange Board of India (Sebi) has granted the financial industry a crucial one-week extension to submit feedback on its transformative mutual fund proposals. The new deadline for public comments is now November 24, moving from the original date of November 17.
Understanding the Proposed Regulatory Overhaul
This extension comes in response to significant apprehension within the investment sector. Market participants are concerned that the draft regulations could substantially affect the earnings of asset management companies (AMCs), mutual fund distributors, and stockbrokers. Sebi's comprehensive proposals are designed to enhance transparency, eliminate concealed charges, and strengthen the supervision of intermediaries.
Central to the consultation paper released last month is a recommendation to impose strict limits on brokerage and transaction charges. These costs are currently allowed in addition to the Total Expense Ratio (TER), which is the maximum annual fee a mutual fund scheme can charge its investors. The TER encompasses management fees, administrative costs, brokerage, and other operational expenditures, all of which are deducted from the scheme's returns, directly influencing an investor's final earnings.
Specific Changes and Their Financial Impact
Sebi has put forward a sharp reduction in the existing brokerage caps. For cash-market transactions, the proposed cap is 0.02% (2 bps), a significant drop from the current 0.12% (12 bps). Similarly, for derivatives trades, the limit would be reduced to 0.01% (1 bps) from the present 0.05% (5 bps). This move is intended to ensure that expenses are charged fairly to investors only once, preventing double-dipping.
Another major change involves scrapping an additional charge of 5 basis points that AMCs earn over and above the exit load. Currently, AMCs collect this fixed fee annually based on the fund's total assets, regardless of whether investors redeem their units, and it is included in the TER. According to an analysis by Nomura Financial Advisory and Securities (India) Pvt. Ltd dated 30 October, the removal of this 5 bps component could lead to a 6–8% decline in AMCs' profit before tax for the financial year 2027.
Short-Term Pain for Long-Term Gain
Asset management companies are worried that these proposals might force them to absorb research expenses instead of passing them on to investors. This shift could increase their operational costs and squeeze profit margins in the immediate future.
However, despite the anticipated short-term stress on industry revenues, the proposed regulations are expected to ultimately benefit the Indian investor. By ensuring that investors pay solely for genuine execution costs and not for bundled research fees, the new framework promises a more transparent and fairer mutual fund ecosystem.
