In a landmark move aimed at bolstering investor protection and enhancing transparency, the Securities and Exchange Board of India (SEBI) has announced a comprehensive overhaul of mutual fund regulations. The decisions, taken at the regulator's board meeting on Wednesday, December 18, 2025, include significant cuts to expense ratio limits and a reduction in brokerage fees paid by fund houses.
Core Reforms: Redefining the Expense Structure
The central reform involves a fundamental change in how the Total Expense Ratio (TER) for mutual fund schemes is calculated. SEBI has introduced the concept of a Base Expense Ratio (BER), which will now form the core of the TER. Crucially, the BER will exclude all statutory and regulatory levies.
As per the official statement, "Total Expense Ratio shall now be the sum of BER, brokerage, regulatory levies and statutory levies." This means charges like Securities Transaction Tax (STT), Goods and Services Tax (GST), stamp duty, SEBI fees, and exchange transaction costs will be charged on an actual basis, over and above the permissible brokerage limits.
Simultaneously, SEBI has slashed the BER limits across various scheme categories. For open-ended equity-oriented and other non-equity schemes, the base expense ratio limits under different Asset Under Management (AUM) slabs have been reduced by up to 15 basis points. In a notable cut, the BER limit for index funds and Exchange Traded Funds (ETFs) has been revised down to 0.9% from the earlier 1%.
The changes are even more pronounced for close-ended schemes. The BER limit for equity-oriented close-ended schemes now stands at 1%, a sharp reduction from the previous 1.25%. Furthermore, SEBI has removed an additional 5 bps expense allowance that was previously permitted for schemes with exit loads as a transitory measure.
Brokerage Caps Halved and Other Key Decisions
In a parallel move to reduce costs for investors, SEBI has drastically cut the maximum brokerage fee that mutual funds can pay. For cash market transactions, the brokerage cap has been halved to 6 basis points from 12 basis points. For derivative transactions, the limit has been revised downwards to 2 bps from the earlier 5 bps, excluding applicable levies.
The board also approved amendments to the Issue of Capital and Disclosure Requirements (ICDR) regulations to address practical challenges. Currently, pre-IPO capital held by non-promoters faces a six-month lock-in, creating issues when such shares are pledged before the public offer. SEBI's new rule mandates depositories to mark such securities as "non-transferable" for the lock-in period if a formal lock-in cannot be created, ensuring compliance.
To boost retail investor engagement, SEBI will now require a focused, standardized summary of offer documents—a draft abridged prospectus—to be available at the Draft Red Herring Prospectus (DRHP) stage itself, in addition to the final Red Herring Prospectus (RHP) stage. The disclosures in the abridged prospectus have also been rationalized.
Broader Market Impact and Future Deliberations
The revised framework is expected to strengthen governance standards within the mutual fund ecosystem by making costs more transparent and directly passing on the benefits of economies of scale to investors. SEBI also approved measures to enhance retail participation in the corporate debt market by allowing debt issuers to offer incentives to certain investor categories and revamped stock broker regulations.
Separately, the board considered recommendations from a high-level committee (HLC) on conflicts of interest and disclosures for SEBI employees and officials. SEBI Chairman Tuhin Kanta Pandey stated that these suggestions required more detailed deliberation due to concerns raised by employees regarding public asset disclosures and would be taken up again at the next board meeting.
These sweeping reforms mark a significant step by SEBI to align India's mutual fund industry with global best practices, prioritizing cost efficiency and investor-centric transparency.
