SEBI Slashes MF expense ratio, yielding savings of Rs. 1,500 cr to investors

SEBI Slashes MF expense ratio, yielding savings of Rs. 1,500 cr to investors

The market regulator Securities and Exchange Board of India (SEBI) on September 18, 2018  announced changes to the total expense ratio (TER) structure of the domestic mutual fund (MF) industry, which it said would lead to annual savings of about Rs. 1,500 crore for investors.

SEBI lowered the expenses paid by investors of equity mutual fund schemes by linking them to assets under management (AUM). These decisions were announced after SEBI’s board meeting in Mumbai.

Mr. Madhabi Puri Buch, whole-time member, SEBI, said “Assets under management of the industry are at a record of Rs. 25 lakh crore, resulting in a revenue of Rs. 13,000 crore. Cutting down the expense ratio is one of the few measures that SEBI had planned to bring down the cost for MF investors. Other measures too will follow.”

According to SEBI, the TER (total expense ratio) for closed-end equity-oriented schemes will be a maximum of 1.25% and for other closed-end schemes will be a maximum of 1%.

For index funds and exchange-traded funds, it will be up to 1%. For Fund of Funds, it will be a maximum of twice the TER of the underlying funds.

For Fund of Funds investing in liquid, index and ETF schemes, the maximum total TER will be 1%.

For Fund of Funds investing in active underlying schemes, the maximum total TER will be 2.25% for equity-oriented schemes and 2% for other schemes.

SEBI makes investing in mutual funds cheaper, caps expense ratio at 1.05%

“Benefits of large scale will be passed on to investors. Paying brokerage via the trail route is a healthy practice and will ensure discipline,” said Radhika Gupta, CEO, Edelweiss Mutual Fund.

The Securities and Exchange Board of India (Sebi) on Tuesday announced major changes to the fee structure for the Rs 25-trillion mutual fund (MF) industry, a decision that will hit the profits of asset management companies (AMCs) but result in savings for investors.

The regulator has capped the so-called total expense ratio (TER) for fund houses with equity assets up to Rs. 500 billion at 1.05%, down from as much as 1.75% charged earlier.

AMCs with lower assets under management (AUM) will be allowed to charge a higher TER, based on slabs. Sebi also said the industry would have to move to a full “trail model” for commissions. It also capped fees for exchange-traded funds (ETFs) at a maximum of 1%.

“The mutual fund industry has grown by leaps and bounds. However, the benefits of economy of scale have not been fully shared with investors,” said Ajay Tyagi, chairman, SEBI.

The reduction in the TER could shave off profitability of large fund houses by up to 12%. Share prices of listed AMCs HDFC MF and Reliance Nippon MF could see a correction, said experts.

The regulator “broadly” accepted the relaxations suggested by the HR Khan committee pertaining to the know-your-customer (KYC) requirements of foreign portfolio investors (FPIs), particularly non-resident Indians (NRIs). The move will help assuage overseas investors’ concerns at a time the rupee is weakening against the dollar.

Earlier this month, the Khan panel said SEBI’s controversial April 10, 2018 circular should be used for determining KYC and not for ownership. The panel also said NRIs should be allowed to invest and manage a foreign fund. Mr. Tyagi said it has broadly accepted all the proposals made by the Khan committee and will soon issue a final circular that will address most of the concerns, including high-risk jurisdiction issue.

SEBI will amend the so-called prohibition of insider trading (PIT) and prohibition of fraudulent and unfair trade practices (FUTP) based on recommendations made by Mr. TK Viswanathan committee to give itself more teeth crackdown against fraudulent activity. The new definition of “dealing in securities” will include employees, agents and also curb use of front entities for insider trading.

Listed companies will also have to put in place systems to prevent misuse of price-sensitive information. More importantly, SEBI said it will seek powers from the government to intercept calls and electronic communication under the Telegraph Act. At present, such powers are only with central agencies like CBI and Income Tax department.

Mr. Tyagi said there are privacy issues with this proposal and the powers will have to be handled with outmost care.

SEBI also gave an in-principle nod to a new unified payment interface (UPI)-based framework for IPOs to allow listing of a security in 3 days, down from 6 days at present. The regulator also approved a new framework for reclassification of promoter entities as ordinary shareholders. The move will require board and shareholder approvals.

SEBI said it will introduce a new framework, which will be operational next fiscal onwards, that will push large corporate towards the bond market for their funding requirements. The move will help reduce the load on the banking system and help deepen the corporate bond market.

SEBI also approved interoperability among clearing corporations which will lead to better margin utilisation and help reduce cost of trading. The regulator said it will allow a “peer-to-peer” framework for interoperability.

Mr. Tyagi said the extension of trading hours may not take place from October 1, 2018 as exchanges are yet to submit their detailed operation plan. Further, SEBI said it is examining the proposals submitted by NSE and BSE to start trading in commodities derivatives.

SEBI said it will soon review the processes for credit rating agencies and soon issue a circular on the issue. The move comes after default rating issued to IL&FS within months after assigning a AAA-rating.

 “Despite all the checks and balances and inspections, these issues keep emerging,” Mr. Tyagi said when asked it was looking into the practices adopted rating agencies.

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