SEBI Proposes Sweeping Overhaul of Mutual Fund Regulations to Reduce Investor Costs

Strategic Insights -

The capital markets regulator, SEBI, has released a consultation paper proposing significant changes to mutual fund regulations in India. The aim is to simplify rules, reduce costs, and increase transparency for investors. The regulations, which date back to 1996, are being reviewed to bring benefits directly to investors and make mutual fund investing simpler and cheaper. Key proposals include reducing brokerage and transaction costs, bringing clarity to fee disclosures, and tightening cost structures for fund houses.

Key Takeaways:

  • SEBI proposes to reduce brokerage and transaction costs for mutual fund investors from 12 bps to 2 bps for cash market trades and from 5 bps to 1 bps for derivatives.
  • The regulator also plans to exclude statutory levies such as GST, STT, CTT, and stamp duty from the overall expense ratio (TER) limits.
  • Transparency in fee disclosures will be improved by showing all statutory charges separately.
  • The consultation paper mandates clearer TER disclosures, covering all expense heads, brokerage, exchange and regulatory fees, and statutory levies.
  • An optional performance-linked TER framework has been proposed, allowing asset management companies to charge based on a scheme's performance, subject to a detailed structure to be finalised later.
  • Roles and obligations of trustees and AMCs have been standardised under specific heads for easier reference.
  • AMCs (or their subsidiaries) will be allowed to offer investment management and advisory services to non-pooled funds, provided they maintain "Chinese walls" between business units and are under enhanced trustee oversight.
  • Requirements for publishing advertisements in newspapers for changes in control or scheme attributes have been replaced by digital communication through websites, emails, or SMS.
  • Submission of ad copies to SEBI has been dropped as monitoring is now automated.
  • Definitions like "Total Expense Ratio" and "Exit Load" have been updated, and views on provisions related to Capital Protection Oriented Schemes, Real Estate Mutual Funds, and Infrastructure Debt Funds have been removed.

Statistics:

  • Reduction in brokerage and transaction costs: 12 bps to 2 bps for cash market trades and 5 bps to 1 bps for derivatives.
  • Increases in expense ratio slabs: 5 bps in the first two tiers.
  • Introduction of an optional performance-linked TER framework: to be finalised later.
  • Updates to definitions: "Total Expense Ratio" and "Exit Load".

Sources:

  • SEBI consultation paper on a comprehensive review of SEBI (Mutual Funds) Regulations, 1996.
  • SEBI press release announcing the review and proposals of the mutual fund regulations.