What To Make Of SEBI’s Order Against DSP AMC?
SEBI's action against DSP AMC on expense ratio issue has experts divided.
DSP Asset Management Co. violated the rules by taking on expenses of one of its schemes on its books, SEBI said in its order on Thursday.
The market regulator has imposed a penalty of Rs 1 lakh on the AMC for bearing some expenses of DSP Nifty 50 ETF.
The actual expenses charged under DSP Nifty 50 ETF was 0.07%, as against actual expense incurred by the scheme i.e., 0.16%. The reason for excess expense borne by the AMC is due to competitive market and increasing of Total Expense Ratio would have restricted its ability to increase the scheme’s AUM, the Securities and Exchange Board of India noted in its order.
It highlighted the Mutual Fund Regulations to say that the maximum an AMC can charge for an index fund scheme or ETF is 1% of the daily net assets. DSP Nifty 50 ETF could have charged up to 1% of expense to the scheme, but it charged only 0.07% while the actual expense incurred by the scheme was 0.16%. It went on to rely on a 2018 Circular to say that all scheme-related expenses must be paid from the scheme itself, and not from the books of the AMC, its associate, sponsor, trustee or any other entity through any route.
DSP, in its response to the regulator, said that this is an incorrect reading of the 2018 Circular. As per the AMC, the circular makes it clear that the 1% expense limit may be exceeded as long as the excess is absorbed by the AMC or the trustee company or the sponsor. Therefore, there is no absolute bar on the asset management company bearing expenses.
The AMC reiterated this view in a comment to BQ Prime.
It explained that the AMC absorbed Rs 53,000 for DSP Nifty 50 ETF in order to keep the expenses at 7 basis points in line with other similar funds in the market.
“There was an interpretation issue with respect to SEBI’s guidelines relating to scheme expenses, which were largely aimed at bad practices around commission payments, misselling and portfolio churning. DSP Nifty ETF had no commission expenses or management fees. A portion of the scheme operating expenses were borne by the AMC in order to keep the scheme expenses lower in line with TER charged by other similar schemes and in the interest of investors.”
DSPIM had self-disclosed this interpretation to SEBI as part of regulatory reporting. It may also be noted that regulations permit AMC to absorb scheme expenses in excess of the regulatory limit. The regulatory interpretation of the guideline, as per the adjudication order, shows no room for any exception, howsoever immaterial.DSP Spokesperson
Finsec Law Advisors' Sandeep Parekh, in a series of comments on Twitter, criticised SEBI’s order as being “profoundly wrong”. He acknowledged that the 2018 Circular is a little ambiguously worded, but its intention is very clear—that malpractices with respect to payment of distributors from AMC’s pockets be disallowed.
According to him, the Mutual Fund Regulations allow the AMC or sponsor to pay for expenses beyond the 1% regulatory cap. "So, a Circular interpreting a prohibition on payment from AMC or sponsor must either be void, or must be read down."
In the present case, it should be read down because the language suggests that what was being prohibited was payment of commissions to distributors from AMC’s pockets. This is great for investors, who really are being subsidised by the AMC—and it is the market forces at play which keep the costs down for investors. Penalising it is a serious regulatory self-goal.Sandeep Parekh, Founder, Finsec Law Advisors
Not everyone agrees with this view.
Though SEBI has taken a hyper-technical view of its Circular, there is some merit in the regulator's reasoning that the practice of an AMC absorbing expenses to keep a particular's scheme's TER competitive can only be afforded by profitable AMCs or AMCs with deep pockets, Nirav Shah, partner at DSK Legal, said.
SEBI is splitting hairs here. That said, there's logic in saying that the investor should have a clear picture of the scheme's expense ratio while comparing it with its peers. And that smaller AMCs won’t be able to take on such expenses on their books.Nirav Shah, Partner, DSK Legal
JN Gupta, managing director of proxy advisory firm SES also sees merit in SEBI's view. Just because there is a benefit to investors doesn't make it kosher, he said.
Is the AMC subsidising all the schemes in this fashion or only DSP Nifty 50 ETF? Let's say an AMC has three schemes. In two, it's beating the peers and in one it's not. Here the AMC decides to subsidise the scheme by adjusting the expense ratio. So, it's a matter of transparency and fairness.JN Gupta, MD, SES
