SEBI Releases Consultation Paper For Mutual Funds — What Does This Mean For AMCs?

The Securities & Exchange Board of India (SEBI) has proposed a series of changes to the way mutual funds are managed, introducing measures to significantly cut brokerage costs, enhance transparency on fees and simplify how investors are charged.

In a comprehensive consultation paper reviewing the 1996 Mutual Fund Regulations, SEBI outlined a plan to tighten cost structures for Asset Management Companies (AMCs), with the aim of passing on benefits to investors.

The focal point of the proposal is the reduction in brokerage and transaction cost that can be tied to a fund. The market regulator has proposed a mechanism to cap brokerage for cash market trades at 2 basis points, which is much lower than the current 12 bps. For derivatives, the cap would be lowered from 5 bps to just 1 bps.

In another significant move, SEBI has proposed removing the transitory 5 bps additional expense that AMCs were allowed to charge on their entire assets under management (AUM) since 2018.

In order to offset this move, the regulator suggested a simultaneous 5 bps increase in the base Total Expense Ratio (TER) slabs for open-ended active schemes.

Speaking of Expense Ratios, SEBI has moved to make expense disclosures more transparent.

Part of the proposal states that taxes and government charges like STT, GST, and stamp duty should not be counted within the mutual fund expense ratio. Instead, these costs will be shown separately and directly charged to investors.

By doing so, SEBI wants to ensure that TER reflects the value of what the fund managers actually charge for managing your money and not taxes.

SEBI has also reduced the base TER limits since the excluded taxes are no longer part of it. Put simply, you’ll see clearer, more transparent costs - one part for fund management and another for statutory taxes.

The consultation paper also proposes an optional framework for a performance-linked TER, allowing AMCs to charge higher or lower fees based on a fund's performance.

Finally, the regulator proposed that all New Fund Offer (NFO) expenses incurred up to the allotment of units must be paid by the AMC, not the scheme, in an attempt to further tighten cost accountability.

SEBI's consultation paper on mutual funds, if implemented, is a risk to earnings for AMCs, according to a Jefferies report.

The most severe impact is likely to be seen from the proposed “cut of 5 bps in equity exit loads.”

Jefferies estimates this change alone could reduce the FY27 profit before tax (PBT) for major listed players like HDFC AMC and Nippon India AMC by a substantial 30-33%.

Moreover, the proposal to slash brokerage fees on cash market transactions from the current 12 bps down to just 2 bps is a significant structural change, one which may benefit investors but AMCs, not so much.

Jefferies notes it will likely have a negative impact on the institutional brokers that service the funds, specifically highlighting 360 ONE and Nuvama.

However, not all proposals are expected to hurt the bottom line. The planned lowering of the headline Total Expense Ratio (TER) by excluding statutory charges is viewed as likely neutral to earnings.