MUMBAI: The Securities and Exchange Board has almost completely overhauled the mutual fund regulations, penned way back in 1996, to improve cost transparency and reduce the expense burden on investors. This was among seven other changes for the capital markets including introduction of an abridged IPO prospectus, and a complete overhaul of the 1992 broker regulation.
The Sebi board meeting here on Wednesday -- the fourth since the new chairman Tuhin Pandey took over in March -- has also cleared changes to the total expense ratio (TER) framework, replacing it with a base expense ratio (BER). This excludes all statutory levies such as securities transaction tax (STT), GST, stamp duty and commodities transaction tax from calculations, which will be directly but separately passed on to the investor. The TER was inclusive of these statutory duties and levies. The board has also approved tighter caps on brokerage and distribution commissions and allowed performance-linked expense structures for certain schemes.
The new mutual fund regulations replace the 1996 framework. While the old one ran into 162 pages or 67,000 words, the new one is only 88 pages or 31,000 words, Pandey told reporters here Wednesday evening.
Asked whether the investor benefits from the changes, Pandey answered in the affirmative, saying, “The BER is a cap and not a floor and the new norms completely remove the 5 bps exit load that an investor had to pay. Also a fund house is free to offer a lower BER, which also benefits the investor.”
Statutory levies (STT/CTT, GST, stamp duty, Sebi and exchange fees, etc.) are to be charged on actuals, over and above the BER, he said, adding that the additional 5 bps expense allowance linked to exit loads has been removed.
The regulator has also rationalised the brokerage caps on mutual funds by revising its earlier proposal to cap the brokerage that mutual funds pay, raising the limit to 6 bps from the earlier 2 bps for equity cash transactions. At present, fund managers pay up to 12 bps as brokerage to buy and sell stocks in their portfolios. Sebi changed brokerage rates for derivative mutual fund deals from 1 to 2 bps exclusive of levies.
The regulator has also cut the base expense ratio limit for index funds, ETFs to 0.9% from 1% and for close-ended equity schemes to 1% from 1.25%.
"The key highlights of the overhaul include improved clarity on statutory levies and expense ratio limits, which are now referred to as the BER," said Pandey, adding, "After the consultation paper was issued, several representations were received from various stakeholders." Taking these into account, a balanced view has been adopted, he said.
The regulator noted that the new regulatory framework aims to simplify compliance and operational requirements by rationalizing reporting, such as reducing annual trustee meetings and removing separate half-yearly portfolio disclosures, and eliminating duplicative filings under MF regulations. This promotes digital-first disclosures, replacing physical submissions and newspaper advertisements with online monitoring and website/email communication.
The new framework also streamlines borrowing, allowing equity-oriented index funds and ETFs to borrow for execution and intra-day redemption needs, while deleting redundant provisions like chapters on real estate and infrastructure mutual funds.
"An important enhancement is the enabling of borrowing by equity-oriented index funds and equity-oriented ETFs for execution-related needs, along with clarification on the permissibility of intraday borrowing mechanisms to manage redemption-related timing mismatches. This was a key concern raised by the industry and has been appropriately addressed," said Pandey.
Explaining the rationale, whole-time member Amarjeet Singh said the goal is better execution and, consequently, lower tracking error.
On October 28, Sebi had released a detailed consultation paper proposing a restructuring of the mutual fund expense framework, citing concerns that the existing TER regime masked actual costs borne by investors. The paper proposed sharply lowering brokerage caps for asset management companies to 2 bps for cash equity trades and 1 bps for derivatives, from existing higher limits.
The regulator has also flagged that including statutory levies within TER inflated costs without reflecting fund management efficiency, and sought feedback on linking a portion of fund expenses to performance relative to benchmarks similar to AIFs.
Meanwhile, the board has decided to seek more internal discussions as well as public feedback on the report of the high level committee set up last April to recommend a comprehensive framework for its officials to disclose their assets and desist from engaging in any act that reeks of conflict of interest. The board said some of the proposals need more discussion and wider consent given their inherent issues of privacy and personal liberties.