Sebi board likely to clear 11 proposals, including MF fees, broker regulations on Wednesday
MUMBAI: The Securities and Exchange Board (Sebi) board which is meeting here Wednesday is likely to consider as many as 11 regulatory proposals, covering major overhauls of broker regulations, mutual fund expense structure, administration of exchanges and the introduction of a closing-auction session among others.
According to the people in the know of the likely proposals to be cleared by the board chaired Tuhin Kanta Pandey, other items include rationalisation of disclosure and lock-in norms under the IPO framework, easing compliance for debt-market issuers, relaxed KYC requirements for NRIs, standardised processes for mutual fund folio onboarding, permitting incentives to improve retail participation in public debt issues and enhanced transparency and reporting standards for alternative-investment funds.
The likely overhaul of norm dealing with brokers and mutual funds’ total expense ratio, dating back to the 1990s, is expected to be significant development if carried forward.
The regulations dealing with mutual funds are set for a revamp, including redefining the total expense ratio (TER) framework. The Sebi is likely to clear a proposal to exclude all statutory levies from the total expense ratio charged by mutual funds. The regulator wants securities transaction tax, commodity transaction tax, stamp duty and GST to be kept outside the TER cap and passed directly to investors.
At present, only GST on management fees is charged separately, while the rest are absorbed within the TER. Sebi has argued in its October 28 consultation paper that removing these levies from the cap would eliminate confusion and ensure that any future changes in government taxes are reflected more transparently.
Over the years, TER has evolved into an all-inclusive cost basket, ensuring that investors gain access to professionally managed products at a highly affordable and user-friendly price points. With the revised regime as well, investors are not expected to incur any additional out-of-pocket charges beyond what is already embedded within the TER. If an investor opts for any additional advisory services, those expenses will be paid separately under the registered investment advisor framework, outside the mutual fund cost structure.
The board is also likely to revisit another proposal from the consultation paper: scrapping the additional 5 bps that funds can currently charge on schemes that levy an exit load. The provision was originally meant to be temporary, and Sebi now wants it removed entirely. To cushion the impact on fund houses, Sebi has suggested raising the first two TER slabs for open-ended active schemes by 5 bps.
For brokers, Sebi plans to update definitions, ease compliance, and plug gaps relating to algorithmic trading, online broking models and fee structures.
The IPO norms are also set for some amendments which include amending the norms regarding the issue of capital and disclosure requirements regulations with a view to simplify IPO processes and rationalise lock-in norms, as currently, depositories cannot create lock-ins on pledged shares.
The board will also consider the report on conflict of interest, which recommends public disclosure of assets and liabilities, stricter gift policies, an anonymous whistleblower system and a two-year cooling-off period for post-retirement roles.
The closing-auction mechanism, which has been pending for long is aimed at allowing a better price discovery mechanism at the end of trade time. The proposed mechanism, which is common in global markets, allows end-of-day price discovery through an auction instead of the current volume weighted average price-based system.
The framework is aimed at reducing volatility in the final minutes of trade, providing a more accurate benchmark for settlements, index calculations and fund net asset values.
Though the idea has long been under discussion, it faced resistance from some domestic institutional investors due to concerns around implementation costs and changes in trading systems.
Sebi had issued a revised consultation paper in August after its initial draft a year earlier. “A closing auction is a basic feature in most developed markets. We adopting it is long overdue,” said one of the sources.
Rules governing exchanges and clearing corporations are likely to be streamlined to eliminate redundant filings, standardise circulars and simplify procedural approvals. Sebi is also considering the merger of investor protection funds of the equity and commodity segments into a single pool, and introduction of a uniform three-year look-back period for claims in broker-default cases.
Sebi is also likely to amend the norms on securities lending and borrowing mechanism (SLBM) to ease business for foreign portfolio investors, and which could potentially improve liquidity and enable a more structured regime for short-selling.
Last month, Sebi chief Tuhin Kanta Pandey had said the regulator would comprehensively review short selling and SLBM after acknowledging that the system remains underdeveloped compared with other jurisdictions.
“An active SLBM is critical for improving price discovery and facilitating interlinkage between the cash and derivatives segments. From a borrower’s perspective, it facilitates the settlement of securities sold short, while lenders can earn a fee on their idle securities,” he had said last month.
The framework for short selling was introduced in 2007 and has remained unchanged since then, while the SLBM was introduced in 2008 and modified a few times subsequently.
In addition, Sebi is also likely to consider measures to ease business for foreign portfolio investors to increase their participation in the domestic market.