Manipulation Of Expense Ratio By Mutual Funds & How It Has Come Under Sebi Scanner
For several years, the grapevine had it that most Mutual Funds (MFs) wined and dined brokers, scheme distributors and arranged their junkets on luxurious cruise ships. The expenses of such extravagance were parked in the books of the asset management companies (AMCs) under the head total expense ratio (TER). Not only this but a few smart alec's even got hefty kickbacks from the same brokers. Such reckless squandering of investor wealth by MFs and the mismanagement of TER is under the scanner of market regulator SEBI. While the regulator has sent show cause notices to a few MFs recently, it will be sending more in the coming months, sources in the know told BW.
TER is the measure of the total costs or expenses incurred by an MF in a running scheme. SEBI rules allow slab-wise charging of TER in debt and equity schemes. For the equity schemes, the highest TER that can be charged is 2.5 per cent of the total asset under management of the respective scheme and for the debt segment maximum TER tops out at 2 per cent.
Between October and December last year, Sebi had sought data from around 30 MFs with regard to the treatment of TER and accounting practices of the same. Sources say that the analysis of the data showed that the TER of a few MFs was far in excess of limits set by Sebi and the incremental amount was parked in the books of the AMCs.
As per Sebi, all expenses should be clearly identified and appropriated in the individual schemes. Sebi's study of the data also found that certain MFs had failed to report the non-compliance of TER rules in their compliance test reports (CTRs) and Half Yearly Test Reports (HTRs). There were errors in TERs disclosed by the schemes and the actual TER charged by the AMC.
As per a Sebi circular dated March 25, 2019, which allows AMCs to pay the expenses that are very small in value but high in volume out of AMC’s books upto a maximum of 2 bps of respective scheme AUM. But in some instances, Sebi found that the expenses borne by AMC were on a higher side.
Documents in possession with BW show that SEBI had sought reasons from MFs and their trustees for charging TER for each scheme in excess of two-basis points of the total AUM of the scheme. Scheme-wise, financial year wise and amount wise details of such expenses being charged to the AMC books was also sought. Sebi had also sought specific comments and opinion from the MF trustees on their agreement or disagreement with the practices followed by the AMCs with regard to the TERs. SEBI had also asked trustees to comment on "fair treatment to all investors across all the schemes in view of the practices followed by the AMC."
There is a view within Sebi that the issue of TER mismanagement by MFs should not be buried or put on the back burner under the guise of reframing the policy, sources said. This especially when MFs are attempting to cover up their wrongdoing of charging incorrect TER to the scheme in order to align it with TER of similar schemes in industry. Such dubious practices help the AMCs maintain their competitiveness by misinterpreting the wordings of SEBI's TER circular and attract investors to scale up its AUM. In such a scenario, while the bigger AMCs with deep pockets will be at an advantage, small AMCs who cannot bear such expenses will be hurt. This could defeat the objective of SEBI's circular titled “Transparency in TER.
An email was sent to Sebi seeking its response to the queries on its probe related to TER against MFs, a response is awaited.
