Asset management companies (AMCs) which were already recovering from a change in taxation for debt mutual funds, may now be facing a Rs 1,400 crore shock from market regulator Sebi, which has proposed a cap on fees.
In FY22, AMCs reported a pre-tax profit of Rs 10,900 crore after incurring expenses of Rs 30,806 crore. However, with the proposed slab, the total chargeable expenses would decrease to Rs 29,404 crore, resulting in an under-recovery of Rs 1,402.
Sebi's proposal aims to establish a uniform total expense ratio (TER) across mutual fund schemes to enhance transparency regarding costs borne by unitholders.
Currently, Sebi permits AMCs to charge mutual fund unitholders four additional expenses beyond the TER limits. These include brokerage and transaction costs, additional TER for distribution commission for inflows from B-30 (beyond the top 30) cities, goods and service taxes, and additional expenses for exit loads.
TER represents the maximum expense ratio an investor may have to pay and should encompass all permissible charges, without exceeding the prescribed TER limits, as stated in Sebi's consultation paper.
Acknowledging that TER should include all costs borne by investors, Sebi proposes that brokerage and transaction expenses be encompassed within the TER limits. Additionally, all investment expenses, including securities transaction tax (STT), should be within the TER limit.
Sebi has put forward several suggestions to promote financial inclusion and incentivise investments from cities outside the top 30 (B-30 cities) in the mutual fund industry. One recommendation is for AMCs to design their distribution commission policies to reward inflows from B-30 cities by offering a higher percentage of commission compared to inflows from the top 30 cities (T-30 cities).
It has also proposed the discontinuation of the provision that permits AMCs to levy an extra cost of five basis points for schemes with exit loads, an existing regulation that has been in effect for more than a decade. Instead, Sebi suggests setting the total expense ratio (TER) at the AMC level, incorporating all costs and expenses, including management fees, brokerage and transaction costs, and incentives for B-30 cities.
To ensure fair competition and to support smaller players in the industry, Sebi has proposed revised TER slabs. Presently, around 20 per cent of the AMCs manage approximately 75 per cent of the industry's assets under management (AUM), while many smaller AMCs struggle to generate profits. The revised TER slabs aim to prevent disadvantages for smaller players and foster competition among AMCs of all sizes.
Sebi also emphasises the importance of uniformity in charging expenses to investors in regular plans and direct plans, with the only distinction being the distribution commission expenses. The regulator has invited comments on these proposals until 1 June.
Furthermore, Sebi suggests allowing unitholders to exit at the prevailing net asset value (NAV) without any exit load when there is an increase in TER. The maximum permissible limit for the exit load of an open-ended scheme would be reduced to 2 per cent.
In terms of financial inclusion for women, Sebi recommends introducing additional incentives for distributors to attract new investments from women investors. Currently, the mutual fund industry comprises 42 players managing an asset base of over Rs 40 lakh crore.