The contentious proposal to cap the fees that fund houses pay brokers for executing trades will be discussed in a meeting between the capital markets regulator and the top executives of asset managers on Monday, according to two people aware of the development.
The proposal will be discussed alongside other issues, including market development , compliance, and other pain points, at the first such meeting between the Securities and Exchange Board of India (Sebi) current chair Tuhin Kanta Pandey and heads of asset management companies (AMCs) under one roof.
Sebi could consider the industry plea, especially from sell-side brokers, to relax the cap on broker commissions from 2 basis points, as proposed, to around 6-7 basis points (bps), one of the two people quoted earlier said.
One bps is one-hundredth of a percentage point. The current structure allows fund houses to pay as high as 12 bps in commission.
The proposed measure is part of Sebi’s move to overhaul the costs mutual funds charge investors–known as the total expense ratio (TER), which is deducted from a fund’s net asset value and impacts investor returns.
Sell-side brokers prepare research which is bundled along with costs to execute trades for mutual funds. Fund houses, which mostly have their own research teams, although not as big as the sell-side, also source research from such brokers.
Venkat Chalasani, chief executive of industry lobby Association of Mutual Funds in India (Amfi), along with top honchos from SBI MF, HDFC MF, ICICI Prudential MF, Aditya Birla Sun Life MF, among others, will attend the meeting, said both the persons cited earlier, speaking on the condition of anonymity.
Pandey took over from Madhabi Puri Buch in March this year. Such meetings are held between the Sebi chair and mutual fund chiefs once a year.
Sebi’s TER overhaul
In a consultation paper dated October 28, Sebi proposed to overhaul the way MFs compute total expense ratio (TER) by excluding statutory levies such as securities transaction tax (STT) and stamp duty, and by slashing broker commissions. But the plan to cap the fees has faced pushback from sell-side brokers, who provide research services to MFs, besides executing trades for them.
Sebi has proposed slashing brokerage paid by mutual funds from 12 basis points (bps) to 2 bps in the cash market, and from 5 bps to 1 bps for derivatives. The move is aimed at preventing investors from paying twice for research—first through brokerages, and again through the asset management company’s own research. The cap, however, squeezes a key source of revenue of brokers and could impose additional costs on mutual funds to expand their research teams.
“This is the first meeting with Sebi and mutual fund executives as a forum,” said one of the persons cited above. “While TER is not the only issue, it will be highlighted by the MFs.”
The second person said, “The regulator wishes to learn how the markets can be deepened with greater innovation to encompass more investors in its fold. A variety of issues on how this can be achieved will be top of the agenda, but the TER-related issues will also figure in the meeting.”
“MFs are the voice of the investor, but institutional brokers affected by the Sebi proposals will be hoping fund houses raise the issue of commissions,” said the other person. “There is a feeling among sell-side brokers that Sebi might relax the 2 bps brokerage cap proposed to 6-7 bps, given the importance of their research in fund manager decisions to allocate the hard-earned money of investors.”
Officials from Sebi, and representatives of Amfi and the broker lobby Association of National Members of India (ANMI) did not respond to Mint’s queries until press time.
Call for status quo
“The expertise of the sell-side is used to provide detailed research to the buy side (fund managers) who can then take the most optimum decision to buy or not to buy a stock in the interest of the investor,” said Anand Rathi, founder of Anand Rathi group, which also provides sell-side services. “I think the status quo should be maintained on brokerage costs.”
Sebi’s objectives are to bring in transparency to what investors pay to mutual funds. TER is charged by a mutual fund to its investors and includes management fees, commissions paid to distributors, brokerage and transaction costs, fees paid to custodians, registrars and transfer agents (RTA), statutory levies, and other expenses.
The TER for mutual funds is 2.25% for equity schemes when the AUM is ₹500 crore. As the AUM starts to increase, the TER falls. The lowest TER a mutual fund can charge is 1.05% when the AUM of a scheme reaches ₹50,000 crore.
The TER is deducted from an MF’s net asset value and has a bearing on investor returns. A fund with a higher TER eats into investor returns more than one with a relatively lower TER, over time. Sebi’s proposals will enable investors to assess the fees charged by fund houses once the charges are unbundled.
Mutual fund assets (equity and debt) have grown from ₹22 trillion in FY20 to ₹79.88 trillion as of October end this year, as per Amfi. The biggest asset manager, SBI MF, has an average AUM of ₹12 trillion for the July-to-September quarter, followed by ICICI Prudential at ₹10.6 trillion and HDFC AMC with ₹8.9 trillion. The top three AMCs make up 40% of the total mutual fund assets of ₹78 trillion as of September end.
