Shares of leading AMCs such as Nuvama Wealth Management, Nippon Life India Asset Management, and HDFC Asset Management fell as much as 9% on Wednesday, reflecting market unease over the potential hit to margins.
Mint breaks down how the proposed reforms will impact mutual funds and retail investors.
What changes has Sebi proposed?
The market regulator has proposed capping the brokerage and transaction costs that asset management companies (AMCs) can charge investors, which are currently levied over and above the Total Expense Ratio (TER). This ratio is the annual cost that a mutual fund charges its investors. It includes management fees (what the fund house charges for managing your money), administrative costs and other expenses. This amount is taken from the fund’s returns—so a higher TER means slightly lower returns for investors.
Since TER already covers fund management, research, and operational expenses, Sebi aims to prevent investors from being charged twice for similar services. According to the regulator, investors may often end up paying twice for research—when it is charged as part of investment management and advisory fees and another when it is covered under brokerage and transaction costs.
To ensure that investors are charged fairly only once, Sebi recommends reducing brokerage limits from 0.12% (12 bps) to 0.02% (2 bps) for cash market transactions and from 0.05% (5 bps) to 0.01% (1 bp) for derivatives.
How will the capped charges affect MFs?
If Sebi’s proposals are implemented, AMCs will have to pay for research expenses instead of passing them on to investors. This shift means AMCs’ operating costs could rise, reducing their profit margins in the short term.
“The worst nightmare of any Indian institutional equities chief executive officer just came to life,” analysts at Bernstein said in a note on Tuesday.
Institutional equity platforms that earn revenue from both trade execution and research services may see lower overall income since AMCs might cut back on paid research. However, despite the near-term financial pressure on AMCs, the change would improve transparency by ensuring investors are charged only for genuine execution costs, not bundled research fees.
“The changes are good for retail investors but not so good for the mutual fund industry and everybody else in the value chain,” an official from an AMC said on condition of anonymity.
What can investors look forward to?
Sebi has recommended that mutual funds disclose upfront the all-inclusive TER with a clear breakdown of each component. The move will improve transparency and allow retail investors to better understand what they pay for.
A cap on additional charges may potentially boost returns for investors, according to some market participants. However, the market is unclear on whether improved returns would be visible in the short term.
“The main message here is clear from all regulators… Be it RBI, IRDA or Sebi. The customer and investor are of paramount importance, and we have to protect them,” Suresh Ganapathy, managing director at Macquarie Capital Securities, wrote in an email to clients.
What can be expected next?
Market participants expect AMCs to push back against Sebi’s proposals since they can eat into their profit. This affects asset managers, distributors and transfer agents.
If the regulator decides to address the concerns raised by MFs, a round of discussions/negotiations about how to manage any potential impact can be expected. If the AMC’s demands go unheard, they might pass on the cuts to distributors or brokers.
The value chain here will get affected and entities such as brokers and distributors will have to share the pain and costs, Ganapathy said in the email.
Will AMCs gain anything from the reforms?
Sebi is also looking into the business restrictions on AMCs under Regulation 24(b). It has recommended allowing AMCs to distribute investment management and advisory services to non-pooled funds that serve large, non-retail investors.
In non-pooled funds, funds of each client are kept separate and managed individually according to the client’s objectives, risk profile or mandate—for instance, family offices or institutional portfolios such as pension funds or insurance companies.
Such services would be provided within a regulatory framework that includes setting up a separate business unit to ensure there is no information sharing. The business head of the separated entity will report directly to the AMC’s chief executive to prevent conflicts of interest.
The move is perceived positively. Globally, AMCs are allowed to act as distributors and advisors. However, such actions are restricted in India. The easing of norms for non-pooled funds is expected to help mutual funds to garner larger investments and boost their assets under management.
