Key taxes may be kept out of MFs’ expense ratio ambit

Capital market regulator SEBI may keep away statutory levies and retain brokering charges under the ambit of the proposed new total expense ratio of mutual funds.

Earlier, fund houses had raised red flag over inclusion of securities transaction tax (STT) and Goods and Services Tax (GST) in TER.

The regulator may also introduce category-wise TER for equity, debt and hybrid, while leaving out arbitrage funds from the new proposals, said people in the know.

The regulator had recently taken its feedback from the mutual fund advisory committee for tweaking the TER rules. A final decision by the regulator on the new norms may yet differ from what was proposed, said market watchers. An email sent to SEBI did not immediately get a response.

Madhabi Puri Buch, Chairperson, SEBI recently said the new consultation paper on TER to be made after relying on data provided by the industry will make both investors and fund houses happy.

• Also Read: MF industry heaves a sigh of relief as SEBI puts off decision on TER cut

The industry gave data for the last five years to prove that economies of scale have been achieved, Buch while scrapping the earlier consultation paper.

The consultation papers from SEBI are mostly the final draft of new regulations as they are put out for public only after a proper engagement with the concerned industry.

However, the regulator took a different approach with the TER regulations due to price sensitivity of the information. The engagement with the industry went underway after the release of the consultation paper.

The earlier consultation paper had said that TER slabs should be at the level of the AMC and not at the scheme level. This was after bucketing the AUM of open-ended schemes into equity and non-equity schemes.

The paper had also sought to bring brokerage and transaction costs within the TER limit to eliminate double charging of investors. The earlier proposals would have made it unviable to run arbitrage schemes, a class of funds under the hybrid category, due to inability to recover transaction costs.

• Also Read: MF stocks hit by proposed change in TER norms

GST on investment and advisory fees is currently permitted to be charged over and above the specified TER limits. GST on all other services is charged to the investors and is part of the total TER limits specified by SEBI.

Brokerage and transaction costs are part of the recurring expenses that can be charged to a scheme. The additional expense can be up to 0.12 per cent of trade value in case of cash market transactions and 0.05 per cent of trade value in case of derivative transactions.

The introduction of the proposed fee caps for mutual fund schemes as per the original proposals was expected to drive down the profits of asset management companies by 30 per cent without passing on the costs to intermediaries, according to an earlier Jefferies report. The top five funds could have seen about 30 bps fall in TER, the next five a 10 bps fall, the next 10 a 12 bps rise, the next 10 a 4.bps fall and others a 11bps rise.

SEBI in its board meet in June had said that it had got more granular data for the last five years that showed that economies of scale had been achieved to quite an extent by the industry.

Industry officials believe that MFs remain under-penetrated and a push product, which requires physically reaching out to customers to realise sales. Drastically altering the TER rates at this juncture would also be unfair to large fund houses who have built scale over several years.

G Pradeepkumar, CEO, Union Mutual Fund said if the GST and STT are kept off the TER in the new consultation paper it will come as a big relief for the industry which has no control over these levies.

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