SEBI’s proposal for uniform TER could impact mutual funds revenue model

Markets regulator Securities and Exchange Board of India (SEBI)‘s proposal to impose a uniform total expense ratio for all mutual fund schemes, aiming to enhance transparency in the costs charged to unitholders could impact the revenues of mutual fund companies.

During FY22, AMCs reported pre-tax profit of ₹10,900 crore. This was after absorbing ₹30,800 crore of expenses, which — as per the new TER proposals — will be capped at ₹29,400 crore. According to calculations done by brokerage firm Jefferies this equates to under-recovery of ₹1,400 crore or 13 per cent of pre-tax profit and 4 basis points of average AUM.

At present, SEBI allows asset management companies to charge four additional expenses—brokerage and transaction costs, TER for distribution commission for B-30 (beyond top 30) cities, GST and exit load—over and above the specified TER limits. TER is a percentage of a scheme’s corpus that a mutual fund house charges towards expenses.

In a consultation paper, SEBI has said that TER reflects the maximum expense ratio that an investor may have to pay and, thus, it should be inclusive of all the expenses permitted to be charged to an investor.

Mahesh Shukla, CEO & co-Founder, PayMe, said SEBI’s proposal to allow limited membership of the stock exchanges for AMCs to cover their transaction costs may discourage fund managers from churning portfolios. The proposal to calculate TER at the AMC level instead of the scheme level will significantly help small AMCs by providing a level playing ground, he added.

Shares of four large asset management companies reported a mixed reaction on Thursday. Shares of HDFC AMC and Aditya Birla Sun Life AMC were down one per cent and two per cent, respectively, at ₹1,795 and ₹349. UTI AMC and Nippon India AMC were up by two per cent and 0.06 per cent at ₹663 and ₹236, respectively.

AMCs are already under pressure after the Union government removed the long-term capital gain tax benefit from debt mutual funds.

The regulator has sought comments on the proposals by June 1. “We expect that industry will look to discuss with SEBI and pass part of the impact on to value chain participants,” said Jefferies.

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SEBI said that additional commission to distributors from B30 cities be paid only for investment from new individual investors identified by their PAN from B-30 cities at the industry level.

SEBI suggested that AMCs can consider paying a higher percentage of commission for inflows from B-30 cities as compared to commission for inflows from T-30 (top 30) cities.

To encourage the participation of women, SEBI has mooted a proposal for the introduction of an additional incentive for distributors while on boarding investments from women investors (new PAN) at the industry level.

Also read: Funds that made ₹25,000 p.m SIP into ₹1 crore in 10 years

SEBI has also proposed that the provision enabling charging of additional expense of 5 basis points for schemes having provision of exit load may be discontinued after 10 years.

Considering that 20 per cent of the AMCs are managing about 75 per cent of the industry AUM and many of the small AMCs continue to be loss making entities, SEBI has proposed revised TER slabs. According to the regulator, the new slabs will ensure level playing field in the mutual fund industry.

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