Batting for investors

The proposals in the Securities and Exchange Board of India’s latest Board Meeting indicate that the regulator is giving serious thought to improving, not just investor protection but market liquidity and credibility as well. The most significant proposal of the Board concerns the restraints, now placed, on expenses that mutual funds charge to investors. With mutual funds becoming the preferred investment vehicle of investors and the assets under management swelling to ₹25 lakh crore, it is right that the regulator is keeping a close watch on this segment, trying to lower the cost for mutual fund investors, bringing in transparency and attempting to restrain mis-selling by intermediaries. By laying down that all commission and expenses should be paid only from the mutual fund schemes and not from any other source, the regulator is removing the advantage that larger fund houses with better free cash flow enjoyed in garnering business. Similarly, the regulator has laid down that commissions shall be paid as a trailing basis and not upfront. This move is likely to make new fund offers less attractive for intermediaries, who had been peddling them to investors in order to earn higher upfront commissions. Capping the expense ratio that can be charged on close ended, interval schemes, ETFs and index funds between 1 and 1.25 per cent also makes sense as these funds are not actively managed and hence involve lower cost.

While the move to bring down expenses and introducing lower total expense ratios for funds with higher quantum of assets under management is likely to go down well with investors, this is likely to dent the earning of fund houses as well as mutual fund intermediaries. Fund houses that have been garnering business by feeding higher commission to intermediaries will also have to re-think their selling strategy. Other measures that the regulator has taken to protect the interest of investors include reducing the time period for listing through the use of UPI linked to ASBA (application supported by blocked amount) facility and tightening the rules related to promoters providing exit to shareholders of a company that is delisted from a recognized exchange.

The move to make larger companies borrow 25 per cent of their incremental borrowings every year from bond markets might however need a re-think as it interferes with the operational freedom of businesses. It’s clear that the regulator is trying to infuse liquidity in bond markets, but borrowers ought to be given the option to raise funds from the least expensive source. But the changes proposed for agri-commodity segment, like reducing the fee it chargesexchanges and asking exchanges to park this money in a fund that is to be used to improve the participation of farmers and Farmer Producer Organisations in the exchanges are welcome. SEBI has also taken the first step towards allowing foreign investors, with underlying exposure to Indian commodity markets, to participate in commodity derivative market as Eligible Foreign Entities. This could improve volumes in this sector.

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