Sebi open to revising cap on brokerage fees paid by mutual funds: Report

The market regulator, Sebi, is considering increasing the proposed limit on the fees that mutual funds can pay to brokerages. This comes after it had earlier proposed a sharp reduction in these fees as part of a broader overhaul of mutual fund structures, sources told news agency Reuters.

This step by the market regulator would help in addressing the concerns of institutional brokers who were concerned about potential revenue losses, and asset managers who argued that a lower cap might hinder their ability to select the best-performing stocks, the sources said.

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Last month, Sebi proposed a major revamp of the mutual fund fee framework, introducing key changes to how fund houses levy charges on investors. This move was aimed at simplifying regulations, enhancing transparency, and lowering overall costs for unit holders.

In a consultation paper released, Sebi said that this proposal aims to promote ease of compliance and to bring regulatory clarity. The regulator has invited public comments until November 17.

At a broader level, Sebi has proposed several changes aimed at simplification, enhanced clarity, transparency, investor protection, and ease of compliance. Key proposals include major revisions to the ‘definitions’ section and the deletion of redundant or duplicative clauses and chapters.

For transparency and investor protection, Sebi has proposed to remove the additional 5 basis points (bps) that fund houses were earlier allowed to charge across schemes. With the additional charges earlier reduced from 20 bps to 5 bps in 2018, the provision for additional expense of 5 bps allowed the AMCs to charge the mutual fund schemes, was transitory in nature.

According to a report by Reuters, the proposal, if implemented, would have led to a wide divergence in rules between India and developed markets like the U.S., where there is no cap on brokerage fees paid by funds.

The industry has argued that the sharp cut will reduce the fees they can pay to sell-side research analysts, handing foreign investors and hedge funds an advantage as they will be able to pay a relatively higher fee, the report added.

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What Sebi said in consultation paper

Sebi also wants to exclude statutory levies such as STT, GST, CTT, and Stamp duty from the expense ratio limits, along with the present permissible expenses for brokerage, exchange and regulatory fees.

The market regulator further proposed to tighten the limits on Brokerage and Transaction charges. At present, MF regulations permit AMCs to charge brokerage and transaction costs incurred for the purpose of execution of trade up to 0.12% of trade value in case of cash market transactions and 0.05% of trade value in case of derivatives transactions.