Aligning profit and protection

SEBI TIGHTROPE ON RATIONALISING COSTS & INVESTOR-FRIENDLY STEPS; PROPOSALS WARRANT DEEPER PROBE

- SANDEEP PAREKH

I N 1774, A Dutch merchant and broker established what is widely regarded as the first mutual fund (MF) by inviting investors to form a trust named Eendragt Maakt Magt (Unity creates strength).

Over time, the MF structure has evolved across jurisdictions. Continuing this process, on October 28, the Securities and Exchange Board of India (Sebi) released a Consultation Paper on Comprehensive Review of Sebi (Mutual Funds) Regulations, 1996, proposing amendments to align the distribution of returns between asset management companies (AMCs) and investors.A few of the major changes, which are the source of heated discussions in the industry, are discussed below.

The first such change is the proposal to revise the total expense ratio (TER) limits so that statutory levies (such as securities transaction tax and goods and services tax [GST]) are excluded while computing TER. It is proposed that such levies are passed directly to investors. While this shift enhances transparency and aligns cost passthrough with regulatory intent, it also triggers a consequential downward revision of the existing TER limits. Specifically, the consultation paper recommends a reduction of 20 basis points (bps) for closeended schemes,and 15 and 10 bps for certain categories of open-ended schemes. The magnitude of the proposed downward revision lacks any clear basis and poses concerns for the growth of the MF industry. The downward revision of the TER exceeds GST and other statutory components that are currently a part of it, and the consequence is an additional, unintended reduction that directly compresses the operating margins of AMCs. In effect, AMCs are compelled to absorb a cost cut that goes beyond the statutory levy adjustment, with no proportionate benefit accruing to investors. Moreover, when AMC revenues are squeezed the impact is often passed on to MF distributors (MFDs), weakening the distribution network that underpins financial inclusion.A large sh-