Asset Managers Drop in India on SEBI’s Expense Overhaul Proposal

In a bid to improve transparency and cut costs for investors, the Securities and Exchange Board of India is proposing that companies include charges such as brokerage fees and taxes within the total expense limit already in place. Mutual funds are currently allowed to charge some expenses over and above these caps, resulting in a higher total expense ratio, or TER.

The TER is a measure calculated by dividing the total cost of the fund by its total assets to arrive at a percentage amount. The regulator proposed the above change and some others via a consultation paper dated May 18.

“SEBI’s consultation paper on new fee caps on mutual funds can impact profits by 13%, though part of it will be passed on to distributors, brokers, and other partners,” Jefferies Financial Group Inc. analysts Prakhar Sharma and Vinayak Agarwal, wrote in a note. 

The actual TER on customers is higher than reported numbers by about 40 basis points on equity schemes and 3-6 basis points on others, they noted.

HDFC Asset Management Co. fell as much as 3.8%, the most since March 24, while Nippon Life India Asset Management Ltd. dropped as much as 1.5%. UTI Asset Management Co. also edged lower.

“It is desirable that the TER reflects the maximum expense ratio that an investor may have to pay and hence it should be inclusive of all the expenses,” SEBI said in the paper. “The investor should not be charged any amount over and above the prescribed TER limits.”

The regulator has also proposed to allow asset management companies to obtain limited-purpose membership with stock exchanges for executing trades for own mutual funds. It has sought public feedback on the proposals by June 1 and it may implement them around January, Jefferies analysts noted.

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