Markets regulator Sebi on Wednesday approved a comprehensive overhaul of mutual fund regulations, introducing changes to the expense ratio framework, brokerage charge limits and compliance requirements to boost transparency, provide regulatory clarity and reduce redundancies.
At its board meeting, Sebi cleared a proposal to exclude all statutory levies such as Securities Transaction Tax (STT), Goods and Services Tax (GST), Commodity Transaction Tax (CTT) and stamp duty from the expense ratio limits, along with the present permissible expenses for brokerage, exchange and regulatory fees.
Sebi chief Tuhin Kanta Pandey told reporters that these expense ratio limits would now be referred to as the base expense ratio.
Currently, GST on management fees is permitted over and above the total expense ratio limit, while other statutory charges form part of the overall Total Expense Ratio (TER) specified for mutual fund schemes.
Under the revised framework, the expense ratio limits are proposed to be exclusive of statutory levies so that any future change in such levies is passed on directly to investors.
The board also decided to eliminate the additional 5 basis points that asset management companies were allowed to charge across mutual fund schemes.
This additional expense was introduced in 2012 at 20 basis points to offset the impact of crediting exit loads back to schemes and was later reduced to 5 basis points in 2018.
Sebi noted that the additional expense of 5 basis points was transitory in nature and decided to remove it with the objective of rationalising costs for unitholders.
To protect investor interests and ensure that expenses are charged fairly only once, Sebi revised brokerage charge limits.
Brokerage charges have been reduced from 12 basis points to 6 basis points for cash market transactions and from 5 basis points to 2 basis points for derivative transactions to bring greater clarity and transparency.
The regulator also introduced a provision enabling expense ratios to be charged based on the performance of a scheme. This provision will be voluntary for asset management companies.
Beyond cost-related changes, Sebi approved several measures to ease compliance and modernise regulations.
These include simplifying eligibility norms for fund sponsors, digitising investor communications such as annual reports, reducing the frequency of mandatory trustee meetings and eliminating newspaper advertisements for scheme changes, which will be replaced with online disclosures.
Duplicative reporting requirements have also been removed.
The board decided to delete redundant chapters on real estate mutual funds and infrastructure debt fund schemes, stating that separate frameworks for such products already exist.
Outdated provisions relating to capital protection and real estate mutual funds have also been removed.
"This exercise has resulted in a 44 per cent reduction in the size of the regulation from 162 pages to 88 pages. The word count has been reduced by approximately 54 per cent from 67,000 words in the current regulation to 31,000 words in the new draft. Further, a number of new provisions have been reduced from 59 to fewer than 15 and all withstanding clauses have been eliminated except for this its limited use under the 'Repeal and Savings' provision," Sebi said.
The mutual fund industry, which began in 1963, currently manages assets worth more than Rs 80 lakh crore.