The Securities and Exchange Board of India (SEBI) has released a consultation paper outlining several proposed changes to the total expense ratio (TER) charged to mutual fund investors. The paper, currently in the consultation stage, seeks feedback from industry participants regarding the 15 topics it covers.

SEBI’s primary proposal is to calculate the TER at the asset management company (AMC) level instead of the scheme level. The regulator believes that this change will promote competition, benefit smaller AMCs, and enable the passing on of economies of scale to investors.

SEBI has also reviewed the existing slab-wise structure for assets under management (AUM), which determines the TER charges. Under the new framework, SEBI proposes a maximum TER of 2.55% for equity schemes at the AMC level, applicable to AMCs falling within the first AUM slab of up to Rs 2,500 crores. The slight increase in the maximum permissible TER rate is intended to allow mutual fund industry players to adjust for the absorption of GST on investments and advisory fees.

To encourage uniformity and transparency, SEBI wants AMCs to include all additional expenses within the TER framework. This move aims to address the issue of AMCs charging brokerage and transaction costs to mutual fund schemes as additional expenses. SEBI noted that some AMCs were executing trades through high-cost brokers not part of the top brokers, resulting in double charging investors for research costs.

SEBI proposes allowing limited membership of stock exchanges for AMCs to cover transaction costs. The regulator acknowledges concerns that the TER-level limits may discourage fund managers from making portfolio changes for the benefit of the scheme’s investors.

SEBI also reviewed B30 cities’ incentives, commissions on new fund offers (NFOs), and proposed changes related to the redemption of investments. The regulator suggests that commissions for switching between schemes should be charged according to the original scheme, even if the switch is made to a scheme with a different commission rate. SEBI also aims to address the practice of splitting investor application amounts to take advantage of B30 incentives by setting the investment limit within Rs 2 lakh.

Additionally, SEBI highlights a discrepancy in costs charged to regular plans versus direct plans (where investors bypass distributors and do not bear commissions). The regulator proposes the inclusion of performance-based TER, which could be charged to investors at the time of redemption based on scheme performance.

Recognizing that these are new concepts, SEBI suggests testing them in a regulatory sandbox to assess their viability. The sandbox allows entities regulated by SEBI to experiment with new solutions and products in a live environment.

SEBI’s proposed changes could have a significant financial impact on asset management companies, potentially amounting to a loss of Rs 1,400 crore. The new rules aim to improve transparency and pass on economies of scale benefits to investors.

If implemented, the changes would result in uniform TER for scheme categories such as equity or debt, with additional costs like brokerage, transaction charges, and GST included. Furthermore, SEBI proposes discontinuing the additional 5bps charge for schemes with exit loads.

The proposed changes also address mutual fund schemes’ ability to charge four additional expenses beyond the expense limits. SEBI suggests fixing the B30 incentive at 1% of the first application or SIP amount, capped at Rs 2,000.