10 key summary points from SEBI’s Consultation Paper on Comprehensive Review of SEBI (Mutual Funds) Regulations, 1996
SEBI’s consultation paper proposes significant changes to the SEBI (Mutual Funds) Regulations, 1996, with aims to increase transparency, lower investor costs, and streamline compliance procedures. Key proposals include excluding statutory levies from the Total Expense Ratio (TER), reducing brokerage limits, eliminating the additional 5 bps charge on schemes with exit loads, and restructuring TER slabs for various fund types. More information is available on the SEBI website.
Here are 10 key summary points from SEBI’s Consultation Paper on Comprehensive Review of SEBI (Mutual Funds) Regulations, 1996. These are focused specifically on Brokerage Costs and Total Expense Ratio (TER) .
1. Removal of Additional 5 bps Expense:
The transitory additional expense of 5 basis points (bps) on the entire AUM (allowed since 2018) has been removed to rationalize investor costs and simplify the TER framework.
2. Upward Revision of Base TER Slabs:
To offset removal of the 5 bps charge, SEBI has increased the first two TER slabs for open-ended active schemes by 5 bps, ensuring operational viability for AMCs while keeping investor costs in check.
3. Statutory Levies Excluded from TER:
All statutory charges including STT, CTT, GST, and stamp duty will now be excluded from the TER limit.
This change ensures greater transparency and allows such costs to be passed directly to investors, preventing distortion of expense ratios.
4. TER Limits Adjusted Downward (Ex-GST):
Since GST on non-management expenses will now be excluded from the TER, the base TER limits have been reduced accordingly to reflect the narrower scope of expenses covered.
5. Unified and Transparent TER Disclosure:
A new regulation defines “Total Expense Ratio” comprehensively — it must include:
• Management fees (within slab limits),
• Brokerage and transaction costs,
• Exchange and regulatory fees, and
• Statutory levies (disclosed separately).
All AMC disclosures must now present TER with breakup by cost head to improve transparency for investors.
6. Reduction in Brokerage Caps:
Brokerage and transaction costs charged to schemes are significantly reduced:
• Cash market: from 12 bps → 2 bps
• Derivatives: from 5 bps → 1 bps
This ensures investors aren’t overcharged under the guise of “execution plus research” fees.
7. Separation of Execution and Research Costs:
SEBI observed that brokerage payments often bundled research services, leading to double charging — once under management fees and again under brokerage.
The revised rule limits brokerage strictly to execution costs, disallowing inclusion of research expenses.
8. Statutory Levies Over and Above Brokerage Cap:
While brokerage is capped (2 bps/1 bps), statutory levies like STT, CTT, GST, and stamp duty incurred on transactions may be charged over and above these limits, ensuring no operational constraints for AMCs.
9. Differential TER Based on Performance (Optional):
A new optional framework allows AMCs to levy performance-linked TER — higher or lower expense ratios based on fund performance — to better align AMC incentives with investor outcomes (to be finalized post consultation).
10. Clear Allocation of Launch-Related Costs:
Reaffirmed rule: all NFO-related expenses until unit allotment must be borne by the AMC, trustee, or sponsor, not charged to the scheme — further tightening cost accountability under the TER regime.
Team: Economiclawpractice.com
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