SEBI reviews decades-old brokerage and mutual fund norms
Context
Securities and Exchange Board of India (SEBI) revised:
Mutual fund expense norms
Two-decade-old stock broker regulations
IPO disclosure framework
Credit rating rules
Objective: Investor protection, cost reduction, simplification, and regulatory modernization.
Key decisions by SEBI
1. Revision of mutual fund expense norms
Reduction in expense ratio
Maximum expense ratio cut by up to 15 basis points (bps).
Applied across slabs based on Assets Under Management (AUM).
Aim: Lower cost burden on MF investors.
New terminology
Expense ratio renamed as Base Expense Ratio (BER).
BER excludes:
Stamp duty
GST
Securities Transaction Tax (STT)
Total Expense Ratio (TER) now includes:
BER
Brokerage
Regulatory levies
Statutory levies
2. Brokerage cost rationalisation
Cap on brokerage segment reduced:
Cash market: 6 bps
Derivatives: 2 bps
Earlier proposal was even stricter:
Cash: 2 bps
Derivatives: 1 bps
Exit load reform
Additional exit load of 5 bps removed completely.
If you invested in a mutual fund and sold your units too early, the fund could charge:
A normal exit load plus
An additional exit load of 5 basis points (0.05%).
This meant extra cost for investors, especially short-term or emergency withdrawals.
Now (after SEBI’s reform):
The additional 5 bps exit load has been completely removed.
Mutual funds cannot charge this extra penalty anymore.
Investors pay less when they redeem early.
3. Sell-side research and brokerage
SEBI examined unbundling:
Research cost
Brokerage commission
Decision:
Unbundling not adopted.
Reason: Business model not viable in India; similar attempts failed in Europe and the U.K.
Sell-side research:
Reports prepared by brokerage firms.
Cost is bundled into brokerage charges.
4. Simplification of mutual fund regulations
Simplified and updated 20+ year-old rules.
Reorganisation of:
Roles and responsibilities of Asset Management Companies (AMCs).
Prudential investment limits.
Valuation norms for securities.
5. Revamp of stock broker regulations
Old brokerage regulations modernised.
Focus on:
Simplified language
Contemporary market practices
6. IPO-related reforms
Offer document summary removed.
Replaced by abridged prospectus.
Prospectus to be made available via QR code for easy digital access.
7. Credit rating agencies (CRAs)
CRAs allowed to rate unlisted debt instruments.
Improves transparency and risk assessment in private debt markets.
8. Conflict of interest
SEBI reviewed the High-Level Committee (HLC) report on conflict of interest.
Public comments to be discussed further.
What is expense ratio?
Expense ratio is the annual fee charged by a mutual fund to manage your money.
When you invest in a mutual fund, the fund house:
Pays fund managers
Conducts research
Handles administration, marketing, compliance, etc.
The cost of all this is charged to investors as the expense ratio.
Example
If you invest ₹1,00,000 in a mutual fund.
Expense ratio = 1% per year.
You pay ₹1,000 annually as management cost.
This amount is not charged separately — it is deducted from your returns.
Why lower expense ratio matters
Lower expense ratio = higher net returns.
Over long-term investments, even a small reduction (like 10–15 bps) can significantly improve wealth creation.
Prelims Practice MCQs
Q. With reference to SEBI’s recent revision of mutual fund expense norms, consider the following statements:
SEBI reduced the maximum expense ratio chargeable to investors by up to 15 basis points.
The expense ratio has been renamed as Base Expense Ratio (BER).
BER includes statutory levies such as GST and Securities Transaction Tax (STT).
Which of the statements given above are correct?
A. 1 and 2 only
B. 2 and 3 only
C. 1 and 3 only
D. 1, 2 and 3
Answer: A
Explanation:
Statement 1 is correct: SEBI cut the maximum expense ratio by up to 15 bps.
Statement 2 is correct: Expense ratio is now termed Base Expense Ratio (BER).
Statement 3 is incorrect: BER excludes GST, stamp duty and STT.
Q. The Total Expense Ratio (TER) of a mutual fund, as per revised SEBI norms, includes which of the following components?
Base Expense Ratio
Brokerage
Regulatory and statutory levies
Select the correct answer using the code given below:
A. 1 only
B. 1 and 2 only
C. 1, 2 and 3
D. 2 and 3 only
Answer: C
Explanation:
SEBI clarified that TER = BER + brokerage + regulatory levies + statutory levies.