HDFC AMC, Nippon Life, Prudent Advisory: Capital market stocks tumble up to 10% as SEBI proposes overhaul of MF regulations; all you need to know

The proposals are aimed at bringing regulatory clarity, reducing redundancies, and promoting ease of compliance, SEBI said in its consultation paper.

Under the proposed framework, SEBI plans to eliminate the additional 5 basis points (bps) that asset management companies (AMCs) were previously allowed to charge across mutual fund schemes.

This additional expense, introduced to offset the impact of crediting exit loads back to schemes, was first set at 20 bps in 2012 and later reduced to 5 bps in 2018. The additional expense of 5 bps that mutual fund schemes were allowed to charge was transitory in nature, SEBI noted.

Accordingly, with the objective of rationalising costs for unitholders, this expense has been proposed to be removed. "However, to mitigate the impact of this change on the operations of AMCs, the first two slabs of the expense ratio for open-ended active schemes have been revised upward by 5 bps," it added.

Reacting to the news, shares of institutional broking firm Nuvama Wealth Management tanked as much as 9% to ₹6,760.50 apiece on the NSE. Motilal Oswal Financial Services was trading over 5.5% lower at ₹1,030.90. IIFL Capital Services tumbled over 9% to ₹335.05.

Among AMCs, HDFC Asset Management Company slipped over 6% to hit a low of ₹5,288 on the NSE. Nippon Life India Asset Management was trading over 2.7% lower at ₹880.30 on the NSE. UTI Asset Management Company was also trading over 2.2% lower at ₹1,274.20.

Canara Robeco Asset Management Company Limited was trading over 4% lower at ₹324.80 on the NSE.

Prudent Corporate Advisory Services, a financial services company that provides wealth management services, including mutual funds, insurance, and stockbroking, was also trading over 3.5% lower at ₹2,619.00 on the NSE.

Computer Age Management Services Limited (CAMS), a leading Qualified Registrar and Transfer Agent (QRTA) for mutual funds, was down 4% at ₹3,828.40 on the NSE.

What was the earlier regulation?

Under the earlier version of the SEBI (Mutual Funds) Regulations, 1996, specifically Regulation 52(6A)(c), mutual fund schemes where an exit load was levied were permitted to charge an additional expense of up to 0.20% (20 bps) of daily net assets.

In May/June 2018, SEBI formally reduced that additional expense cap from 20 bps to 5 bps (0.05%) across all mutual fund schemes. For example: “The additional expense of 20 basis points has been reduced to 5 basis points across all mutual fund schemes."

The rationale: the additional expense was originally meant to compensate schemes for exit-load credits (i.e., when investors exit a scheme and the exit load is credited back to the scheme), but SEBI found that the average actual exit load credited was around nearly 5 bps, while funds were charging nearly 18-20 bps additional expense.

SEBI's latest proposals for brokers

To protect the interests of investors and to ensure that expenses are charged fairly only once to the investors, the brokerage charge has been revised from 12 bps to 2 bps for cash market transactions and 5 bps to 1 bps for derivative transactions to bring clarity and transparency, SEBI has proposed.

To facilitate greater clarity and transparency, SEBI has proposed to exclude all statutory levy -- STT (Securities Transaction Tax), GST (Goods and Services Tax), CTT (Commodity Transaction Tax) and Stamp duty-- from the expense ratio limits along with the present permissible expenses for brokerage, exchange and regulatory fees.

Presently, GST on management fees is permitted over and above the TER limit.

However, all other statutory charges are part of the overall TER limit specified for mutual fund schemes.

"The expense ratio limits are proposed to be exclusive of statutory levy, so that any change in statutory levy in the future is passed on to the investors," SEBI proposed.

It said that a provision enabling the expense ratio to be charged based on the performance of a scheme has been introduced, and the same would be voluntary for AMCs.

A detailed framework in this regard shall be finalised separately in consultation with stakeholders, it added.

SEBI noted that the mutual fund industry, which began in 1963, now manages over ₹75.6 lakh crore in assets with 25 crore investor accounts.

SEBI has sought public comments on proposals until November 17.

Impact on AMCs and other firms

Analysts tracking the capital market and AMC sector note that the reduction of the cash brokerage from 12bps to 5bps and derivative brokerage from 2bps to 1bp would adversely affect brokers.

Further, analysts at an investment firm, quoted by a business news website, said they expect AMCs may pass on the 5 bps equity TER cut to other industry participants; however, assuming no pass-through, core earnings for ICICI Pru, HDFCAMC, NAM, ABSL AMC and UTIAM would be affected by 8.0-9.0%. The impact would be more severe for Canara Robeco Asset Management Company Limited at ~22% due to the ~90% equity share.

This negative effect has been partly neutralised by proposing a performance-based TER (framework to be finalised).

According to news reports, global investment firm Jefferies has said that SEBI's consultation paper on MFs is a risk to related companies' earnings.

Besides, a cut in cash market brokerage fees from 12 bps to 2 bps to bring equity schemes in line with arbitrage funds. Jefferies added that if proposals are implemented, it may be negative for institutional brokers, including 360 ONE and Nuvama.