Sebi tweaks MF, IPO rules, skips conflict of interest changes

Synopsis

The capital market regulator has approved significant changes to mutual fund fee structures, aiming for greater transparency and cost efficiency for investors. These reforms include reducing total expense ratios and brokerage fees, alongside simplifying IPO disclosures and revamping stock broker regulations. The board also deferred a decision on managing internal conflicts of interest.

Mumbai: The board of the capital market regulator approved major changes to the mutual fund industry's fee structure to make it more transparent and cost-efficient for investors, but deferred a decision on a new framework for managing conflict of interest among its own top officials. It also approved proposals to simplify initial public offer (IPO) disclosures and revamp stock broker regulations at the meeting on Wednesday.

The comprehensive review of Securities and Exchange Board of India (Sebi) regulations on mutual funds and stock brokers is the first in nearly three decades.

The regulator approved measures to encourage a transparent break-up of costs charged by asset management companies and mandated disclosure of all components of such charges to investors. It has reduced the total expense ratio (TER) across categories - equity and debt funds - and also lowered brokerage fees. TER has been defined by Sebi as covering all scheme expenses charged to investors.

The regulator said expense ratio limits will now be called base expense ratio (BER) and would exclude all statutory levies such as securities transaction tax (STT), goods and services tax (GST) and stamp duty.

The total expense ratio will be a sum of the base expense ratio and brokerage besides regulatory and statutory levies. The cap on brokerage has been reduced to 6 basis points (bps) from the existing 12 basis points for cash market transactions and 5 basis points to 2 basis points for derivative transactions. It has also scrapped the additional 5 basis points that fund houses are currently allowed to charge across schemes. A basis point is one-hundredth of a percentage point.

Sebi had said in a discussion paper that high brokerage charges could be attributed to services other than execution, which may include research.

"It was very clearly brought to our notice that the sell-side research is a bundled cost and if we were trying to propose that they can unbundle it and can pay brokerage at a lower level and pay for research separately... that business model is not available today," Sebi chairman Tuhin Kanta Pandey told reporters after the board meeting. "Attempts to unbundle sell-side research cost and brokerage charges were not successful in Europe and the UK."

As part of its other key approvals, the regulator introduced a standardised, concise abridged prospectus at the draft offer document stage itself, aimed at improving information accessibility for retail investors and also eased pre-IPO lock-in rules.

On concerns over the high component of offers for sale in IPOs, the Sebi chief said that money is fungible and can come in any time in the journey of a company.

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