SEBI Proposes Major Overhaul of Mutual Fund Regulations for Simplicity and Investor Protection

The Securities and Exchange Board of India (SEBI) has put forward a comprehensive proposal to overhaul its mutual fund regulations. The aim is to simplify a framework that has become complex over nearly three decades due to piecemeal amendments, thereby improving ease of understanding and implementation for both regulators and investors.

Key changes proposed include the removal of an additional 5 basis points (bps) expense charge AMCs could levy on schemes with exit loads. To partially compensate, base expense ratio slabs for open-ended schemes will be marginally increased by 5 bps. Brokerage caps are being drastically reduced from 12 bps to 2 bps for cash transactions and from 5 bps to 1 bps for derivatives, aiming to prevent investors from bearing duplicate costs for research services bundled with commissions.

For greater transparency, statutory levies such as GST, stamp duty, and securities transaction tax will now be accounted for outside the Total Expense Ratio (TER) limit. Compliance burdens are reduced with digital communication replacing hard copy submissions and newspaper notices. Half-yearly portfolio disclosures will be integrated into monthly reports. Structural reforms involve clarifying eligibility for sponsors and trustees, removing redundant scheme categories, and providing clearer definitions for terms like TER and 'independent trustees.' Asset management companies managing non-pooled or non-broad-based funds must operate them through separate business units with stringent oversight to manage conflicts.

Impact: These reforms are expected to lead to more transparent and potentially lower costs for mutual fund investors. By simplifying rules and clarifying disclosures, SEBI aims to boost investor confidence and streamline the industry's operational framework, while also addressing potential conflicts of interest in fund management. Rating: 7/10.

Definitions: Basis Points (bps): A unit of measure equal to one-hundredth of a percentage point (0.01%). Asset Management Companies (AMCs): Firms that manage investment portfolios on behalf of clients, such as mutual funds. Open-ended Schemes: Mutual fund schemes that issue and redeem units continuously, with their prices determined by Net Asset Value (NAV). Exit Load: A fee charged when investors sell their mutual fund units before a specified period. Total Expense Ratio (TER): The annual operational cost charged by an AMC to manage a mutual fund scheme, expressed as a percentage of scheme assets. Brokerage: A fee paid to a broker for executing buy or sell orders on behalf of investors. Derivatives: Financial instruments whose value is derived from an underlying asset (e.g., stocks, bonds). GST (Goods and Services Tax): A value-added tax levied on the supply of goods and services. Stamp Duty: A tax imposed on legal documents and transactions. Securities Transaction Tax (STT): A tax levied on specific transactions of securities in stock exchanges. Sponsors: Entities that establish a mutual fund and appoint the trustee. Trustees: Individuals or entities responsible for protecting investor interests in a mutual fund. Independent Trustees: Trustees who have no affiliation with the sponsor or AMC, ensuring impartiality. Non-pooled/Non-broad-based Funds: Funds that do not pool assets from multiple investors or lack broad diversification.