SEBI's Mutual Fund Reforms: Transparency Takes Center Stage

1 min read Updated on 29 Oct 2025, 09:29 AM

Reviewed by

Radhika SScanX News Team

Overview

SEBI's consultation paper on mutual fund regulations proposes changes aimed at enhancing transparency and reducing costs. Key proposals include unbundling costs, removing the 5 basis point additional expense, slashing brokerage caps, and excluding statutory levies from Total Expense Ratio. Feroze Azeez, Deputy CEO of Anand Rathi Wealth, suggests these changes may increase transparency more than significantly reducing expense ratios. A Jefferies report indicates potential earnings risks for Asset Management Companies, with major players possibly facing a 30-33% reduction in profit before tax. Azeez cautions that SEBI's assumptions about cost-saving in the distribution chain may be flawed and suggests the new structure could foster better competition on fees among asset management companies.

*this image is generated using AI for illustrative purposes only.

SEBI's recent consultation paper on mutual fund regulations has sparked discussions in the financial sector, with industry experts weighing in on its potential impact. Feroze Azeez, Deputy CEO of Anand Rathi Wealth, offers insights into the proposed changes and their implications for the mutual fund industry.

Key Highlights of SEBI's Consultation Paper

Focus on enhancing transparency in mutual fund operations
Proposal to slash brokerage caps and remove certain fees
Unbundling of costs, including exclusion of statutory levies from Total Expense Ratio (TER)
Removal of the 5 basis point additional expense

Impact on Transparency and Expense Ratios

According to Azeez, the primary outcome of SEBI's proposed regulations may be increased transparency rather than a significant reduction in expense ratios. The unbundling of costs is expected to provide greater clarity to both distributors and investors regarding fee structures.

Proposed Changes and Their Implications

Proposed Change	Implication
Unbundling of costs	Enhanced clarity on fee structures for distributors and investors
Removal of 5 bps additional expense	Logical step, as it was initially introduced after exit loads were credited back to schemes
Slashing brokerage caps	Potential impact on distributor earnings
Exclusion of statutory levies from TER	Improved transparency in actual fund management costs

Potential Risks and Industry Impact

A report by Jefferies highlights potential earnings risks for Asset Management Companies (AMCs):

The proposed 5 basis point cut in equity exit loads could reduce profit before tax for major players
HDFC AMC and Nippon India AMC might see a 30-33% reduction in profit before tax

Expert Opinions

Feroze Azeez cautions that SEBI's assumptions about cost-saving in the distribution chain may be flawed. He points out that unlike AMCs, distributors face consistent variable costs, which could impact their operations under the new regulations.

Competitive Landscape

Azeez believes that the new structure may foster better competition on fees among asset management companies. This increased competition could potentially benefit investors in the long run.

Conclusion

While SEBI's proposed regulations aim to enhance transparency in the mutual fund industry, their impact on expense ratios and industry dynamics remains to be seen. As the consultation process continues, stakeholders will be closely monitoring how these changes may reshape the mutual fund landscape in India.

Regulatory Flexibility on Proposals

The latest update suggests SEBI is taking a collaborative approach by reviewing stakeholder feedback before finalizing the expense ratio regulations. This indicates potential modifications to the original proposals outlined in consultation papers, reflecting the regulator's consideration of industry perspectives.

Update Details	Information
Expected Changes	Small modifications to original proposals
Basis for Changes	Stakeholder feedback consideration
Source	CNBC TV18
Approach	Collaborative regulatory framework

Original Regulatory Framework Under Review

SEBI had initially proposed several major changes to mutual fund operations:

Business Structure Separation: Requirements for non-mutual fund activities to operate as separate business units with clear operational barriers.
Enhanced Trustee Responsibilities: Mandated trustee oversight for fees and resource allocation in non-mutual fund services.
Total Expense Ratio (TER) Restructuring:
- Exclusion of brokerage fees from total expense ratio calculations
- Proposed exclusion of taxes and statutory fees from TER
Brokerage Fee Adjustments: Reduction of brokerage fees for funds from 12.00 basis points to 2.00 basis points for cash market transactions.
Performance-Based Fee Structure: Introduction of optional expense ratios linked to fund performance metrics.

Stakeholder Engagement Impact

The regulator's decision to consider stakeholder feedback demonstrates SEBI's commitment to balanced regulation that addresses industry concerns while maintaining investor protection objectives.

Stakeholder Category	Potential Benefit
Asset Management Companies	Input consideration in final regulations
Investors	Balanced approach to cost optimization
Industry Participants	Collaborative regulatory development
Market Infrastructure	Smoother implementation process

Implementation Outlook

With SEBI expected to incorporate stakeholder suggestions, the final regulations may feature refined approaches to expense ratio management and operational requirements. The small changes being considered could help address practical implementation concerns while maintaining the core objectives of enhanced transparency and cost efficiency in the mutual fund industry.

This collaborative regulatory approach suggests SEBI's commitment to creating a framework that balances investor protection with industry operational realities, potentially leading to more effective implementation of the expense ratio regulations.