Mutual Fund New Rules: AMCs, Broking, Capital Market Stocks In Focus; How Will New MF Fees Structure Impact?

Majority of capital market stocks including listed assets under management (AUM) and stockbroking companies, continued to be under pressure on October 30th. This comes after market regulator Sebi released a consultation paper for the mutual fund industry to bring in new changes.

For now, it seeks feedback from the public along with suggestions.

Capital Market Stocks:

When the research paper was released on October 28, capital market stocks witnessed decline in the range of 1% to approximately 9% on exchanges during the October 29th session.

The situation is slightly calmer on October 30th, but still majority of the stocks are either down or trading cautiously.

Stocks like Edelweiss Financial, IIFL Capital Services, Indian Energy Exchange, HDFC AMC, Nuvama Wealth Management, and UTI AMC dropped by 1% to 3.5% on Thursday. Also, stocks like 360 One WAM, Angel One, CDSL, Geojit Financial Services, One97 Communications, and Prudent Advisory Corporate were down marginally.

The only stocks that are trading higher are Anand Rathi Wealth, CAMS, ICICI Securities, Motilal Oswal and NSDL in the range of 1% to 3%. BSE and Nippon Life India AMC is up marginally.

Why Sebi is changing mutual fund rules?

As per analysts at Kotak Institutional Equities, while the broader purpose is to simplify and shorten regulations covering mutual funds, there are few pertinent items with respect to AMC financials: (1) removal of 5 bps exit load charged to the scheme as part of the overall total expense ratio (TER); and (2) lowering of expense ratio slabs with a view to exclude all the statutory levies (STT, GST, stamp duty, etc.) from expense ratio limits. Some of the other proposals include (1) greater disclosure of TER, including brokerage, exchange and regulatory fees and statutory levy; and (2) enabling differential expense ratios based on fund performance.

Key changes proposed by Sebi:

Among the major changes is the revision of brokerage and transaction charges over and above the Total Expense Ratio (TER) limit.

Under its focus to transparency and investors protection, Sebi has proposed following changes:

1. Exit Load Charge:

Sebi has decided to remove 5 basis points of additional charge on exit of mutual fund scheme.

What investors need to know is that before 2012, AMCs used exit load charges to a scheme for payment of distribution commission to the distributors and other marketing /selling expenses. But in 2012, mutual funds were allowed to credit exit load to the schemes and AMCs were allowed to charge additional 20 bps as an additional expense to investors. But that was further reduced to 5 bps from 20 bps in 2018.

The additional charges were transitory in nature.

Now, Sebi proposes to scrap 5% as well. While doing so, the watchdog said, "in order to reduce the impact of the proposed change on the operations of AMCs, first two slabs of the expense ratio of open ended active schemes have been revised upward by 5 bps."

Impact?

The analysts at Kotak explained that a 5-bps cut on equity regular TER of 1.8% implies a 3% hit to the value chain. If AMCs were to absorb all the hit, the impact on revenues would be around ~5% and on core PBT around ~10%.

However, Kotak also notes that the comparison of revenue growth between AMCs and distributors reveals a still unbalanced sharing of the industry revenues. RTAs could also face additional pricing pressure.

2. Statutory Levy

- Further, Sebi has proposed to exclude all statutory levy i.e. STT, GST, CTT, Stamp duty from the expense ratio limits along with the present permissible expenses for brokerage, exchange and regulatory fees.

At present, 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.

3. Brokerage Charges:

Currently, mutual funds charge brokerage and transaction costs incurred for the purpose of execution of trade up to 0.12 percent of trade value in case of cash market transactions and 0.05 per cent of trade value in case of derivatives transactions.

Under this, Sebi noticed the brokerage paid by AMCs is lower in arbitrage fund than compared to equities.

Here's an example! If the brokerage for arbitrage fund was in the range of 1.18 bps to 1.34 bps during the period April 01, 2023 to March 31, 2024 whereas during the same period the brokerage for other equity schemes was in the range of 5 bps to 12 bps.

Hence, Sebi has decided to lower the brokerage charge to 2 bps from 12 bps on cash market transactions, and to 1 bps from 5 bps on derivative transactions. All other costs relating to execution of transaction may be charged on actual basis.

Impact?

Analysts said, ''We need to ascertain what the actual impact of this is, especially for large players, as distribution commissions could be lower for select large funds.''

''There is a proposal to reduce the limit on brokerage cost to 2 bps (from 12 bps) for cash trades and derivatives to 2 bps (from 1 bps). The SEBI has flagged reservations with respect to double charging of research services, i.e., both through the broker and AMCs' own stock,'' said analysts.

Also, all statutory levies are proposed to be outside the expense ratio limits. i.e STT/CTT/GST/stamp duty incurred for execution of trades can be over and above the limit of 2/1 bps.

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