Mutual Fund Industry Gathers Critical Data for Sebi's Brokerage Cap Proposal
The Indian mutual fund industry is actively compiling an extensive dataset covering portfolio churn and transaction costs to assist the Securities and Exchange Board of India (Sebi) in evaluating its proposal to significantly cap brokerage fees. The Association of Mutual Funds in India (Amfi) has directed fund houses to submit detailed turnover data that will help assess the brokerage and transaction costs incurred during trade executions.
According to three sources familiar with the development, the consolidated information gathered from asset management companies will be forwarded to Sebi. The regulator aims to determine how significant brokerage expenses are for mutual funds before finalizing the proposed caps that could dramatically alter the industry's cost structure.
Proposed Brokerage Reductions and Their Implications
On October 28, Sebi proposed substantial reductions in brokerage payments by mutual funds - from 12 basis points to just 2 bps in the cash market, and from 5 bps to 1 bps for derivatives trading. This radical move targets the prevention of double payments by investors for research services - first through brokerages and subsequently through the asset management company's own research expenditures.
An official from a prominent asset management company confirmed: "We have received a request from Amfi to submit turnover data for equity and derivatives separately. They plan to send this comprehensive data to Sebi for further analysis."
The data collection initiative has been ongoing for over two weeks, with fund houses required to submit transaction spending records spanning the past decade. This historical perspective will provide crucial insights into trading patterns and cost structures.
Understanding Portfolio Churn and Transaction Costs
Turnover in equities and derivatives serves as a key indicator of how frequently a fund enters and exits market positions, directly reflecting portfolio churn activity. Higher turnover typically signifies more active trading strategies and consequently increased brokerage expenditures, making it a practical measure of overall trading costs.
Another industry official explained that Amfi will analyze the submitted data to determine the actual transaction spending by mutual funds. This analysis is expected to significantly influence Sebi's final decision regarding the proposed cost caps. The regulator has extended the deadline for submitting responses to the circular from November 17 to November 24, allowing more time for comprehensive data compilation.
Currently, AMCs disclose their total expense ratio and additional costs twice annually on their websites, with direct links provided to investors. The new data request specifically focuses on compiling a ten-year dataset of total transaction costs incurred during share purchases and sales to assess the feasibility of the proposed caps.
Real-World Impact and Industry Concerns
The potential implementation of new brokerage caps has generated uncertainty throughout the mutual fund ecosystem. Reduced brokerage revenues could significantly impact brokers, AMCs, and distributors alike. If the proposals take effect, AMCs would need to absorb their own research costs rather than passing them to investors, potentially increasing operating expenses and squeezing profit margins.
Platforms offering both execution and research services might also experience revenue declines as AMCs reduce spending on paid research services. JM Financial highlighted in an October 29 report: "We expect the AMCs to pass on a part of the impact which will affect the revenue streams of institutional equities."
For context, the largest schemes of India's two biggest AMCs - SBI Nifty 50 ETF and HDFC Balanced Advantage Fund - reported brokerage and transaction expenses of ₹74 crore and ₹43 crore respectively in FY25, according to their annual report disclosures.
Nomura Financial Advisory and Securities noted in an October 30 analysis that while reduced brokerage caps might not immediately affect AMCs, as they could potentially pass on lower brokerage costs or rationalize their broker networks, these changes would make active fund management more expensive and push AMCs toward passive investment products.
Sebi's consultation paper additionally proposes eliminating an extra 5 bps charge that AMCs currently earn over the exit load, a fee charged to investors who exit schemes prematurely. This comprehensive approach underscores Sebi's commitment to reducing investor costs and improving transparency in the mutual fund industry.
