Sebi Announces Major Mutual Fund Regulation Overhaul
India's capital markets regulator, the Securities and Exchange Board of India (Sebi), has notified a comprehensive revamp of mutual fund regulations. The new framework introduces a Base Expense Ratio (BER) and separates fund management fees from statutory charges. This move aims to bring greater transparency to the mutual fund industry.
Key Changes and Implementation Timeline
The regulator has lowered expense ratio caps across most fund categories. These new regulations will come into force starting April 1, 2026. Sebi confirmed this timeline in an official notification released recently.
This regulatory overhaul follows the Sebi board's approval of the proposal back in December. The changes represent a significant shift in how mutual fund expenses are structured and disclosed to investors.
Understanding the New Expense Structure
Under the new framework, Sebi has introduced the concept of a Base Expense Ratio (BER). This BER excludes statutory levies such as the Security Transaction Tax (STT) and Goods and Services Tax (GST). This marks a departure from the current system, which focuses on the Total Expense Ratio (TER).
The TER concept will continue to exist. It will now be calculated as the sum of the BER, brokerage fees, regulatory levies, and statutory charges. This separation provides clearer visibility into the actual fund management costs versus government-imposed taxes.
Clear Expense Identification and Responsibility
Sebi has mandated that all expenses of mutual fund schemes must be clearly identified. These expenses should be paid directly from the scheme itself. The expenses must remain within the base expense limits, brokerage limits, transaction costs, and statutory levies permitted under the regulations.
The regulator has established clear responsibility for excess expenditures. Any spending that exceeds the specified base limits must be borne by the Asset Management Company (AMC), the trustees, or the sponsors. Furthermore, if any scheme expense is covered by the AMC, trustee, or sponsor, this can only occur after the investment and advisory fees charged to the scheme are fully reversed.
Brokerage Limits and Other Rationalizations
Sebi has rationalized brokerage limits significantly. The cap has been reduced from 0.12 percent to 0.06 percent for regular transactions. For derivative transactions, the limit drops from 0.05 percent to 0.02 percent.
The regulator has also eliminated an additional 0.05 percent exit load measure. This measure was first introduced in 2018 and will no longer apply under the new regulations.
Digital Transformation and Compliance Easing
In addition to expense-related changes, Sebi has introduced several digital initiatives. Investor communications, including annual reports, will now be digitized. The regulator has also eased compliance burdens for mutual fund companies.
Mandatory trustee meeting frequency has been reduced. Newspaper advertisements for scheme changes have been eliminated entirely. These will be replaced by online disclosures. The changes also remove duplicative reporting requirements, streamlining operations for fund houses.
This comprehensive regulatory overhaul represents Sebi's ongoing effort to modernize India's mutual fund industry. The changes aim to protect investor interests while promoting transparency and efficiency in fund management practices.
