The Securities and Exchange Board of India (Sebi) is poised to undertake one of the most significant regulatory overhauls in decades, with its board set to review sweeping changes to rules governing mutual funds and stock brokers on 17 December. This move, confirmed by sources familiar with the meeting's agenda, aims to modernize outdated frameworks and enhance transparency for investors.
Mutual Fund Reforms: A Push for Transparency and Cost Caps
At the heart of the proposed changes for the mutual fund industry are measures to increase cost clarity for investors. In October, Sebi proposed to cap the brokerage and transaction costs that mutual funds can charge over and above the annual fees collected through the Total Expense Ratio (TER). Additionally, the regulator suggested scrapping the extra five basis points charged over the exit load and called for more comprehensive TER disclosures.
However, these proposals have met with resistance from asset management companies (AMCs). Industry officials argue that capping brokerage fees would squeeze their income, potentially affecting the quality of research and their ability to secure block deals from brokers. Mutual fund distributors are also apprehensive, fearing that AMCs might pass on the financial pressure to them, reducing their commissions.
"If the recommendations on brokerage costs are accepted as it is, then it would have an impact on AMCs. But we are expecting Sebi to come mid-way," an anonymous AMC official stated, reflecting the industry's hope for a moderated final rule.
Modernizing Stock Broker Regulations for the Digital Age
Parallel to the mutual fund review, Sebi is expected to formalize and update regulations for stock brokers, many of which date back to 1992. The current norms do not adequately reflect the contemporary market dominated by electronic, high-frequency, and algorithmic trading.
The overhaul seeks to provide clear definitions for practices like algorithmic and proprietary trading. By streamlining these rules and removing overlapping or obsolete provisions, Sebi aims to reduce compliance complexity for market intermediaries and bring much-needed legal clarity to fast-evolving trading technologies.
Internal Reforms and Privacy Concerns at Sebi
In a significant move towards internal governance, the Sebi board will also discuss recommendations from a high-level committee formed to overhaul its conflict-of-interest and disclosure norms. This committee was established in March 2024 following allegations by US short-seller Hindenburg Research against former chairperson Madhabi Puri Buch.
The committee has proposed stringent measures, including mandatory pre-appointment disclosure of any conflicts of interest for top positions like chairperson and whole-time members. It also recommends that senior Sebi officials publicly declare their assets and liabilities.
These proposals, particularly the public asset disclosure, have raised privacy concerns among Sebi employees. Legal experts anticipate the regulator may soften these norms. "The Sebi may consider privacy for its employee disclosures, which is reasonable... It is possible that they might tame the panel recommendations as it could set a precedent for other regulators/agencies," noted Abhiraj Arora, a partner at Saraf and Partners.
While the board will address broker and mutual fund norms, a separate consultation on revamping settlement norms, mentioned by Sebi chairman Tuhin Kanta Pandey last month, is not expected to be discussed on December 17, as it is still in preparatory stages.
