In a significant move that brings relief to India's asset management industry, the Securities and Exchange Board of India (Sebi) has finalized a regulatory framework for mutual fund charges that is considerably less stringent than initially feared. The decision, announced on Wednesday, addresses long-standing concerns over fee transparency while stopping short of the sharp cuts that had rattled fund houses and distributors.
A Compromise on Brokerage Costs
The regulator has set a new cap on brokerage costs that mutual funds can incur. For trades in the cash market, the brokerage is now capped at 6 basis points (bps), reduced from the earlier 12 bps. For derivatives trades, the cap is set at 2 bps, down from 5 bps. Notably, Sebi has also scrapped an additional 5 bps charge that was previously allowed over exit loads—fees applied when investors redeem their units.
This final structure marks a substantial moderation from Sebi's October consultation paper, which had proposed slashing caps to a drastic 2 bps for cash and 1 bps for derivatives. The industry had warned that such deep cuts would severely compress margins and disrupt operations. The new norms will take effect on 1 April 2026, providing a three-month transition window for the sector to adapt.
Overhauling the Expense Ratio for Clarity
Alongside brokerage changes, Sebi has reworked the structure of the Total Expense Ratio (TER) to enhance disclosure and prevent double charging. The key change involves unbundling statutory levies from the Base Expense Ratio (BER).
Going forward, the BER will exclude charges like Securities Transaction Tax (STT), Commodities Transaction Tax (CTT), and Goods and Services Tax (GST). The TER will now be transparently disclosed as a sum of the BER, brokerage, regulatory levies, and statutory charges.
"The important objective of this exercise was to make it (costs) transparent because the taxes and levies are subject to change over time and they should not remain embedded in the TER," explained Sebi chairperson Tuhin Kanta Pandey in a post-meeting press conference. "It is not as radical as it was proposed in the beginning."
Industry Reaction and Market Impact
The final rules have been welcomed by fund managers as a balanced and pragmatic outcome. Sandeep Bagla, CEO of Trust Mutual Fund, noted that the 6 bps cap is a good solution for all stakeholders and the implementation timeline is comfortable.
The revised framework is expected to have a varied impact. Smaller mutual fund schemes, which typically charge higher expense ratios due to limited scale, may gain more flexibility. This headroom could help them manage operational costs or increase distributor commissions to stay competitive.
Deepak Shenoy, CEO of Capitalmind Mutual Fund, pointed out that while BER changes might slightly crimp distributor commissions for larger schemes, they offer more leeway for smaller ones. However, he cautioned that the changes are unlikely to meaningfully boost investor returns, as investors are largely indifferent to minuscule 0.01-0.02% reductions.
Distributors, who were bracing for a major hit, see long-term positives. Santosh Joseph, MD & CEO of Germinate Investor Services, believes the hit on margins will be compensated by the industry's sustained growth.
The stock market reacted positively to the regulatory clarity. Shares of major asset management companies like HDFC AMC, Aditya Birla Sun Life AMC, and Canara Robeco Asset Management saw significant gains following the announcement.
Regulatory Philosophy and Future Steps
The moderation in Sebi's final stance has sparked discussion on the role of a regulator in pricing. Legal expert Sandeep Parekh of Finsec Law Advisors remarked that a modern regulator should ideally let market forces decide fees unless competition fails. He noted that while lower costs benefit investors, second-order effects like reduced research quality need study.
Industry bodies have expressed satisfaction with the consultative process. Sundeep Sikka, Executive Director & CEO of Nippon Life India Asset Management and Chairman of AMFI, stated the outcome provides certainty and will aid the industry's growth and penetration.
Sebi is expected to issue a circular next year with further clarifications on the expense ratio caps and related changes, finalizing the roadmap for implementation by the 2026 deadline.
