Over a dozen representatives of domestic and global institutional brokerages recently met SEBI officials to raise concerns on the proposed reduction of brokerage charge cap for mutual funds, a person in the know has confirmed to Moneycontrol. The market regulator, in an October 28 consultation paper, has proposed key changes on expense ratio charged by mutual funds including capping a maximum of only 2 basis points of equity and 1 basis points of derivatives trades outside the Total Expense Ratio (TER). Any excess brokerage must be within the TER, a move that is expected to put pressure on asset managers and hit institutional brokers revenue.
According to the source, the brokers have raised concerns about the proposal. One source, who attended the meeting with SEBI, said, “Brokers conveyed that SEBI should encourage the research instead of discouraging it through such policy tweaks”. Brokers also conveyed that as service providers they provide more than just research for fund houses and any such reduction in fee could impact their profitability as well as offering of wide range of services.
In the proposal, the regular had justified the suggestion noting that mutual funds should be responsible for their own research and cannot pass on double the costs to investors through the TER. One regulatory source said, “Brokers shared their own views and concerns, which will be examined”. The said source further clarified that, “The intent of proposal is not to impact the profits of any entity but to ensure transparency and fairness for investors”.
Also read: SEBI may address mutual funds’ concerns on expense ratio, cost structure
The regulatory source further added, “The whole noise is around brokerage cap issue and TER, interestingly not a single feedback has been received from the industry on performance based optional TER, so the narrative is selective”
Under current SEBI regulations, an Asset Management Company (AMC) is prohibited from executing more than 5 percent of its total trades through any single broker over a rolling three-month block. If an AMC needs to exceed this 5 percent threshold for a non-associated broker, it must record a written justification and report all such trades quarterly to its trustees. This rule ensures that AMCs do not over-rely on any single broker, thereby reducing conflicts of interest and maintaining fairness in trade execution.
SEBI has proposed a major overhaul of the Total Expense Ratio (TER) framework for mutual funds to improve transparency and lower costs for investors. The draft rules suggest capping brokerage fees charged by mutual funds to 2 basis points (bps) for cash market trades (down from the current 12 bps) and 1 bp for derivatives (down from 5 bps).
At a recent event, SEBI’s Whole Time Member, Amarjeet Singh noted that they are not against research but are looking for more transparency. “Research is good for the market, good for investors. We all acknowledge it. I think what we are rooting for is more transparency. As a regulator, we don't like hidden costs. We want more transparency. That's all,” he noted.
Moneycontrol has recently reported that SEBI had expressed openness for discussing a higher cap, more than 2 bps.
Mutual funds also meet SEBI
Similarly, senior mutual fund officials also met with chair Tuhin Kanta Pandey on Monday, November 24 to discuss a variety of concerns including the discussion on overhauling the 24(b) regulation. A person in the know told Moneycontrol that the meeting was held for mutual funds to discuss grievances across the board, including the recent consultation paper.
One source said that some smaller mutual funds had raised concerns about the reduced brokerage suggestion, suggesting that as they had smaller teams and resources they could face issues with regards to participating in block deals, where brokerages act as the intermediaries that execute these block deals on behalf of mutual funds, ensuring confidentiality, lower market impact, and faster execution compared to placing the same order in the open market. Because block deals involve very high volumes, they allow mutual funds to buy or sell significant positions without sharply moving stock prices.
Mutual funds industry body AMFI has shared its final views with SEBI in response to the consultation paper but details of the same could not be ascertained. Meanwhile at the demand of Mutual Fund Distributors, SEBI extended the timeline to share their views on the proposal.
SEBI is expected to make a final view on the consultation paper and the 24(b)-regulation overhaul in the upcoming SEBI board meeting which is to be held on December 17.
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