Sebi's proposed fee caps could slash AMC profits by Rs 1,400 crore

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Capital market regulator Sebi's new proposal to improve transparency in mutual fund houses could be a major blow to asset management companies (AMCs)'s profits.

AMCs are already under pressure from changes in taxation for debt mutual funds and the new proposal by the Securities and Exchange Board of India to bring a uniform total expense ratio (TER) will impact profits by 13 percent, to the tune of a Rs 1,400-crore loss, according to a Jefferies report released on May 19.

The TER is a percentage of a scheme's corpus that a mutual fund house charges towards expenses including administrative and management.

During FY22, AMCs reported pre-tax profit of Rs 10,900 crore. This was after absorbing Rs 30,800 crore of expenses, which as per the new TER proposals will be capped at Rs 29,400 crore. According to Jefferies' calculation, this equates to under-recovery of Rs 1,400 crore or 13 percent of pre-tax profit and 4 basis points of average AUM.

"However, we expect that industry will look to discuss with SEBI and pass part of the impact on to value chain," Jefferies analysts Prakhar Sharma and Vinayak Agarwal said.

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At present, Sebi allows asset management companies to charge unitholders of mutual fund four additional type of expenses over and above the specified TER limits. These are brokerage and transaction costs, additional TER for distribution commission for inflows from B-30 (beyond top 30) cities, goods and services taxes, and additional expense for exit loads.The board has sought comments on the proposals till June 1 and post-finalisation, it may implement in six months.

The new proposed changes are part of Sebi's plan to improve transparency and pass the benefit of larger scale to investors. The market regulator has also sought to improve linkage of charges/ TER with fund-performance.

Noting the underlying principle that TER should be inclusive of all costs charged to an investor, Sebi, in its consultation paper released on May 18, proposed that brokerage and transaction expenses may be included within the TER limit. Besides, all expenses and costs of investment including STT (Securities Transaction Tax) should be within the TER limit.

Speaking to Moneycontrol, Nirav Karkera, Head of Research, Fisdom, is of the view that the new proposal is in the best interests of mutual fund investors but could lead to intermittent challenges for the asset management industry. Such challenges would be majorly attributable to the transition and limited visibility on the outcomes of such a transition in the near term.

Manoj Nagpal, Outlook Asia Capital, told CNBC-TV18 that the new changes proposed are very positive. He sees SEBI's proposal as making Mutual Funds lucrative and is indirectly a positive for AMCs and distributors.

Among other proposals, Sebi suggested that unitholders should be given an option to exit at the prevailing net asset value (NAV) without any exit load when there is an increase in TER and proposed to lower the exit load of an open ended scheme to a maximum permissible limit of 2 per cent.

For financial inclusion of women in the mutual fund space, Sebi suggested an additional incentive may be introduced for distributors for new investments from women investors (new PAN) at the industry level.

Shares of HDFC Asset Management Company, Aditya Birla Sun Life AMC, UTI AMC, and Nippon Life India Asset Management were down 1-2 percent whereas Shriram Asset Management Co and Escorp Asset Management were up 3 and 10 percent, respectively.