Sebi fines Nippon Life India AMC, trustee for charging expenses on AMC's books

While the AMC and its trustees submitted that the schemes in question are ETFs and FoFs, which are majorly Direct Plan oriented schemes, the regulator said that there are no exceptions to the directions.

The capital markets regulator has fined Nippon Life India Asset Management Ltd Rs 2 lakh and Nippon Life India Trustee Ltd Rs 1 lakh for charging total expense ratio (TER) of various schemes to the asset-management company's books.

The regulator does not permit this to ensure that it is a level playing field for big and small AMCs, to reduce portfolio churning and to bring transparency in expenses, among other things.

In an order dated August 8, the Securities and Exchange Board of India (Sebi) stated that the AMC bore excess expenses on few of its schemes and that the trustee did not ensure that AMC complies with the regulations.

On October 22, 2018, the regulator issued a circular stating that all scheme-related expenses (including commission paid to distributors) must be paid from the scheme and within regulatory limits, and not be paid from the books of the AMC, its associate, sponsor, trustee or any other entity.

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During the regulator's investigation, it was observed that in five of the AMC's ETFs, it charged less than 1 percent expense to the schemes and charged certain scheme expenses to the AMC books. Therefore, it was alleged that the AMC was in violation of the October 2018 circular.

AMCs are allowed to pay expenses that are "very small in value but high in volume" out of its books but up to a maximum of 2 bps of the respective scheme's AUM. But, in this case, more than this limit was found to have been charged to the AMC's books for FY21 and FY22.

While the AMC and its trustees submitted that the schemes in question are ETFs and FoFs, which are majorly Direct Plan oriented schemes, the regulator's order said that the October circular is applicable to all types of schemes and that there were no exceptions.

The order stated, "If varied practice is followed it has a potential to create anomalies in the mutual fund industry as profitable AMCs or AMCs with deep pockets can afford to pay schemes expenses from AMC books whereas small AMCs won’t be able to borne such expenses from their books."

It added, "Thus the objective of the TER (total expense ratio) circular is to bring transparency in expenses, reduce portfolio churning etc. and not to allow varied practice to be followed." Therefore, the order stated, the contention of the AMC and trustee "is not tenable".