SEBI Consultation Paper on Mutual Fund TER and AMC Rules
Why in the news
SEBI released a consultation paper on sweeping changes to mutual fund regulations: a new TER structure, clearer investor charges and fewer business limits on AMCs.
TER proposals
| Item | Proposal |
|---|---|
| TER definition | Includes base expense ratio, brokerage, exchange fees, regulatory fees and statutory levies, with full cost breakdown disclosed |
| Brokerage, cash market | From 0.12% (12 bps) to 0.02% (2 bps) |
| Brokerage, derivatives | From 0.05% (5 bps) to 0.01% (1 bp) |
| Extra distribution charge | The additional 5 bps provision to be scrapped |
| Small open-ended active funds | 5 bps upward revision in the first two TER slabs |
| Statutory levies (STT, GST, stamp duty) | Outside the TER cap; tax changes passed to investors |
AMC business relaxation
- Under Regulation 24(b), AMCs may offer management and advisory services to non-pooled funds of large institutional clients.
- Conditions: Chinese walls, key employee segregation and direct reporting to the AMC CEO, to prevent conflicts and match global practice.
Other operational reforms
- AMCs may voluntarily link TER to performance.
- NFO costs up to unit allotment are borne by the AMC.
- Winding-up costs cover custodian and audit fees but not advisory or investment fees.
- Trustee meetings reduced from six to four a year.
Structure review
- Comments invited on the three-tier structure of Sponsor, Trustee and AMC; ideas include corporate or LLP-based funds and independent oversight in place of trustees.
- Industry voices Jimmy Patel (Quantum MF) and D.P. Singh (SBI MF) welcomed the proposals.
Expected impact
- Investors: lower costs, simpler disclosure.
- Industry: operational flexibility and wider AMC activities.
- Regulator: a transparent, competitive, globally aligned MF market.
Key terms
- TER: yearly percentage of fund assets charged for management and operations.
- Basis point: one-hundredth of a percent.
- Chinese wall: internal barrier between two business units to prevent conflict of interest.
Exam angle
- Cash-market brokerage cap: 2 bps; derivatives: 1 bp.
- Regulation 24(b); trustee meetings: six to four.