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    Sebi’s new proposal may lead to Rs 1,400 crore blow to mutual fund houses

    Synopsis

    The asset management companies are facing a Rs 1,400 crore shock from the markets regulator, Sebi, which has proposed a cap on fees. This would lead to under-recovery of Rs 1,402 crore. The new proposed changes, which may get implemented after 6 months, are part of Sebi's plan to improve transparency and pass on the benefits of economies of scale to investors.

    Sebi’s new proposal may lead to Rs 1,400 crore blow to mutual fund housesReuters
    NEW DELHI: Asset management companies, which were already licking wounds after changes in taxation for debt mutual funds, are now staring at a Rs 1,400 crore shock from markets regulator Sebi which has proposed a cap on fees.

    During FY22, AMCs reported pre-tax profit of Rs 10,900 crore after absorbing Rs 30,806 crore expenses (TER). Under the proposed slab, the total expenses chargeable would come down to Rs 29,404 crore. This would lead to under-recovery of Rs 1,402 crore.

    Calculations done by Jefferies shows that it would result in 5% impact of costs, 13% of pre-tax profit and 4 bps of average AUM. "However, we expect that industry will look to discuss with SEBI and pass part of impact to value chain," Jefferies analysts Prakhar Sharma and Vinayak Agarwal said.

    The new proposed changes, which may get implemented after 6 months, are part of Sebi's plan to improve transparency and pass on the benefits of economies of scale to investors.

    Under the new rules, Sebi has proposed that MFs should make the total expense ratio or TER uniform for scheme categories such as equity or debt. For hybrid and solution-oriented schemes, AUM will be divided into equity and other than equity portion and relevant TER will be applicable on the respective part of AUM.

    TER may also include other costs like brokerage, transaction, STT and GST on investment and advisory fee. Further, 5bps additional charge by AMCs for schemes having provision of exit loads is proposed to be discontinued.

    Rough calculations done by JM Financial shows that the near-term impact will be higher for larger AMCs like HDFC AMC (10-12% EPS cut in case 50% impact is passed on to distributors/brokers), while for mid-size AMCs like Nippon AMC the impact is estimated at 5-6%. For UTI AMC, the EPS impact will be negligible (even positive) given the equity AUM is on a lower side.

    "However, given the scale based AUM slabs, TERs will continue to moderate as AUM of AMCs continue to increase and benefits of operating leverage should be limited going ahead," the brokerage said.

    Sebi has also proposed that the performance-based TER concept should be tested under the regulatory sandbox. If implemented, it may result in mutual fund investors being charged a lower base TER at the time of application while the balance may be charged at the time of redemption based on scheme performance.

    Under the current regulations, mutual fund schemes can charge four additional expenses beyond the expense limits - brokerage and transaction costs, expenses for inflows from B-30 cities, additional expenses for schemes having provision of exit load and GST on investment and advisory fees.

    On B-30 incentive, the regulator wants it fixed at 1% of the size of the first application or amount committed through SIP but with a maximum limit of Rs 2,000.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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