SEBI's Mutual Fund Expense Ratio & Brokerage Limit Reforms: Understanding the impact on stocks

Mumbai: The stock market witnessed a sharp decline on 18 December, apart from this, there was a strong buying in asset management companies i.e. AMC shares. The reason for this was the decision of the SEBI Board, which approved the change in the expense ratio of mutual funds. This decision had a direct impact on the stock market. The Nifty Capital Markets Index rose nearly 2 percent in morning trading. Shares of Nippon Life AMC were up about 6 percent and HDFC AMC's shares were up about 4.5 percent. UTI AMC recorded an increase of about 4 percent and ABSL AMC recorded an increase of about 1.7 percent.

SEBI has set a new limit on the brokerage offered by AMC to brokers and distributors. In the cash market, the brokerage limit has been reduced from 12 basis points to 6 basis points. At the same time, this limit has been reduced from 5 basis points to 2 basis points in derivative transactions.

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Due to the new rules, the average stock transaction cost of fund managers is expected to be reduced by about 10 to 15 basis points. However, this decision is considered a bit softer than the consultation paper released in October. SEBI has also removed the additional 5 basis point expense allowance levied on exit load schemes.

The Capital Markets Index rose nearly 2 percent. Shares of Nippon Life AMC were up about 6 percent and HDFC AMC's shares were up about 4.5 percent. UTI AMC recorded an increase of about 4 percent and ABSL AMC recorded an increase of about 1.7 percent.

The shares of Canara Robeco Asset Management Company, which was listed recently, witnessed the highest rise. This stock jumped about 8.5 percent to around 312 rupees and was among the top gainers of the day.

SEBI has reduced the maximum expense ratio from 2.25 percent to 2.10 percent for open-ended equity schemes with an AUM of less than 500 million rupees. For debt schemes, this limit has been reduced from 2 percent to 1.85 percent. Now the expense ratio of active equity funds will be in the range of 0.95 percent to 2.1 percent, whereas for debt funds, this limit has been fixed from 0.7 percent to 1.85 percent.

One important change is that Base Expense Ratio (TER) has been replaced by Total Expense Ratio (TER). Taxes and other statutory charges like GST, stamp duty, STT, CTT will remain outside the BER and will be shown separately. BER will include only fund level expenses like management fees, distribution brokerage and RTA charges.

If the 5 basis point reduction in equity TER is not fully affected by investors, then the core earnings of listed AMCs can be affected by about 8 to 9 percent. However, it is believed that the market had already included this effect in the prices.

According to Gaurav Jani, research analyst at PL Capital, SEBI believes that when AMCs already charge mutual fund fees, additional brokerage has a double impact on investors. This change is negative for the broker, but the effect will not be as big as the first proposal. It is estimated that revenue can be affected by 15 to 20 percent in cash deals and 3 to 5 percent in the derivatives segment.