The Securities and Exchange Board of India (SEBI) has announced a wide-ranging set of regulatory reforms aimed at lowering costs for investors, improving transparency in mutual funds, and streamlining capital market regulations. Taken together, the measures reflect the regulator’s effort to strengthen investor protection while fine-tuning market efficiency amid the growing scale of India’s financial markets.
What decisions did SEBI take at its latest board meeting?
At its recent board meeting, SEBI approved multiple reforms across mutual funds, initial public offerings, corporate debt markets, and stock broker regulations. Among the most consequential decisions was a comprehensive review of mutual fund expense structures, including a reduction in permissible expense ratios and brokerage fees.
The board also discussed recommendations of a high-level committee on conflicts of interest and asset disclosures by SEBI officials, but deferred a final decision, citing concerns raised by employees. These proposals are expected to be revisited at a subsequent meeting.
How has the mutual fund expense framework been changed?
SEBI has restructured how mutual fund costs are defined and capped. The existing Total Expense Ratio (TER) framework has been replaced with a clearer, more disaggregated structure centred on a new Base Expense Ratio (BER).
Under the revised system:
- BER will exclude all statutory and regulatory levies.
- Statutory charges such as STT, CTT, GST, stamp duty, SEBI fees, and exchange fees will be charged on actuals.
- Total Expense Ratio will now explicitly consist of BER, brokerage, and applicable levies.
This change is intended to enhance transparency by allowing investors to clearly see what portion of costs goes towards fund management and what portion reflects unavoidable statutory charges.
What reductions have been made in expense ratio limits?
SEBI has lowered the maximum permissible BER across multiple categories:
- For open-ended equity and non-equity schemes, limits have been reduced by up to 15 basis points across asset under management slabs.
- For index funds and ETFs, the cap has been reduced to 0.9 per cent from 1 per cent.
- For close-ended equity schemes, the limit has been cut from 1.25 per cent to 1 per cent.
In addition, SEBI has removed the extra 5 basis points that schemes with exit loads were earlier allowed to charge as a transitional measure.
Why was brokerage capped more tightly?
The regulator has sharply reduced the brokerage fees that mutual funds can pay to intermediaries:
- Cash market brokerage has been halved from 12 basis points to 6 basis points.
- Derivative transaction brokerage has been reduced from 5 basis points to 2 basis points, excluding statutory levies.
This move directly addresses concerns that high intermediary commissions were inflating costs for investors without commensurate value addition.
What changes were made to IPO regulations?
SEBI approved amendments to the Issue of Capital and Disclosure Requirements (ICDR) regulations to ease compliance and improve investor access to information.
A key change relates to lock-in requirements for non-promoter shareholding. Where physical lock-in of shares is not feasible due to pledging, depositories will now mark such securities as “non-transferable” for the lock-in period, ensuring regulatory intent is preserved.
Additionally, SEBI has allowed a standardised and concise draft abridged prospectus to be made available at the Draft Red Herring Prospectus (DRHP) stage itself, rather than only at the RHP stage. This is expected to improve retail investor understanding early in the IPO process.
How do the reforms affect debt markets and retail participation?
To deepen the corporate debt market and attract retail investors, SEBI has permitted debt issuers to offer incentives to select investor categories. The board has also approved reforms to stock broker regulations, though details are expected to be notified separately.
These measures align with SEBI’s broader objective of diversifying sources of capital and reducing over-reliance on bank financing.
Why do these reforms matter?
The changes signal a regulatory shift toward cost efficiency and transparency in India’s rapidly expanding mutual fund industry. By explicitly lowering expense ceilings and separating unavoidable statutory costs from fund management charges, SEBI aims to ensure that scale benefits are passed on to investors.
At the same time, reforms in IPO disclosures and debt markets seek to strengthen retail confidence and participation, which is critical as household savings increasingly flow into capital markets.
What to note for Prelims?
- Base Expense Ratio (BER) and its components
- Difference between TER and BER
- ICDR Regulations and lock-in provisions
- Role of SEBI in investor protection
What to note for Mains?
- Regulatory measures to reduce costs in mutual funds
- Balancing investor protection with market efficiency
- Importance of transparency in capital market regulations
- SEBI’s role in deepening debt and equity markets
