SEBI’s revised TER framework a net positive for listed AMCs: Sunil Subramaniam

The recent revision of the Total Expense Ratio (TER) framework by the Securities and Exchange Board of India (SEBI) marks a significant development for India's burgeoning mutual fund industry. This regulatory adjustment, which eased some of the previously proposed stricter norms, has been widely welcomed by Asset Management Companies (AMCs) and is perceived as a 'net positive' for their listed entities, as articulated by industry leaders like Sunil Subramaniam. To truly grasp its importance, we must delve into the background, the specifics of the change, and its broader implications for the Indian economy and its investors.

At its core, the Total Expense Ratio (TER) represents the annual cost of managing a mutual fund, expressed as a percentage of the fund's average net assets. This ratio includes various operational expenses such as fund management fees, registrar and transfer agent fees, marketing and distribution expenses, and other administrative costs. For investors, a lower TER generally translates to higher net returns, assuming similar fund performance. SEBI, as the primary regulator of the Indian securities market, has a mandate to protect investor interests while fostering market development. Historically, SEBI has consistently intervened to ensure transparency and fairness in the mutual fund industry, recognizing its crucial role in channeling household savings into productive assets.

In May 2023, SEBI initially proposed a more stringent TER framework. Key aspects of this proposal included a potential reduction in TERs, especially for larger funds, and a significant change in how TER was calculated, proposing to club institutional and retail assets for TER calculation purposes. This move aimed to bring down costs for retail investors and prevent AMCs from charging higher fees by segmenting their investor base. However, these proposals raised considerable concerns within the AMC industry. AMCs argued that such drastic cuts could significantly impact their profitability, impede their ability to invest in market development, and potentially reduce the reach of mutual funds, especially in smaller towns and cities where higher distribution costs are involved. They also pointed out that lower profitability might deter new players and innovation, ultimately harming the market's long-term growth.

What happened recently is that SEBI, after extensive consultations with industry stakeholders, revised its stance. The regulator softened some of the more impactful proposals from its May 2023 consultation paper. Crucially, the revised framework, detailed in SEBI circular SEBI/HO/IMD/DF3/CIR/P/2023/178 dated October 25, 2023, largely retained the existing structure for TER calculation, allowing AMCs more flexibility than initially feared. It did not proceed with the proposal to club institutional and retail assets for TER calculation, which was a major relief for the industry. While SEBI reiterated its commitment to ensuring reasonable costs for investors, the final framework adopted a more balanced approach, acknowledging the operational realities and growth imperatives of AMCs. This measured approach reflects SEBI's role not just as a watchdog but also as a facilitator of market growth.

Key stakeholders in this scenario include SEBI, the regulator, whose primary objective is investor protection and market integrity, as enshrined in the SEBI Act, 1992. Then there are the Asset Management Companies (AMCs), who manage the mutual funds and are directly impacted by TER regulations, as it affects their revenue and profitability. Millions of mutual fund investors, both retail and institutional, are also crucial stakeholders, as TER directly impacts their investment returns. Lastly, fund distributors, who play a vital role in taking mutual fund products to a wider audience, are also affected, as their commissions are often linked to the TER.

This development matters significantly for India's financial landscape. A stable and growing mutual fund industry is vital for capital formation, providing a crucial channel for household savings to flow into the equity and debt markets, thereby supporting corporate growth and infrastructure development. By easing the TER framework, SEBI has instilled confidence in AMCs, potentially encouraging them to expand their operations, innovate with new products, and deepen their penetration into tier-2 and tier-3 cities. This aligns with broader national goals of financial inclusion and making India a more financially literate and invested nation. The positive sentiment generated by this revision, coupled with supportive global central bank policies, provides comfort to Indian markets, potentially attracting more domestic and foreign investment.

Historically, SEBI has evolved its regulations for mutual funds significantly since the SEBI (Mutual Funds) Regulations, 1996, were first introduced. These regulations provide the comprehensive legal framework for the establishment and operation of mutual funds in India. Over the years, SEBI has consistently sought to balance the interests of investors and the industry, periodically revising norms to enhance transparency, reduce costs, and improve governance. This latest revision is a testament to SEBI's dynamic regulatory approach, which involves continuous dialogue and adaptation to market realities.

Looking ahead, the revised TER framework is expected to foster sustained growth in the mutual fund industry. AMCs will likely continue their expansion plans, focusing on investor education and product diversification. This could lead to greater innovation in fund offerings and more competitive services, ultimately benefiting investors through better choices and potentially improved service quality. However, the market's sustained enthusiasm will also depend on robust earnings delivery by listed companies and reasonable valuations. SEBI will continue its oversight, ensuring that while AMCs have operational flexibility, investor interests remain paramount. This balancing act is crucial for building a mature, robust, and investor-friendly financial market in India, contributing to the nation's economic resilience and growth trajectory.