Mumbai: Equity investors can look forward to lower costs while purchasing mutual fund schemes and faster listing of shares in initial public offerings (IPOs), with the markets regulator clearing proposals in this respect.
A Securities and Exchange Board of India (Sebi) board meeting on Monday also mandated large firms to tap the bond market for 25% of incremental borrowings, besides allowing interoperability among clearing corporations, and approving a framework to open commodity derivatives to foreign participants.
In a statement issued after the meeting, Sebi said all mutual fund commissions and expenses must be paid from the scheme itself, adding that the industry must adopt a full trail model of commission in all schemes without paying any upfront commission. Trail commissions are payments earned by distributors as long as investors stay invested in the scheme.
Sebi capped the total expense ratio (TER) for equity-oriented mutual fund schemes (close-ended and interval schemes) at 1.25% and for other schemes at 1%. However, it allowed an extra 30 basis points (bps) for selling in B-30 (beyond top 30) cities. One basis point is one-hundredth of a percentage point.
The TER cap for fund of funds will be 2.25% for equity-oriented schemes and 2% for other schemes.
“The board took note of the benefits of the (Sebi mutual fund advisory committee) proposal with respect to sharing of economies of scale, lowering the cost for investors, bringing in transparency in appropriation of expenses, and reducing mis-selling and churning,” the Sebi statement added.
The TER cap could have a ₹1,300-1,500 crore impact on the revenue of the mutual fund industry, Sebi whole-time member Madhabi Puri Buch told reporters.
According to Harsha Upadhyaya, chief investment officer, equity, at Kotak Mahindra Asset Management Co. Ltd, the new TER may cause short-term disruptions, but will enhance returns for investors. “However, the change in TER may impact profit margins of AMCs.”
Stefan Groening, director, investment solutions, at Sharekhan, BNP Paribas, said as costs go down, the net return of funds increases, making mutual funds even more attractive. “Care should be taken to ensure that costs are not lowered to an extent where the industry is unable to attract and pay for quality talent,” he said. “Additionally, moving to the all-trail model helps better align the distributors’ interest with the investors, thereby benefiting the retail investor. However, it may become difficult for new distributors to enter the market.”
Meanwhile, in a relief for foreign portfolio investors (FPIs), Sebi chairman Ajay Tyagi said the board discussed and broadly agreed upon the proposed know-your-customer (KYC) requirements and eligibility criteria for FPIs and a revised circular would be issued separately.
Sebi also reduced the time period for listing after an initial public offering to three days from six, freeing up locked investor funds faster. According to Sebi, early listing and trading of shares will benefit both issuers and investors. “Issuers will have faster access to the capital raised, thereby enhancing the ease of doing business and the investors will have early liquidity,” it said.
Unified Payment Interface (UPI) has been introduced as a payment mechanism for retail investors in IPOs.
Sebi allowed interoperability of clearing corporations, helping market participants consolidate their clearing and settlement functions at a single clearing house and reducing the effective trading cost for investors. Interoperability will lead to efficient allocation of capital for the market participants, it said.
The Sebi board approved a framework for enhanced market borrowings by large companies (outstanding borrowing of ₹100 crore or more), which will come into effect from 1 April 2019 and require firms to raise 25% of their incremental borrowings through bond market.
As a first step for opening up the commodity derivatives markets to foreign participants, the board approved the regulatory framework for permitting foreign entities having actual exposure to Indian commodity markets to participate in the domestic commodity derivatives markets.