The Securities and Exchange Board of India (Sebi) may look at reducing maximum limit of the total expense ratio after two years. The issue was discussed by the mutual fund advisory committee but was not part of the final list of proposals that were submitted to the Sebi board.

According to Sebi board agenda papers, the 14-member mutual fund advisory committee (MFAC) discussed the matter of reducing the total expense ratio after two years, but stopped short of including it in the final list of proposals that were submitted to the board.

Sources, however, add that the capital market regulator has already taken a note of this issue. In its recommendation to Sebi, the MF committee had mentioned that ?reduction in the maximum limit of TER for various schemes may be revisited after a period of two years.?

?Sebi has made a note of the recommendation to revisit the total expense ratio after two years. However, it hasn?t been explicitly mentioned in the gazette as you cannot state a law saying it may be changed after a certain period of time,? said a person from the 14-member MF advisory committee on conditions of anonymity.

This assumes significance when seen in the light of recent developments wherein SEBI allowed mutual fund houses to charge an additional 20 basis points (bps) every year after crediting back the exit loads to the scheme. The regulator has also allowed MFs to charge an additional 30 bps for getting inflows from beyond the top 15 cities.

?The thinking behind revisiting the TER is to gauge whether it has worked or not and whether it has fulfilled the objective it set out to achieve,? said the person. A higher expense ratio is expected to give fund houses more leeway to spend money on distribution, marketing and sales expenses.

Incidentally, the SEBI move of allowing an additional 20 bps to the expense ratio while crediting back exit loads to the scheme has not gone down too well with investor associations. They feel that the regulator’s premise that on an average 20% of the investors redeem their holdings before the end of the first year does not hold true when seen in the context of a rising market.

Meanwhile, SEBI notified the new norms for mutual funds on Wednesday. Fund houses can charge an additional 30 bps of TER if inflows from beyond the top 15 cities are at least 30% of gross new inflows in the scheme or 15% of the average assets under management (year to date) of the scheme, whichever is higher.

The assets under management (AUM) of the mutual fund industry stood at Rs 7.52 lakh crore as on August 31, 2012, according to data from the website of industry body AMFI. The industry has been struggling ever since entry loads were done away with in August 2009. Equity schemes have seen inflows in only thirteen months after the entry load ban was enforced.