The shares of leading asset management companies (AMCs) plunged sharply on Wednesday, October 29, after the Securities and Exchange Board of India (SEBI) floated a sweeping set of proposals to rationalise mutual fund expenses. The market regulator’s move aimed at tightening the definition of the Total Expense Ratio (TER) and revising the limits on brokerage and other charges triggered a wave of selling across the asset management pack, as investors reassessed earnings outlooks for the sector.
HDFC Asset Management Company, Aditya Birla Sun Life AMC, UTI AMC, Nippon Life India AMC, and Shriram AMC all fell as much as 10% during the session. Other names like CAMS, Nuvama and Motilal Oswal also saw over 4% losses each.
Key objective of the SEBI proposal
SEBI’s consultation paper, which seeks to bring “regulatory clarity, cost rationalisation and transparency” to the Rs 75.6 lakh crore mutual fund industry. According to SEBI’s paper released on October 28, the regulator has proposed a complete overhaul of the mutual fund expense framework. The key thrust is to reduce investor costs and streamline what fund houses can charge under the Total Expense Ratio the fee deducted annually from assets under management (AUM) to cover management and operating expenses.
The regulator plans to remove the additional 5 basis points (bps) that AMCs were previously allowed to charge across schemes. This charge was originally introduced in 2012 to compensate fund houses for crediting exit loads back to the schemes first set at 20 bps and later reduced to 5 bps in 2018. SEBI has now proposed to eliminate it entirely, calling it “transitory in nature.”
To soften the blow, the regulator has proposed a 5 bps upward revision in the first two TER slabs for open-ended active schemes. This adjustment, SEBI said, would “mitigate the operational impact” on fund houses while maintaining its broader goal of cost rationalisation for investors.
Another crucial element in SEBI’s plan is the sharp cut in brokerage charges. The permissible brokerage expense will be reduced from 12 bps to 2 bps for cash market transactions and from 5 bps to 1 bps for derivatives, a move SEBI says is meant to ensure that expenses are charged fairly and transparently to investors.
Additionally, SEBI proposed to exclude all statutory levies including STT, GST, CTT, and stamp duty from the TER limit, allowing these costs to be passed through directly to investors. Presently, GST on management fees is charged above the TER, while other statutory levies are included within it. The regulator believes excluding these from TER will make cost disclosures clearer and prevent any ambiguity about future statutory changes being borne by AMCs.
SEBI also outlined potential performance-linked expense models to be made voluntary and plans to simplify compliance requirements such as reducing the frequency of trustee meetings, digitising investor communications, and removing outdated fund categories. Public feedback has been invited until November 17.
Jefferies on SEBI proposal: Changes a ‘risk to earnings’
The proposal by SEBI led to knee-jerk reaction across the AMC stockls. Markets immediately interpreted the draft as a potential hit to AMCs’ fee income a crucial driver of profitability. The elimination of the 5 bps additional charge and the steep cut in brokerage limits were seen as the biggest risks, prompting aggressive selling across listed asset managers.
Global brokerage house, Jefferies, in its research note said the proposed framework introduces near-term uncertainty for the mutual fund sector and could impact profitability by 8–10% for leading asset managers if implemented as outlined.
Jefferies on SEBI proposal: Cut in brokerage limits a concern?
The brokerage noted that the removal of the 5 bps allowance previously granted to offset exit-load credits would directly hurt AMC margins. This additional 5 bps accounted for a steady source of revenue across equity schemes, and its withdrawal would leave a visible dent in earnings.
While SEBI has proposed compensating the loss by raising the lower TER slabs by 5 bps, Jefferies noted that this adjustment may not be sufficient for large AMCs with higher average AUMs, where the incremental slab benefit is relatively minor compared to the revenue lost from the abolished charge.
The report further pointed out that the cut in brokerage limits (from 12 bps to 2 bps) could not only reduce AMC operational recoveries but also strain broker relationships, as execution economics for both sides become tighter. The brokerage emphasised that this aspect may weigh on both AMCs and associated brokerage houses that rely on fund-related execution volumes.
Jefferies on SEBI proposal: A look at initial financial impact
Jefferies described the consultation paper as “a comprehensive reform aimed at investor protection but a tangible earnings risk for fund houses.” The firm cautioned that while the industry could adapt over time, the immediate financial impact would be hard to offset.
The brokerage note observed that AMCs with higher equity AUM exposure such as HDFC AMC and Nippon India AMC stand to be most affected. These companies derive a substantial share of profits from active equity funds where fee compression directly cuts into earnings.
Jefferies on SEBI proposal: Margin pressure inevitable
Jefferies also noted that the new structure may compel fund houses to revisit distributor commissions, internal cost structures, and scheme-level expense allocations. The interplay between investor benefit and AMC sustainability will likely shape the final version of SEBI’s framework.
However, Jefferies did acknowledge SEBI’s effort to rationalise regulatory overlaps and modernise compliance, including digital communication and the removal of redundant provisions. These, it said, would reduce administrative burdens over time, even if profitability takes a near-term hit.
