The Securities and Exchange Board of India’s (Sebi) latest proposals to reduce fee structure by rationalisation of the total expense ratio (TER) and brokerage fees hit capital market stocks, including asset management companies, brokerages and mutual fund distributors badly on Wednesday. As many as 12 stocks fell over 5% intra-day.
“Overall, for an asset management company, the hit in the profits due to the changes proposed in TER may be to the tune of 4-6 bps,” said a CEO of a fund house.
Another worry is the proposal to sharply reduce brokerage costs – the cost that fund houses incur when they buy or sell securities. The market regulator has proposed to bring it down from the current high of 12 bps and 5 bps in cash and derivative market to 2 bps and 1 bps, respectively.
However, bigger fund houses do not see the latest proposals as too worrisome. “It is bringing transparency. The proposals are not negative or regressive on any stakeholders. The economies of scale will take care of any hit on earnings,” said D P Singh, deputy managing director and joint CEO, SBI Mutual Fund.
“At the same time, a reduction of 5 bps TER as a number may sound low as proportion of total TER but it’s a material proportion of AMCs’ margins. For an industry, which makes approximately Rs 15,000 crore profits across 45+ AMCs in aggregate after managing 250 million folios and 75 lakh crores, it’s a significant impact,” said Aashish Somaiyaa, CEO, WhiteOak Capital AMC.
The fall in the stock prices of listed entities was mainly due to concerns over revenue and margin compression for market intermediaries, added Siddhartha Khemka, head of research (retail), Motilal Oswal Financial Services.
There are also worries that if AMCs pass on the reduced fee earnings by cutting commissions, distributors will also see a significant impact on their earnings, said analysts. Consequently, The biggest drop was in the shares of Prudent Corporate Advisory (16.3% intraday), one of the largest distributors of MF products. 360One WAM, another big distributor, ended the trade down 3.6% on Wednesday.
Suresh Ganapathy, analyst, Macquarie wrote in a note, “The clear message is total expense ratios and brokerage commissions are heading downward. The value chain here will get affected and will have to share the pain and costs.”
The proposal could also sharply reduce the profits of institutional brokerages that execute trades on behalf of mutual funds. The stocks of IIFL Capital fell 10% intraday while Nuvama dropped 9% and Motilal Oswal 8.5%.
As lower cost caps ripple through the system, brokers, AMCs, and distributors may need to recalibrate their margins and share the cost burden, believe analysts.