The Securities and Exchange Board of India (SEBI) will put forth two options to water down its earlier proposal to levy a standard investor fee on mutual funds, to limit the impact on the profitability of the ₹44.3 lakh crore ($537.75 billion) asset management industry, two sources with direct knowledge of the matter said.
The changes, following a push-back from the industry, will be part of a discussion paper likely to be issued in the coming weeks, the sources said. A discussion paper is the first step in crafting regulations.
Both sources declined to be identified as they are not authorised to speak to the media. A spokesperson for SEBI did not respond to an email sent on Monday.
Editorial | The proposed changes to total expense ratio of mutual funds are in investor interest
The markets regulator is exploring an option to let mutual funds charge higher fees with all expenses, including brokerage and taxes, paid by fund houses, the sources said.
‘Marginal impact’
SEBI's original proposal allowed fund houses to charge a maximum fee of 2.55 per cent of the assets under management (AUM) with all expenses, including brokerage costs.
A final decision will be taken after receiving feedback on the discussion paper, but the industry expects it to be set at a level which has a "marginal impact" on profitability, said one of the sources.
In a presentation to the regulator in June, the industry argued that the original proposals would squeeze the profitability of almost all asset management companies (AMCs) by 20-80 per cent, said the second source.
The other option is to exclude brokerage and taxes but the investor fees will be lower, the sources said.
Arbitrage funds that buy and sell securities frequently and hence have a higher tax burden, will be allowed to choose the second option, the sources added.
Both options were discussed with an internal committee finalising rules on July 21, according to the first source.
SEBI's discussion paper on mutual fund fees, first released on May 18, drew the ire of the industry, prompting the regulator to defer a decision to it at the June 29 board meeting.
At a news conference following the board meeting, SEBI's chairperson, Madhabi Puri Buch, said the regulator would issue a fresh discussion paper which will make the industry "quite happy."