Sebi Halves Brokerage Fees for Mutual Funds

In a move aimed at safeguarding retail investors and enhancing compliance, the Securities and Exchange Board of India (Sebi) has approved measures that include cutting brokerage fees for mutual funds and simplifying disclosures for public listings.

Following a board meeting on Wednesday, Sebi announced that brokerage costs for mutual funds will be reduced from the current 12 basis points (bps) to 6 bps in the cash market. For the derivatives segment, limits have been lowered from 5bps to 2bps.

The Sebi board also eliminated the additional 5bps charge applied on top of the exit load, which is the fee charged when investors redeem their investments. The new rules will take effect on April 1, 2026.

These changes follow an October recommendation by the market regulator to overhaul brokerage and transaction fees paid by investors on top of the total expense ratio (TER). The aim is to prevent investors from being charged twice for the same service. Sebi had previously suggested cutting the brokerage fee cap to 0.02% for cash-market trades and to 0.01% for derivatives transactions, from 0.12% and 0.05% respectively.

The TER represents the annual expenses charged by a mutual fund, encompassing fund management fees, administrative costs, brokerage, and other operational charges. It is deducted from the fund’s returns, directly affecting investor earnings. Expense ratio limits, now termed base expense ratios, will exclude statutory levies such as securities transaction tax (STT), commodities transaction tax (CTT), and goods and services tax (GST). The TER will now be the sum of the BER, brokerage, regulatory levies, and statutory levies.

According to Sebi chair Tuhin Kanta Pandey, the current proposal is a balanced version. He stated that mutual funds can offer even lower fees to attract investors, emphasizing the focus on transparency and making charges more visible. He added that the proposal is not as radical as initially suggested.

The reduction in fee caps is anticipated to impact the margins of asset management companies, potentially leading to a pass-through of costs to distributors. An unnamed AMC official noted that smaller AMCs may face challenges in negotiating block deals and research with brokers due to their smaller asset under management (AUM).

Other Key Decisions

**Stockbroker Regulations:** The stockbroker regulations, which had remained unchanged since 1992, have been reorganized into 11 chapters. Some provisions were deleted, and others were integrated to improve readability. Stock exchanges will now act as the first-line regulators for stockbrokers, who will report non-compliance and furnish financial statements to them.

Sebi has also streamlined the criteria for identifying qualified stockbrokers to ensure that brokers meeting specific criteria, such as a large number of active clients, are subject to enhanced supervision and compliance.

**Pre-IPO Disclosures:** Amendments to the Issue of Capital and Disclosure Requirements (ICDR) Regulations were approved to introduce a draft abridged prospectus. This will provide a focused, concise, and standardized summary of offer documents at the draft red herring prospectus (DRHP) stage, accompanied by an abridged prospectus at the red herring prospectus (RHP) stage. This replaces Sebi's earlier recommendation of an offer summary.

According to Makarand Joshi, founder of MMJC and Associates, the rationalized abridged prospectus, available early in the IPO process, will make it easier for investors to quickly understand fundamentals such as the business, financials, and key risks.

**Pledged Share Lock-in:** Sebi approved a proposal to treat pledged shares as locked in for the prescribed period, even if depositories cannot technically impose a lock-in due to the pledge. If a pledge is invoked, the shares transferred to the pledgee will remain locked in for the balance period; on release, they will remain locked in with the pledger. This aims to resolve operational challenges faced by issuers during IPOs.

**Other Amendments:** The Sebi board also approved amendments to regulations 39 and 40 of the Listing Obligations and Disclosure Requirements (LODR), including removing the requirement of a Letter of Confirmation (LOC) by listed companies to investors.

The timeline for transferring unclaimed funds to the Investor Education and Protection Fund/Investor Protection and Education Fund has been adjusted. Issuers of non-convertible securities will now transfer the unclaimed amount after seven years from the security's maturity date, replacing multiple transfers when interest or dividend repayment is due.

Issuers of debt securities can now offer incentives such as additional interest or a discount to the issue price to specific categories of allottees, such as senior citizens and women, to encourage their participation in the debt market.

Credit rating agencies can now rate financial instruments falling under the purview of other financial sector regulators (FSR), even without specific rating guidelines from the respective FSR. Previously, CRAs were restricted from rating unlisted debt securities due to the absence of guidelines.

The threshold for High Value Debt Listed Entities (HVDLE) has been increased to ₹5,000 crore from ₹1,000 crore to ease corporate bond issuance for non-bank lenders, housing finance companies, and asset reconstruction companies.

Finally, Sebi announced that it would take more time to consider the recommendations made by the high-level committee on conflict of interest, disclosure, and recusal norms for Sebi officials. Concerns have been raised by Sebi officials regarding privacy with public disclosures of assets and liabilities, as well as restrictions on an official’s spouse trading in the stock market.