Sebi‘s Fee Cut Proposal Triggers Market Reaction for AMCs and Brokerages
Recent proposals by the Securities and Exchange Board of India (Sebi) to revise mutual fund fee structures have led to a downturn in the stocks of Asset Management Companies (AMCs) and brokerage firms.The proposed changes aim to lower costs for investors but are expected to impact the revenue streams of various players in the mutual fund ecosystem.
A key element of Sebi’s proposal allows fund houses to charge an additional 5 basis points (bps) across all schemes. However, this is offset by other measures designed to reduce overall expenses. According to analysis, this 5 bps increase could considerably boost earnings, potentially impacting HDFC AMC and Nippon AMC by 30-33% in FY27 if implemented.
Alongside this, Sebi is proposing to cap brokerage fees paid by mutual funds to broking firms. Cash market trades would be limited to 2 bps, a substantial reduction from the current 12 bps, while derivative trades would be capped at 1 bps, down from 5 bps.
Industry officials anticipate that brokerages and mutual fund distributors will bear the brunt of these changes. Sandeep Bagla, CEO of Trust Mutual Fund, suggests that while revenues for some AMCs may initially fall during an adjustment period, they are likely to gradually reduce payouts to distributors.
The proposed changes are also expected to lower the base expense ratio for open-ended equity mutual fund schemes by 15 bps and close-ended equity schemes by 25 bps, as outlined in Sebi’s consultation paper. Moreover, Sebi proposes to exclude government levies like STT, GST, CTT, and stamp duty from expense ratio limits, meaning any future changes to these levies will be directly passed on to investors.
The impact on brokerages is predicted to vary. Somnath Mukherjee, VP of Corporate Development at Zerodha, estimates institutional brokers could see a revenue hit of 5-20%, depending on the value placed on thier additional services and their reliance on institutional clients. Smaller and mid-sized brokers heavily dependent on institutional business are expected to be more significantly affected.
Fund houses, often relying on brokerage research and management meetings due to smaller in-house teams, may become more selective in their partnerships as brokerage fees are capped. Kunal Valia, founder and compliance officer of Statlane, a Sebi-registered research analyst, warns that the rationalization of the expense ratio could reduce AMCs’ margins by 10-15%, with a subsequent impact on mutual fund distributors.