The Securities and Exchange Board of India’s (Sebi’s) proposal to introduce a uniform total expense ratio (TER) structure has left asset management companies (AMCs) sweating over a potential Rs 1,400-crore hit to the bottom line.
The consultation paper by the regulator states that fresh proposals will cap the TER at Rs 29,404 crore, in comparison to the Rs 30,806 crore charged by AMCs in FY22. According to a Jefferies calculation, this indicates a 13% dent to profits if the proposal to bring in a uniform TER sees light of the day.
The report said that the pre-tax profit of fund houses was Rs 10,900 crore in FY22, after accounting for the Rs 30,800 crore in expenses. The new structure points to a hit of Rs 1,400 crore, and 4 bps of the average AUM.
The new proposal comes as a double-whammy to MFs, after the earlier blow to fund houses with respect to removal of the indexation benefit. However, some see a silver lining, saying it could help bring in more investors into the MF universe.
“This is a welcome step as a uniform structure, which will bring in higher transparency, will help get in more retail investors into a space largely dominated by institutional investors,” said Manmeet Kaur, principal associate, Karanjawala & Co.
She said TERs based on the AMC level, instead of the scheme level, will help in widening the reach to smaller cities.
Sebi’s new slab has a 2.55% limit on expenses for equity schemes for AMCs with an AUM of up to Rs 2,500 crore. For non-equity schemes, the proposed cap is 1.2% up to Rs 5,000 crore in AUM.
Listed AMCs saw a mixed bag on Friday. While HDFC MF and Aditya Birla Sun Life MF closed in the red, down 0.83% and 1.58% respectively, UTI AMC rose 2.38% and Shriram AMC gained 2.12%. Nippon Life AMC traded flat at 0.06%.
“The larger AMCs are in focus. HDFC MF and Aditya Birla Sun Life MF are bigger in terms of profitability, hence they reacted negatively. The market possibly sees better profits for the relatively smaller players, which explains the trend,” said Gaurav Jani, research analyst, Prabhudas Lilladher.
Until now, brokerage and transaction costs, incentives to distributors to get inflows from B30 regions, GST and expenses on account of exit loads were components charged over and above the TER.
“TER reflects the maximum expense ratio an investor may have to pay and hence should be inclusive of all expenses permitted to be charged to an investor. The investor should not be charged any amount over and above the prescribed limits,” Sebi said in its consultation paper.
Industry experts have been of the view that the proposed regulations, while beneficial from the investors’ point of view, would add to pressure on fund houses as distributors play a huge role in bringing in investors, especially from the non-metro regions.
“The proposal to introduce AMC-level slabs in place of fund-level slabs will enable larger AMCs to pass on economies of scale across funds, thus benefiting investors in terms of lower costs,” said Kaustubh Belapurkar, director – manager research at Morningstar India.
According to Sebi, the weighted average TER, including additional expense charged by AMCs in FY22 was 0.77% for debt schemes and 2% for equity.
The regulator argues that the TER charged is mostly close to the prescribed regulatory limits in the case of schemes oriented towards retail investors i.e. equity and hybrid schemes, but in the case of debt — with investors being mostly institutional with bargaining power — the TER is much lower than the prescribed limit. Thus, the benefit of economies of scale accruing in debt schemes appears to be passed on to investors but not so in the equity and hybrid schemes.
An MF distributor who did not wish to be named, said the regulator’s proposals would make it more difficult for them in the already-competitive industry.
“The suspension in B30 schemes came as a big blow. Reducing the permissible limit on expenses will only make our lives more difficult. It is unfair that the whole community is being made to pay because of a few bad apples,” he said.