SEBI cuts Total Expense Ratio (TER)

Why in news?
=>The Securities and Exchange Board of India (SEBI) has broadly accepted the recommendations of the H.R. Khan Committee on Know-Your-Client requirements for foreign portfolio investors (FPIs), while lowering the total expense ratio (TER) for open-ended equity schemes, thereby making it less expensive for investors to invest in mutual funds.

Why the amendments in the first place?
=>The move to amend the KYC norms for FPIs is primarily to curb money laundering and round tripping of funds, especially if the investment is routed through a high-risk jurisdiction – typically countries with a known history of funding terrorism activities or money laundering.

Key Highlights:
=>The SEBI decided to amend the contentious circular issued in April and issue a separate circular to address the concerns raised by overseas investors.
=>In another major decision, the regulator has capped the maximum expense ratio at 1.05% for open-ended equity schemes with assets under management (AUM) in excess of Rs. 50,000 crore. Currently, schemes with AUM in excess of Rs. 300 crore charge 1.75% as total expense ratio.
=>Further, SEBI has laid down a range of 1.05% to 2.25% to be charged as expense ratio depending on the AUM of the scheme. Earlier the range was 1.75% to 2.5%.

Additional expense:
=>It however, allowed an additional expense ratio of 30 basis points for retail flows from beyond the top 30 cities. More importantly, the additional expense will not be allowed for flows from corporates and institutions.
=>It is of the view that the lower expense ratio would lead to investors saving Rs. 1,300 crore to Rs. 1,500 crore in commissions.

SEBI (Settlement Proceedings) Regulations 2018:
=>It has framed the SEBI (Settlement Proceedings) Regulations 2018 which bar offences that cause a market wide impact, loss to investors or affects the integrity of the market, to be settled through the consent route.
=>While serious offences like insider trading or front running can be settled through consent, SEBI has said that it would use a principle-based approach while deciding on such matters.
=>Meanwhile, SEBI will also not settle any proceedings wherein the applicant is a wilful defaulter or if an earlier application for the same offence has been rejected.
=>It has also approved a framework for permitting foreign entities having an exposure in physical commodity market to hedge in the commodity derivatives segment.
=>SEBI will also revisit the proposal of allowing Unified Payment Interface (UPI) while bidding for shares in an initial public offer (IPO) that would bring down the overall timeline from the current T+6 to T+3 days.

Background:
=>In April, SEBI issued a circular directing certain categories of FPIs such as trusts, banks, mutual funds, and investment managers to disclose their beneficial owners within six months. A beneficial owner is a person who, directly or indirectly, derives the benefits of ownership.
=>The circular said that Non Resident Indians (NRIs), Persons of Indian Origin (PIOs), Overseas Citizens of India (OCIs) and Resident Indians (RIs) cannot be beneficial owners of a fund investing in India.
=>It also asked FPIs to disclose names and addresses of the beneficial owners; whether they were acting alone or together through one or more natural persons as a group; tax residency jurisdiction; and the beneficial owner group’s percentage shareholding capital or profit ownership in the FPI.
=>After receiving representations from market participants who sought a review of the guidelines and additional time for complying, SEBI extended the six-month deadline for disclosure to December 31.

Recommendations of H.R. Khan Committee:
=>It has proposed that NRIs, OCIs and RIs should be allowed to hold a non-controlling stake in FPIs, and no restrictions should be imposed on them to manage non-investing FPIs or Sebi-registered offshore funds.
=>It has recommended that erstwhile PIOs should not be subjected to any restrictions, and clubbing of investment limits should be allowed for well-regulated and publicly-held FPIs that have common control.
=>It has suggested that the time for compliance with the new norms should be extended by six months, after they are finalised, and non-compliant investors should be given another 180 days to wind down their existing positions.
=>It has also asked SEBI to do away with additional KYC requirements for beneficial owners in case of government-related FPIs.
=>The committee has recommended changes in the norms pertaining to the identification of senior managing officials of FPIs, and for beneficial owners of listed entities. It has suggested changes in the disclosure of personal information of beneficial owners. It has said, however, that all new rules should apply equally to investors using participatory notes (P-Notes).

Pic courtesy:thehindubusinessline.com