Why in news?
=>Recently, Securities and Exchange Board of India (SEBI) announced changes to total expense ratio (TER) of mutual funds.
What is total expense ratio and why is it important for investing in mutual funds?
=>Mutual funds are investments where an investor entrusts his/her money with an investment manager (of an asset management company) to manage the money smartly and efficiently. This money management comes at a cost, which is usually charged as a percentage of the investment.
=>SEBI has laid down rules on how much an asset management company can charge an investor to manage their funds.
=>For an investor this is important because it is a charge (called total expense ratio or TER in short) levied on their investment, and the money they get back from their investment is reduced by this figure. For example, if a fund charges 2% as the TER, and the fund produces a gross profit (return) of 15% in a given year, the investor would get 13% – which is the gross profit minus the TER – in their hands.
=>So, for an investor, TER is an important number to focus on since it has a direct impact on their returns. However, it is not the only number to look at and investors should evaluate funds based on various parameters such as consistency of performance and risk levels.
What are the changes made by SEBI now to TER?
=>SEBI has, across the board, lowered the TER that a fund house can charge its investors. The reduction is higher for larger funds and lower for smaller funds; larger and smaller being a measure of how much money a fund manages.
=>The reduction has been anywhere between 0.01% to 0.44%. For very small funds, SEBI has actually increased the allowable expense ratio a little. However, in general, mutual fund investors should see a marginal reduction in the fee they were paying, which would mean they would see an increase in the returns they were getting.
=>Also, SEBI has specified the expense ratio for funds larger than the largest funds today, in anticipation of market growth.
Benefits of retail investors:
=>Let’s take an example to understand. A very popular fund among investors is a hybrid fund called HDFC hybrid equity fund. This fund manages assets worth close to Rs. 24,000 crore. The base TER (the TER prior to GST and some minor additional expenses) that this fund is charging now is 1.76%. Post the recent change, they will be able to charge as base TER would be 1.50%, a reduction of 0.26%.
=>So if an investor is investing Rs. 1 lakh in this fund, and the fund realises a gross profit of Rs. 20,000 in a year (20% profits), the investor would get in hand (when he redeems), an amount, roughly, of Rs. 117,888. After the new rules are in place, the same investor would stand to get an amount roughly of Rs. 118,200 – a gain of Rs. 312 from previously.
SEBI also decided to go with the HR Khan Panel recommendations, which sought the easing of restrictions the regulator had imposed on investments by nonresident Indians (NRIs) and some foreign funds. That will ease the concerns of overseas investors worried about tighter norms.
=>SEBI said it will not settle offences through the consent mechanism if it views the issue as having market-wide impact, affects the integrity of the market or results in loss to investors. The consent order mechanism is similar to a negotiated settlement of civil proceedings between the regulator and securities law offenders and aimed at reducing long-drawn litigation.
KYC requirement and common application form for FPIs:
=>SEBI said it agreed with the Khan Committee recommendations and will issue a separate circular on the matter. On April 10, Sebi had issued a circular that barred NRIs and persons of Indian origin from being beneficial owners in funds that invest in India.
=>Foreign Portfolio Investors (FPIs) opposed the move, saying SEBI should use the beneficial owner definition for greater disclosures and not to curb investments.
=>The committee suggested NRIs should be allowed to manage funds and relaxed rules that would have limited their investments in the country. SEBI also finalised a common application form for FPI registration including Permanent Account Number (PAN) and Know Your Customer (KYC) fields for opening bank and demat accounts. The move is part of efforts by the government and regulators to ease the conduct of business in India.
Reducing Timeline for Listing:
=>SEBI said it will cut down the listing period after an initial public offering (IPO) to T+3 from T+6 now. This means a company will get to list three days after the IPO as against six at present.
=>SEBI has, in principle, approved the proposal of revisiting the public issue process by way of introducing the use of Unified Payment Interface (UPI) with facility of blocking the funds (ASBA facility), as a new payment mechanism for retail investor applications submitted through intermediaries.
=>Under Applications Supported by Blocked Amount, or ASBA, money isn’t debited until shares are allotted.
Bond market borrowing by large corporates:
=>SEBI also approved operationalisation of the budget announcement that mandated large corporates to meet one-fourth of their financing needs through debt instruments. SEBI said the rules will come into effect from April 1, 2019.
=>A large corporate has been categorised as one with outstanding borrowings of Rs 100 crore or above and credit rating of AA and above.
Foreign investor participation in commodities:
=>SEBI approved rules for permitting foreign entities to have exposure to Indian commodity markets. Such entities would be classified as ‘eligible foreign entities’.
Reclassification of promoter / public:
=>SEBI changed rules for reclassification of promoters. Promoters seeking reclassification and persons related to them should not hold more than 10% of the total voting power or exercise control over the listed entity or have special rights in the company. They should not be in key managerial positions for three years from reclassification and be willful defaulters.
Restrictions on Fugitive Economic Offenders:
=>SEBI said there will be restrictions on fund raising through various share sales or making an open offer for Fugitive Economic Offenders. With regard to the expense ratio changes, there will be no benefit to investors up to assets under management (AUM) of Rs 2,000 crore.
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