Sebi likely to scrap small town-linked incentive for mutual funds

This comes amid concerns about misuse of framework

The Securities and Exchange Board of India (Sebi) is likely to scrap an incentive it allows fund houses for mobilising assets from smaller centres — called Beyond 30 (B30) in industry parlance. At present, mutual funds can charge up to 30 basis points over and above the total expense ratio (TER) on assets garnered from such places.

Any city or town that does not fall into the so-called T30 category, or the top 30 centres in terms of assets under management (AUM), is part of B30. The B-30 incentive was introduced in 2018 to boost the penetration of MFs in smaller cities. 

According to sources, Sebi is planning to discontinue the B30 incentive and allow a one-time fee for distributors bringing new investors, irrespective of the location. However, the one-time fee will form part of the TER. This could leave fund houses with little room to pay extra incentives to distributors.

The regulator’s planned move follows concerns about the misuse of the current framework by distributors to generate higher income. As the B30 incentive is paid only in the first year of investment, certain distributors allegedly resort to shifting investors’ money from one fund to another every year to continue receiving the incentive.

Sebi, which has undertaken a comprehensive study of fees and expenses charged by MFs, has discussed these issues with the MF advisory committee and sought views from the industry body Association of Mutual Funds in India (Amfi) and individual fund houses, said people in the know.

A query sent to Sebi on the issue remained unanswered.

TER is the total expenses incurred by a fund house in managing a scheme.

However, expenses such as those incurred while buying and selling securities by MF schemes and the 18 per cent GST on the fund management fee is outside the purview of the TER. Sebi is looking to bring all these costs within the TER.

The regulator has set upper limits on how much TER a scheme can levy. An active equity fund scheme can charge a maximum TER of 2.25 per cent of the AUM, while debt schemes can charge up to 2 per cent.

Many schemes currently charge a TER that is below the maximum permitted by Sebi, market players said. If more heads such as GST are brought under the TER, it may prompt fund houses to increase the ratio wherever there is room available, they added.

Over the years, Sebi has endeavoured to lower the cost of investing for MF investors. The last time when the regulator had announced a cut in TERs, most AMCs had safeguarded their margins by passing on the cut to distributors. In October 2018, Sebi had brought two changes: one was the downward revision of TERs, and second was a ban on upfront commission to distributors.

Since the downward revision of TERs was also passed on to distributors, the industry saw consolidation in the number of distributors. Registration of new distributors declined 51 per cent year-on-year in financial year 2020 and 35 per cent in FY2021, according to a report by ICICI Securities.