 "Sebi pause on 'total expense ratio' sets off rally in AMC shares")
Shares of four listed asset management companies (AMCs) gained between 1 per cent and 15 per cent, following the deferment of the proposed overhaul of the total expense ratio (TER) by the Securities and Exchange Board of India (Sebi).
The capital markets regulator issued a consultation paper in May, proposing to cap expenses such as brokerage, securities transaction tax, and goods and services tax charges within TER. The move would have eroded the profitability of the Rs 43 trillion-mutual fund (MF) industry.
On Wednesday, the Sebi board deliberated on the proposals but deferred a final decision in light of fresh data from industry representatives. Some industry players have cited challenges, particularly the viability of arbitrage funds with a higher churn rate.
After the board meeting on June 28, Sebi Chairperson Madhabi Puri Buch said the board was taking into account the revised data on the expected impact and would float a fresh consultation paper on TER.
“Unlike other proposals that involve industry at the co-creation stage, this paper was brought without it because of its price sensitivity on listed AMCs. Based on data received, the board has recommended issuing a new consultation. The industry will be quite pleased to see the new proposal,” said Buch.
Sources said the new proposals would be floated by Sebi over the next few months.
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Currently, MFs charge according to the size of the scheme. Newer schemes charge more because their asset sizes are smaller.
Sebi’s initial plan was to link the expense cap with the overall assets managed by the fund house. In such a scenario, larger AMCs would not have been able to charge as much as they do now for launches.
Brokerages believe that even though there is uncertainty about the final regulations, there is a likelihood of an easing in regulatory stance.
Analysts suppose that the pressure on earnings growth, which led to a derating in AMC stocks, could be nearing its end.
Regulatory tightening has been weighing on AMC shares, notwithstanding record equity flows and healthy asset growth.
“AMC stocks are down 10-20 per cent from last year’s peak levels (versus National Stock Exchange Nifty50 up 3-4 per cent), whereas equity assets under management (AUM) is up 10 per cent in six months. We reverse a part of the equity yield cuts that we have had preemptively built into the numbers, leading to an upgrade in earnings,” says Kotak Institutional Equities in its report on AMCs.
The firm notes that AMCs will continue to see declining revenue yields, albeit at a slower pace than previously anticipated.
ICICI Securities, in its report on AMCs, has called the revision a positive move, whilst adding that the establishment of the fact that the industry has passed on the benefit of economies of scale to investors, is a bigger positive for the sector.