SEBI Considers Capping Broker Commissions for Mutual Funds

The Securities and Exchange Board of India (SEBI) is scheduled to meet with senior executives from various asset management companies (AMCs) tomorrow to discuss a proposed cap on brokerage commissions for mutual funds. Central to this meeting is the contentious plan to limit the commissions paid by fund houses to brokers for executing trades, which currently can reach as high as 12 basis points (bps).

This proposal suggests a significant reduction, capping broker commissions at just 2 bps for cash market trades and 1 bps for derivatives. The meeting will feature notable figures such as Venkat Chalasani, CEO of the Association of Mutual Funds in India (AMFI), alongside leaders from major firms including SBI Mutual Fund, HDFC Mutual Fund, ICICI Prudential Mutual Fund, and Aditya Birla Sun Life Mutual Fund.

In addition to the commission cap, the discussions will encompass broader topics related to market development, compliance issues, and the challenges currently faced by the mutual fund industry. SEBI’s chairperson, Tuhin Kanta Pandey, will lead the discussion, marking the first meeting of its kind under his leadership.

The proposal for capping broker commissions forms part of a larger initiative by SEBI to reform the way mutual funds calculate their total expense ratio (TER). According to a consultation paper released on October 28, 2023, SEBI aims to enhance transparency by excluding statutory levies, such as securities transaction tax (STT) and stamp duty, from the TER.

Resistance to the proposed changes has emerged from sell-side brokers who argue that reduced commissions could adversely affect their revenue streams. These brokers often provide essential research services to mutual funds and execute trades on their behalf. Critics of the cap argue that it could hinder mutual funds’ ability to invest in quality research, potentially leading to increased costs for these firms as they strive to build their own research teams.

SEBI’s move to limit broker commissions is primarily aimed at ensuring that investors are not charged twice for research services—once through brokerage fees and again through the asset management companies’ own charges. If implemented, this cap could reshape the compensation structure within the mutual fund industry, prompting a reevaluation of how asset managers allocate their resources.

As the meeting approaches, industry stakeholders are keenly watching for developments that could impact the future of mutual fund operations in India. The outcome of these discussions may set a precedent for how broker commissions are structured in the years to come, potentially influencing investor costs and the overall market landscape.