SEBI Overhauls Mutual Fund Cost Framework and Stockbroking Rules

The Securities and Exchange Board of India (Sebi) has revised the cost structure for the ₹80 trillion mutual fund industry, effective 1 April 2026, to enhance transparency and ease investor understanding.

Key Highlights:

1. Introduction of Base Expense Ratio (BER)

• The Base Expense Ratio (BER) is the core fee charged by a mutual fund’s Asset Management Company (AMC) only for managing investor money.
• Replaces the current TER structure, which included brokerage, STT, stamp duty & exchange fees.
• Pass-through levies now removed from BER and shown separately.

2. Brokerage Fee Reduction

• Cash market brokerage: reduced to 6 basis points (bps) from 12 bps
• Derivatives brokerage: reduced to 2 bps from 5 bps
• What is a basis point?
  • 1 basis point = 0.01%
  • Therefore, 6 bps = 0.06%

Brokerage is paid to stockbrokers for executing buy/sell transactions on behalf of mutual funds. Lower brokerage reduces total fund costs and may improve investor returns.

3. Exit-Load Brokerage Removed

• SEBI has scrapped the additional 5 bps brokerage linked to exit loads.
• Exit load is a fee charged to investors when they redeem units before a specified period. Earlier, AMCs could charge extra brokerage out of this exit-load component.

4. Shift from TER to BER Structure

• Earlier:
  • Total Expense Ratio (TER) included:
  • fund management fee + operations + brokerage + taxes + regulatory charges
• Now:
  • SEBI has introduced the Base Expense Ratio (BER) concept.
• Base Expense Ratio (BER)
  • BER is the core fee charged by the Asset Management Company for managing investor money. It excludes statutory taxes and levies.

Under the new system, TER = BER + brokerage + regulatory levies + statutory taxes

Market Impact

• Pressure on AMC profit margins, especially small AMCs
• Costs may be passed to distributors
• Greater pricing clarity and lower long-term investor cost burden

5. Stockbroker Regulations Overhauled

SEBI has modernised stockbroker rules for the first time since 1992.

Key features:

• Regulations reorganised into 11 chapters
• Outdated provisions removed or merged
• Stock exchanges designated as first-line regulators

Meaning: Instead of SEBI handling routine violations, stock exchanges will directly monitor stockbrokers for compliance, reporting, and misconduct.

Qualified Stockbroker (QSB) rules refined

Eligibility criteria updated to ensure firms with large scale operations are subject to tighter supervision.

Pledged Share Lock-in Clarity

Pledged shares will now remain locked in for the required period even after pledge invocation.

Why important?

During IPOs, promoters must lock in shares for a fixed period. But pledged shares couldn’t technically be locked earlier, creating compliance hurdles. The change fixes this gap.

6. Debt Market Reforms

Retail Participation Incentives

• Debt issuers may offer:
  • extra interest
  • price discounts to groups like women and senior citizens.

Aim: encourage wider retail investment in bonds.

HVDLE Threshold Raised

High Value Debt Listed Entities (HVDLE):

Classification limit increased from ₹1,000 crore to ₹5,000 crore.

This eases bond issuance requirements for NBFCs, HFCs, ARCs, and others.

7. Credit Rating Expansion

Credit rating agencies may now rate instruments regulated by other financial sector authorities, increasing coverage for unlisted and non-traditional debt products.

8. Unclaimed Funds Transfer Rule Revised

Unclaimed amounts from non-convertible securities must now be moved to the Investor Education and Protection Fund after seven years from maturity, instead of multiple staggered transfers earlier.

9. Conflict-of-Interest Norms Deferred

SEBI has postponed decisions on new rules