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SEBI's Big Bang Reforms

SEBI's slew of changes will improve fund industry's prospects, help it spread to smaller cities while increasing investors' cost slightly

Markets regulator SEBI has implemented a slew of reforms that will impact mutual funds, IPOs and some other aspects of capital markets. Most of the regulatory changes were widely expected and were formally adopted in a meeting of the regulator's board at Mumbai earlier today.

The thrust of the changes in mutual funds was to improve the economics of the business while incentivising fund companies to broad-base their business and move into smaller cities and towns. Some of these measures will increase the cost of mutual funds to investors, probably in the range of 0.05 to 0.2 per cent per annum for most investors.

Here's a brief overview of the mutual fund-related measures that SEBI Chairman U.K. Sinha announced:
1. The expense charged by the fund from investor will now be fungible, i.e., they will be treated as a single pool, which can be used as the fund company wants to. Up till now, the expense had an internal division of actual expenses and the management fee. This will give greater flexibility to the fund company to tailor revenue usage to its business needs.

2. To incentivise funds to broad-base investments to smaller cities, they can charge higher expenses depending on how much of their new investments come in from cities outside the 15 largest ones in the countries. At the maximum, this additional charge can be 30 per cent of AUM if 30 per cent of a fund's investments come from these smaller places. Lower levels will mean correspondingly lower additional charges.

3. All investors in a given plan will have to be charged the same

4. Service tax on the expenses will be charged to the investors instead of being paid by the AMC. This is in line with other industries.

5. Exit load, if charged, will now be put back into the fund instead of going to the AMC. Currently, up to 1 per cent of the exit load can be held back by the AMC. Now, the entire amount will be put into the fund, i.e., it will enhance the NAV of the fund and thus contribute to investors' returns.

6. SEBI will recommend that equity mutual funds be included in the ambit of the Rajiv Gandhi Equity Savings Scheme.

7. SEBI has initiated the process of enabling self-regulatory organisation for fund advisors. This step is being taken in co-ordination with other financial regulators like the Reserve Bank, IRDA and PFRDA. It should eventually result in co-ordinated regulation of financial intermediaries.

Also, SEBI's Mutual Fund Advisory Committee has been tasked with creating a comprehensive National Mutual Fund Policy, which is likely to be ready in about six months.