Hindustan Times (Delhi)

Mutual fund investors charged ₹1,500 cr unfairly:sebi study

ROAD AHEAD Regulator’s advisory panel suggests asset managers credit excess charges back into schemes

- Kayezad E Adajania and Jayshree P Upadhyay kayezad.a@livemint.com

MUMBAI: Asset managers have overcharge­d mutual fund investors by as much as ₹1,500 crore in the last five years by unfairly charging fees, according to an internal study by the market regulator.

A Securities and Exchange Board of India (Sebi) advisory committee has recommende­d that asset managers credit the excess charges collected by them back into the mutual fund schemes. The regulator’s board, which is meeting on Wednesday, is likely to consider this issue, said two people aware of the matter.

HERE’S HOW THIS OVERCHARGI­NG HAPPENED:

Till 2012, mutual funds pocketed the exit loads collected and used it for their sales and marketing expenses. An exit load is a cost imposed on investors when they redeem a scheme within a prespecifi­ed time period.

In September 2012, the regulator told asset management companies that they should deposit exit loads back into the schemes.

However, to compensate for their losses, Sebi allowed asset managers to charge an additional 20 basis points (bps) in expense ratios. One basis point is one-hundredth of a percentage point.

But some fund houses used this extra leeway to impose higher charges in two ways.

One, they added this 20 bps expense ratio even in schemes that did not levy an exit load, In 2012, Sebi asked asset management firms to credit exit loads collected by them back into the respective schemes

To compensate for their losses, fund houses were allowed to charge an extra 20 basis points (bps) in expense ratios

Wrong charge: Fund houses charged the 20 bps even in schemes which never had exit loads

Overchargi­ng: In other cases, the 20 bps expense ratio resulted in fund houses pocketing more than what exit loads had brought in A Sebi internal study calculated the amount collected from this 20 bps charge to be around R1,600- as on December 2017. It said that only around 10% of this money was credited back to schemes, resulting in excess fee collection of around R1,500

such as closed-end funds. Two, for funds that did levy an exit load, the 20 bps expense ratio resulted in fund houses pocketing more than what exit loads had brought in.

The Securities and Exchange Board of India’s internal study calculated the amount collected from this 20 bps charge to be around ₹1,600-1,700 crore as of December. It said that only around 10% of this was credited back. Thus, it resulted in exces- sive fees collection of around ₹1,500 crore.

A Sebi spokespers­on did not respond to an email seeking comment.

“The perversion was that the 20 bps was used in all schemes. What was intended to be a compensati­on for loss of exit load money became a birth right for fund houses to charge 20 bps,” said an industry official close to the developmen­ts.

Of the emails sent to the 15 largest fund houses on the issue, only Tata Asset Management Ltd responded.

“We have no exit load in our tax-saving schemes and nor do we charge 20 bps. We have never charged (20 bps) in close-ended schemes, since in any case the investor cannot exit. As regards clawback for those who were not exactly following the right practice, we feel that though the proposal is fair, it would be very difficult to implement, especially in an open-ended scheme,” a Tata Asset spokespers­on said.

 ?? MINT/FILE ?? Jeweller Nirav Modi. The deadline for submitting sealed bids is April 19 and auctions will be conducted on April 24
MINT/FILE Jeweller Nirav Modi. The deadline for submitting sealed bids is April 19 and auctions will be conducted on April 24

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