MFs overcharged ₹1,500 cr in exit fees in 5 years: Sebi
ROAD AHEAD Sebi committee for depositing excess charges back into schemes MUMBAI:
Asset managers have overcharged mutual fund investors by as much as ₹1,500 crore in the last five years by wrongly charging exit fees, according to an internal study by the markets regulator.
A Securities and Exchange Board of India (Sebi) advisory committee has recommended that mutual funds deposit these excess charges collected back into 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 used to pocket the exit loads collected and use it for their sales and marketing expenses. An exit load is a cost imposed on investors when they redeem a scheme within a pre-specified time period, usually one year for equity funds.
In September 2012, the regulator told fund houses that they should deposit exit loads collected back into schemes. However, to compensate for their losses, Sebi allowed asset managers to charge an extra 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 charged this 20 bps expense ratio even in schemes that did not levy an exit load, like for example, closed end and taxsaving funds. Two, for funds that did have an exit load, 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 ₹1,600-1,700 crore as on December 2017. It said that only around 10% of this money was credited back to schemes. Thus, it resulted in excessive fees of around ₹1,500 crore of investors. India’s mutual fund houses manage around ₹21 lakh crore in assets.
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 birth right for fund houses to charge 20 bps”, said another industry official close to the developments.
Of the emails sent to the 15 largest fund houses by assets on the exit load issue, only Tata Asset Management Co Ltd responded and said, “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.”
That apart, according to two other people familiar with the developments, the Sebi board will also consider revising the 20 bps extra expense ratio to 10 bps.
Meanwhile, a Sebi-constituted committee to review norms for market infrastructure institutions recommended steps to improve governance at exchanges, depositories, clearing corporations and registrar agents, according to two people with direct knowledge of the matter.
According to these people, the panel headed by former RBI governor R Gandhi, suggested mandatory rotation of key management personnel, capping salaries for such personnel at bourses and increasing the proportion of public interest directors (PIDs).
This is also the first time the panel has recommended registrars should be brought under norms that govern market infrastructure institutes, said one of the people cited earlier on condition of anonymity.