‘Sebi fee review to make a big dent in MFs’ profits’
May 30, 2023
Synopsis
The Securities and Exchange Board of India (SEBI) may negatively impact India's mutual fund sector with its proposal to review total expense ratio (TER) regulations, according to brokerage Nuvama. The sector's net profitability could fall by up to 27% from listing asset managers' 2024-25 net operating profits due to changes potentially increasing annual fees to include items such as securities transaction tax (STT) and brokerage.
The capital market regulator's proposed review of the total expense ratio (TER) regulations of domestic mutual funds may result in listed asset managers' FY25 net operating profits dropping by up to 27%, according to brokerage Nuvama. The total expense ratio is the total fee mutual funds charge investors annually.
The Securities and Exchange Board of India's (SEBI)’s proposal is expected to squeeze the profitability of these mutual funds as it wants fund houses to include securities transaction tax (STT), brokerage, and goods & service tax (GST) into TER. It has also proposed changing how mutual funds charge investors the expense ratio. The overall impact of all these measures will hit their profitability.
According to Nuvama, HDFC AMC’s FY25 estimated operating profits will likely fall by 27.2%, while Nippoin and Aditya Birla Mutual Funds' operating profits may drop by 25.1% and 20.9%, respectively.
Despite concerns over the impact on their profitability, shares of three out of the four listed mutual funds have inched up since the release of Sebi's discussion paper on TER on May 18. HDFC AMC shares have gained 3,5%, UTI has risen 4.7%, Nippon Life has advanced 3.5%, while Aditya Birla AMC has shed 1.2%.
The proposed TER structure for equity assets size in excess of Rs 1 trillion reduces the TER, which includes all taxes and STT, to 130 bp, which is too aggressive for India's nascent fund management industry, according to Nuvama Wealth Management.
“If asset managers absorb the entire impact, we reckon equity yields would reduce by 2–19bp. Larger asset managers would bear the brunt of the impact as larger corpuses command lower TERs,” said the report. “Hence, we estimate if the entire impact is borne by the asset manager, HDFC AMC would see a revenue yield reduction of 20bp, and an estimated FY25 estimated net operating profit less adjusted taxes reduction of Rs 460 crore,” it added.
Nuvama said that Aditya Birla AMC and Nippon Life revenues would see an operating net profit impact of Rs 150 crore and Rs 220 core in FY2025.
The proposal reduction in TER comes from the government's decision to remove long-term capital gains tax benefits for debt mutual funds from April 1. From this financial year, capital gains from debt mutual funds are being taxed as per the individual's income tax slab. Before that, the indexation benefit for debt fund investments held for at least three years lowered the tax outgo compared to several other fixed-income products.
This measure could reduce flows into debt, gold, and international schemes by an estimated 10–20%. Over the long term, listed asset managers’ earnings shall be impacted by 1.2–6.5%, according to Nuvama estimates.
[The Economic Times]
