Capital markets regulator Securities and Exchange Board of India (SEBI) is frowning upon asset management companies bearing the expenses of passive schemes from their own books rather than from the allocated total expense ratio, or TER, reported Hindu Business Line .
According to current norms, all scheme related expenses must be paid from the scheme and not from the books of the AMC, its associate, sponsor or trustee.
Last December, SEBI had levied a penalty of ₹1 lakh each on DSP Investment Managers and DSP Trustee for taking up the expenses for DSP Nifty 50 ETF on its books.
Other fund houses which may be following a similar practice to subsidise small passive schemes, especially those with assets under ₹100 crore, have now come under the regulatory radar, said two people in the know.
It is not clear what action SEBI will initiate against these fund houses. An email sent to the regulator did not get an immediate response.
Currently, there are 29 passive schemes with assets under ₹10 crore, and 141 schemes with assets under ₹100 crore, data from Value Research shows.
This is from the universe of 308 passive schemes that include index funds and exchange traded funds.
Such funds mimic the underlying index and low cost is their primary selling proposition. Latest data show 114 such schemes had an expense ratio of 30 bps or less, of which 27 schemes charged lower than 10 bps.
“Fund houses that run small passive schemes will find it practically impossible to recover everything from the TER. Also, if you try to charge everything to the scheme, the TER could go up and impact returns,” said a senior fund official.
“Some of the scheme expenses are fixed in nature. So, when the fund is small the expenses will be a large percentage of the AUM and what the fund is charging as TER may not be enough to meet the expenses.