SEBI may ease its proposed brokerage fee cap after industry backlash, says Report.
Original consultation paper cut fees sharply to boost transparency and reduce investor costs.
SEBI’s first major mutual fund rule overhaul in nearly 30 years.
The Securities and Exchange Board of India (Sebi), the market regulator, is considering easing the severity of its recently proposed cap on fees that mutual funds pay to brokerages, according to two sources with direct knowledge of the matter who spoke to Reuters, a news agency.
The move signals a potential regulatory climbdown, prompted by significant concerns raised by institutional brokers and asset managers who warned that the original, sharply reduced proposal could severely impair fund performance and industry revenues, the news agency reported.
The brokerage cap debate is unfolding amid Sebi's comprehensive review of its mutual fund regulatory framework, the first major overhaul of the Sebi (Mutual Fund) Regulations, 1996, in almost three decades. The regulator has proposed sweeping changes in how fund houses operate, charge fees, and disclose expenses, aiming to enhance transparency and reduce overall costs for retail investors.
The consultation paper released by Sebi in October outlined a major effort to bring clarity and transparency to fund expenses. A crucial proposal was a revision of brokerage fees, where the regulator sought to dramatically lower the cap on fees paid by mutual funds for cash market transactions from the existing 12 basis points (bps) to just 2 bps. For derivatives, the cap was proposed to drop from 5 bps to 1 bps.
The intent behind this steep cut was to ensure that investors are not effectively paying twice for research, once through the fund management fee and again through high, bundled brokerage charges.
However, according to Reuters, the proposed reduction triggered immediate and strong opposition from the financial sector. Institutional brokers expressed fears of a severe hit to their revenue streams, which rely heavily on these fees. More crucially, asset managers argued that such a low ceiling would compromise their ability to secure high-quality, external sell-side research, sources told the agency.
Fund managers cautioned that being restricted in the fees they could pay would impact their stock-picking ability and place them at a competitive disadvantage.
Additionally, as reported by Reuters, the industry highlighted that the proposal, if implemented, would have created a wide divergence in rules between India and developed markets like the United States, where brokerage fees paid by funds face no such explicit regulatory cap.
Despite these industry arguments, Sebi's own analysis, according to sources cited by the news agency, suggests that the reliance on high brokerage fees for research may be overstated. The regulator noted that foreign investors are generally "more conservative in paying for research" compared to domestic mutual funds.
With India's mutual fund industry managing assets worth Rs 75.61 lakh crore as of September 30, 2025, the outcome of these proposals is highly consequential. Sebi has invited public comments until November 17, 2025, before finalising what is set to be the biggest update to the country's mutual fund rules in decades.
