Markets
For mutual funds, a temporary relief on expense ratio rules
Summary
If the proposed TER regulation was implemented, then the impact on the operating margin for larger AMCs (based on assets under management) could have been high, assuming they absorbed the cut completely, said analysts.Shares of asset management companies (AMCs) soared on Friday after the Securities and Exchange Board of India (Sebi) deferred a decision to implement the new mutual fund total expense ratio (TER) proposal. If the proposed TER regulation was implemented, then the impact on the operating margin for larger AMCs (based on assets under management) could have been high, assuming they absorbed the cut completely, said analysts. AMCs charge certain expenses to unitholders for managing the mutual fund scheme and this is expressed as TER. That is, total expenses of the scheme divided by total assets under management. Currently, the maximum TER is 2.25% (excluding tax and other fees) for equity schemes.
In December, Sebi had notified that it will conduct a detailed study on TER. In May, a discussion paper was released that proposed a slew of changes to the TER. As such, the regulatory uncertainty has weighed on AMC stocks in the past few months. Though the move to defer the TER regulation is sentimentally positive for stocks of AMCs, Sebi chairperson Madhabi Puri Buch said the regulator would soon come up with a second consultation paper on TER.
“We see a higher likelihood of regulatory stance easing (versus market expectations) toward the sector, even as there is some residual uncertainty around what comes out in the next consultation paper and the final regulations," said analysts from Kotak Institutional Equities. “While we still await the shape of final regulations, improved prospects of a less disruptive outcome augurs well for AMC stocks," the analysts added. The broking firm has reversed a part of the equity yield cuts that it had pre-emptively built in its earnings estimates.
In this backdrop, shares of HDFC Asset Management Company Ltd (HDFC AMC), Nippon Life India Asset Management Ltd and UTI Asset Management Company Ltd (UTI AMC) surged 8-12% on Friday. For Aditya Birla Sun Life AMC (ABSL AMC), the impact of this move is comparatively lower.
Thus, it isn’t surprising that the stock gave up the gains and closed flat.
Broadly, Friday’s gains have added to the stock performances of AMCs. But significant upsides could be capped from here. Intense competition in the industry is a concern. Yields are expected to remain under pressure. “We maintain our broad outlook of about 15% AUM growth for the sector and telescopic pricing/fresh flow driven gradual decline in yields as of now," said analysts from ICICI Securities in a report on 30 June.
