SEBI’s new mutual fund rules a ‘mixed bag’, may hurt research quality: Sandeep Parekh

The Securities and Exchange Board of India (SEBI) has unveiled a sweeping overhaul of mutual fund regulations—the first in nearly three decades—triggering wide debate across the industry.

While the regulator has attempted to strike a middle ground on key issues such as the Total Expense Ratio (TER) and brokerage fees, the changes could have unintended consequences, particularly for research quality and smaller fund houses, according to Sandeep Parekh, Managing Partner at Finsec Law Advisors.

Speaking on the revised framework, Parekh reiterated his broader discomfort with regulatory price controls. “My view has been that the regulator should not be getting into price fixation. It should do that only if competitive forces are not working—let us say there’s a monopoly or an oligopoly,” he said, arguing against fee caps on financial products from first principles.

Parekh described the unbundling of brokerage and research costs as a “mixed bag”. While it improves transparency for investors, he warned it could weaken the research ecosystem that supports fund management.

Read Here | SEBI board approves revamp of stockbroker regulations; replaces 1992 framework

“The smaller funds will not be able to afford the research reports which came bundled till now,” he said, noting that the changes would “adversely impact both the funds and the brokers”.

Parekh elaborated that even large mutual funds cannot replicate the specialised, in-depth research provided by brokerage houses, which employ analysts dedicated to specific sectors. “It’s much more efficient for a brokerage hiring a transport expert and then distributing that research to 45 or 50 mutual funds,” he explained.

The new cap, he fears, will “reduce the quality of information which a fund will have when they are making investment decisions,” a potential negative impact on fund management itself that he feels SEBI has not addressed.

Read Here | SEBI lifts high-value debt bar to ₹5,000 crore, easing compliance for bond issuers

Regarding the revised TER structure, which now separates the base expense ratio (BR), regulatory levies, and brokerage, Parekh acknowledged it is a fairer calculation. However, he pointed out that the new system will favour large funds with significant assets under management (AUM) and operations centred in Tier-1 cities.

Conversely, it could harm smaller funds and disincentivise distribution in Tier-3 towns where commissions may become too low to be viable. “It will disincentivise distribution at the bottom of the pyramid really,” he cautioned.

Also Read | SEBI eases IPO compliance with abridged prospectus, automated pre-issue share lock-in

For the entire discussion, watch the accompanying video

Catch all the stock market live updates here