Indian asset management stocks saw a strong positive reaction on December 18, a day after the Securities and Exchange Board of India approved a revised structure for brokerage payments and mutual fund expenses. The regulatory decision, finalised at SEBI’s board meeting on December 17, was interpreted by the market as more balanced than initially feared, prompting a re-rating across listed AMC counters.

Over the past few years, mutual fund expenses - particularly brokerage and distribution costs - have been under intense regulatory scrutiny. SEBI has consistently flagged concerns that investors were indirectly paying twice for research and transaction-related services, once through brokerage embedded in expenses and again through other statutory levies.

In October, the regulator floated a consultation paper proposing steep cuts in brokerage caps for both cash and derivatives transactions. That proposal raised alarms across the asset management and distribution ecosystem, with fund houses warning of margin pressure and potential disruption to distribution incentives.

Against this backdrop, the final decision announced this week was closely watched by both markets and the industry.

SEBI has approved a reduction in brokerage limits paid by asset management companies to brokers and distributors, while also excluding statutory levies from these caps. For cash market transactions, the brokerage ceiling has been reduced to 6 basis points from 12 bps earlier. For derivatives, the cap has been lowered to 2 bps from 5 bps.

Crucially, the earlier limits included statutory levies, whereas the revised framework excludes them, effectively aligning brokerage caps closer to post-tax, real-world industry levels. This adjustment was one of the key reasons the market reacted positively, despite the headline reduction.

SEBI has also removed the additional 5-bps expense allowance that was applicable to schemes with exit loads, simplifying the expense structure.

While the final brokerage caps are higher than those proposed in the October consultation paper - 2 bps for cash and 1 bps for derivatives- they still represent a clear tightening compared to the earlier regime.

The decision addresses two competing priorities: lowering investor costs and preserving the economic viability of fund houses and distributors. By excluding statutory levies such as GST and transaction taxes from the brokerage cap, SEBI has reduced the risk of margin compression that the industry had feared.

For investors, the changes are intended to prevent double charging for research-related and transaction costs, while also improving transparency. For AMCs, the clarity around allowable expenses removes a significant regulatory overhang that had weighed on valuations.

The market response reflected this interpretation. At around 9:35 am on December 18, the Nifty Capital Markets index was trading nearly 2 percent higher. Nippon Life India Asset Management and HDFC Asset Management rose about 6 percent and 4.5 percent, respectively. UTI Asset Management and Aditya Birla Sun Life AMC gained around 4 percent and 1.7 percent. Recently listed Canara Robeco Asset Management Company surged as much as 8.5 percent to around ₹312 per share.

SEBI’s final framework on mutual fund expenses also includes a broader restructuring of how costs are disclosed and capped. The regulator has reduced the maximum expense ratio for open-ended equity schemes with assets below ₹500 crore to 2.10 percent from 2.25 percent earlier. For debt schemes in the same AUM bracket, the cap has been lowered to 1.85 percent from 2 percent.

For very large schemes managing over ₹50,000 crore, the ceiling has been set at 0.95 percent for equity funds and 0.7 percent for debt funds. Overall, active equity schemes will now operate within an expense band of 0.95 percent to 2.1 percent, while fixed income schemes will range between 0.7 percent and 1.85 percent, depending on size.

A key structural change is the replacement of the Total Expense Ratio with a Base Expense Ratio. Under the new framework, statutory levies such as GST, stamp duty, STT, CTT, and other taxes will be excluded from the BER and disclosed separately. The BER will cover only fund-level costs such as management fees, distribution brokerage, and RTA charges.