SEBI penalises DSP AMC, trustees for TER violations

Capital market regulator Securities and Exchange Board of India (SEBI), in one-of-its-kind order, has fined DSP Investment Managers (the asset management company of DSP Mutual Fund) and its Trustee company (DSP Trustee Co) for charging a lesser total expense ratio (TER) from its subscribers. The SEBI order stated the fund house bore the expense ratio of the Nifty 50 ETF Scheme on its books, and thus they have been penalised under Section 15HB of the SEBI Act, which allows SEBI to charge a penalty up to Rs 1 crore for violation of this act. 

SEBI, in its latest order on the DSP Nifty 50 ETF Trade Fund, stated the expanse ratio was 0.16%. However, the fund house charged just 0.07% from the scheme as the scheme's expanse ratio and soaked up the balance of 0.09% on its own books.  

SEBI said the fund house, by paying 0.09% expenses of the scheme out of 0.16% from its own books within the regulatory limits of TER of 1%, has violated the SEBI provisions dated October 22, 2018. The circular requires that all scheme-related expenses will necessarily be paid from the scheme only, within the regulatory limits and not from the books of the asset management companies (AMC), its associate, sponsor, trustee or any other entity. 

SEBI said though the expense amount of Rs 53,238.10 borne by the AMC was “minuscule” in absolute terms, there is no "iota of doubt" that the violation is not merely a "technical violation" but is "deliberate one to align the TER of the scheme, with other similar schemes in the industry and consequently getting the expenses of the scheme beyond the TeR charged, reimbursed by the AMC". 

By absorbing the expenses, the fund house's intention was to solely keep the TER "competitive to attract investors" and scale up the AUM, since the scheme’s expense was an actual 0.16%, whilst it has disclosed TER of 0.07%, the SEBI order said. 

The SEBI order said the noticees' contentions were nothing but an attempt to cover up their wrongdoing of charging “incorrect TER” to align it with TER of similar schemes in the industry to maintain it as competitive by misinterpreting the wordings of TER circular and attract investors to scale up its AUM. 

"This practice of paying the expenses of the scheme from AMC books well within the regulatory limits will only be afforded by profitable AMCs or AMCs with deep pockets whereas small AMCs won’t be able to bear such expenses from their books," the order said. 

This is to note that the TER of a scheme is one of the important parameters for investors while taking investment decisions. The objective of SEBI’s TER Circular is to bring transparency to expenses, and reduce portfolio churning and mis-selling in mutual fund schemes. SEBI said the said circular will get diluted with this varied practice of charging and disclosing incorrect TER of the scheme, which will create anomalies in the Mutual Fund industry and will lead to unhealthy competition. 

Since the higher the TER, the lower will be the return to the investors of the scheme and vice-versa. Thus, if a scheme discloses a lower TER, whereas, in reality, the actual TER is higher, the disclosed TER is misleading.