SEBI: Are Indian mutual funds heading towards a MiFID-like framework, asks Bernstein

Are we staring at MiFID for Indian mutual funds? Bernstein said SEBI’s latest consultation paper to rationalise total expense ratios (TERs) and cap brokerage costs resembles a MiFID-style framework for India’s mutual fund industry.

Markets in Financial Instruments Directive (MiFID) is a European Union (EU) regulatory framework that establishes a uniform set of rules governing investment services and financial markets.

Bernstein said the regulator’s proposal highlights that “due to bundled service arrangements (execution + research), investors end up paying twice for research — as management fees and as brokerage.” 

Bernstein noted this signals a clear intent to unbundle execution and research payments — a potential structural shift for asset managers and institutional equity businesses.

Under the draft, execution costs would be capped at 2 bps for cash and 1 bp for derivatives trades, while research-related brokerage would be excluded from the TER and borne directly by asset managers. The paper also proposes a 5 bps reduction in TERs, removal of certain legacy facilitations, and greater transparency through detailed break-ups of reported expenses. Taxes have been carved out of TER, and a new slab-based pricing framework has been suggested.

Bernstein said the proposal could affect institutional equity platforms, mutual fund managers, distributors, and transfer agents. While it remains a consultation paper — with feedback invited until November 17, 2025 — the risk of implementation cannot be ignored, especially since the regulator has incorporated feedback from its 2023 draft.

The brokerage expects pushback from the fund industry, as unbundling research costs could compress asset managers’ yields and weigh on revenue yields for institutional equity platforms.

"Yes, it is only a consultation paper (like 2023, which also talked of lower expense ratios & brokerage caps - but was eventually not implemented). That is unlikely to stop capital market stocks from reacting to the news (like 2023)," Bernstein said.

The paper notes that the feedback from the 2023 consultation process was incorporated into the current proposal. 

"So, one cannot wish away the risk entirely despite likely push-back and meaningful second-order impacts. Like the insurance industry (GST impact), the mutual fund industry will also huddle up to first push back on the proposal (eats into their yields as well), and eventually enter discussions/negotiations around how to manage (split) any potential impact. This affects
asset managers, distributors and transfer agents," Bernstein said.