SEBI’s New Rules on Mutual Funds and Brokers: A Shift Toward Transparent, Technology-Resilient Markets

The Securities and Exchange Board of India (SEBI) has rolled out one of the most comprehensive reform packages in recent years, reshaping how mutual funds and stock brokers operate. These rules—focused on cost transparency, governance, technology compliance, and investor protection—signal a decisive step toward a more efficient and resilient Indian capital market.

Historical Context: From Regulatory Evolution to Structural Reform

Since liberalisation in the 1990s, SEBI’s regulatory journey has moved through three distinct phases:

1. 1996–2010: Expansion with limited oversight — Mutual funds were allowed wide latitude in expense structures. Brokerage incentives and opaque TERs (Total Expense Ratios) were common.

2. 2011–2020: Rationalisation and consolidation — SEBI capped TERs, mandated distributor disclosures, and tightened KYC norms.

3. 2021 onwards: Structural transparency and technology accountability — The current reforms reflect India’s shift to a digitally powered, mass-retail market, where over 60 million investors now access mutual funds and brokerage apps.

Historically, the emphasis was on growth and market access. The new reforms mark a transition to sustainable efficiency, embedding transparency and resilience at the core.

Key Changes for Mutual Funds

1. Real Estate and Diversification

SEBI has opened the door for mutual funds to invest in Real Estate Investment Trusts (REITs)—a move aimed at diversifying investor portfolios and connecting retail capital with India’s infrastructure and property markets.

2. Transparent Expense Structures

The Total Expense Ratio (TER)—long criticised for bundling multiple costs—will now show Securities Transaction Tax (STT), GST, and stamp duty separately. This reform ensures investors finally see the real cost of fund management.

Example:

Brokerage charges for mutual funds on cash market trades will drop from 12 basis points (bps) to 2 bps, and on derivatives from 5 bps to 1 bps.

Impact: Lower fund costs → higher net investor returns.

3. Performance-Linked Fees

SEBI is exploring optional performance-linked TERs—meaning fund fees could adjust based on actual returns. This aligns AMC incentives with investor outcomes and rewards efficiency over asset size.

4. Governance and Structure

Reforms also propose clearer rules on sponsor eligibility, a possible umbrella licensing system for asset managers, and consolidation of circulars into unified “Master Regulations.” These steps will simplify compliance and reduce regulatory ambiguity.

5. Stakeholder Feedback

Public comments remain open until November 17, 2025, with implementation expected soon after—a signal that SEBI wants participatory, not unilateral, reform.

Key Changes for Stock Brokers

1. Defining and Managing Technical Glitches

Brokers with over 10,000 clients must report trading platform glitches within one business day and submit a root-cause analysis within 14 days.

Importantly, SEBI has narrowed the definition of “glitch” to include only major disruptions during market hours that fall within the broker’s control. This reduces unnecessary penalties and focuses attention on critical incidents.

2. Relief for Small Brokers

For smaller brokers with limited digital exposure, the compliance burden has been lightened. Non-critical operational issues will no longer trigger mandatory reports—balancing regulatory stringency with proportionality.

3. Settlement Cycle Deferral

The deadline for T+0 (same-day) settlement of equity cash trades has been deferred indefinitely due to infrastructure constraints. This reflects SEBI’s pragmatic approach—acknowledging industry readiness before enforcing change.

The Regulatory Philosophy: Beyond Checklist Compliance

SEBI’s Chairperson has emphasised a shift in mindset:

> “Market intermediaries must move past checklist compliance toward culture, ethics, and resilience.”

This philosophy is central to India’s maturing capital market. Rules are not ends in themselves—they are tools to build trust and long-term investor participation.

Implications for MSMEs and Local Economic Development

While these reforms primarily target market intermediaries, their downstream impact on India’s MSME and regional economy could be substantial.

1. Lower Financing Costs:

Cheaper and more transparent mutual fund products can attract MSMEs seeking structured investment vehicles or corporate treasuries to park surplus funds efficiently.

2. Regional Inclusion:

Smaller brokers—often serving Tier-II and Tier-III cities—gain breathing space under relaxed glitch-reporting norms. This could expand access to capital markets for small investors and entrepreneurs in non-metro areas.

3. Product Innovation:

With permission to invest in REITs and potentially infrastructure funds, AMCs can design development-linked funds—targeting sectors such as logistics, warehousing, or SME-industrial clusters.

4. Trust and Formalization:

Transparency reforms enhance retail confidence, accelerating the shift from informal savings (gold, land, cash) to formal investment products—an essential condition for MSME capital formation.

Gains, Gaps, and Guardrails

Gains

Investors: Lower fees, clearer charges, better risk disclosure.

AMCs: Incentive alignment via performance-linked TER.

Brokers: Predictable compliance, reduced penalties, stronger digital trust.

Gaps

Implementation readiness: Smaller AMCs may struggle with IT systems and granular disclosures.

Education deficit: Transparency helps only if investors understand new metrics.

Market concentration: Large fund houses and brokers could consolidate market share, marginalising smaller players.

Guardrails

India must accompany these reforms with capacity building, investor education, and independent cost audits. Without these, transparency could remain a formal checkbox rather than a functional change.

What Lies Ahead

1. AI-Driven Compliance and Monitoring

Expect AMCs and brokers to deploy AI systems for real-time compliance tracking, error detection, and reporting—turning regulation into a data-intelligence function.

2. Emergence of Regional or Thematic Funds

With REITs and diversified assets, mutual funds could soon align with regional or MSME-thematic portfolios, linking capital markets directly with India’s growth engines.

3. Global Capital Integration

Transparent cost and governance frameworks will make Indian funds more attractive to global investors seeking emerging-market exposure under familiar compliance norms.

4. Investor-Centric Market Design

The likely next phase will focus on “smart transparency”—where investors get personalized dashboards integrating fees, returns, and risk scores across all holdings.

A Balanced Conclusion

SEBI’s reforms are neither cosmetic nor reactionary—they mark a structural reset. By integrating cost clarity, governance, and technological accountability, India’s financial markets are moving toward global best practice while retaining a uniquely inclusive focus.

The future capital market will not just be cheaper—it will be fairer, faster, and more credible.

But credibility cannot be legislated—it must be earned through implementation, ethics, and continuous learning. If SEBI, the industry, and investors align on this front, India can transform its markets from merely growing to genuinely trustworthy—the ultimate currency of finance.

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