SEBI’s new expense ratio framework, in force since 1 April 2026, has been reported as a fee cut: the ceiling on an open-ended equity scheme fell from 2.25% to 2.10%. The board memorandum behind it describes the same limits as settled “with a view to ensuring minimal impact on AMCs’ cost structure”.

The SEBI (Mutual Funds) Regulations, 2026 were approved at the board’s 212th meeting on 17 December 2025 and replaced a set of regulations that had run since 1996. They govern an industry holding ₹87.08 lakh crore as on 31 August 2026. What follows concerns one component of the revision: the permitted ceiling on an open-ended equity scheme, and what has been allowed to sit outside that ceiling, from 1996 to now. It is not a comparison of Indian fund costs with those in other markets.

The Slab Structure Went Unchanged for 23 Years

The original equity table charged 2.50% on the first ₹100 crore of assets, 2.25% on the next ₹300 crore, 2.00% on the next ₹300 crore and 1.75% on the balance. SEBI’s 2018 board memorandum records that these limits were set when the regulations were framed in 1996 and had “not been modified or changed since then.” They ran until 1 April 2019.

For most of that period the ceiling functioned as the price. In FY2017-18, 49.82% of equity schemes in regular plans charged the full slab rate and a further 22.28% charged within 0.25% of it - roughly 72% at or near the cap. Debt schemes behaved differently: 7.44% charged the full rate, and 74.71% charged at least 1.00% below it. SEBI drew the conclusion itself, that “economies of scale have not been passed to retail investors.”

That is why the ceiling is the number worth tracking rather than the average. Where a cap binds for three schemes in four, the cap is the fee. It is also the input with the best record of predicting what follows: Russel Kinnel of Morningstar tested expense ratios against the other variables Morningstar tracked and found fees the strongest predictor of subsequent returns, with cheapest-quintile US equity funds recording a 62% success rate over 2010 to 2015 against 20% for the priciest.

Every Reform Since 2009 Has Carried a Compensating Adjustment

2009. SEBI abolished the entry load with effect from 1 August 2009, requiring upfront commission to be paid by the investor directly to the distributor. Distribution still had to be funded. By SEBI’s own count, commission paid out of AMCs’ books rose from about 11% of industry revenue in FY2009-10 to 22% in FY2017-18. The charge did not disappear; it moved to a place the scheme’s expense ratio did not show.

2012. The September 2012 circular required exit load, net of tax, to be credited to the scheme instead of funding distribution. The compensation was explicit, and SEBI restates it in the 2026 memorandum: “In 2012, mutual funds were mandated to credit exit load to the scheme and AMCs were allowed to charge 20 bps as additional expense to compensate for the impact of policy change.” The same circular allowed 30 basis points for inflows from beyond the top 15 cities, placed service tax on management fees outside the cap, and mandated direct plans from 1 January 2013.

2018. The October 2018 circular replaced the 1996 slabs, banned upfront commission in favour of a full trail model, required all commission to be paid from the scheme, and narrowed the geographic allowance to retail inflows from beyond the top 30 cities. The 20 basis point cushion was not withdrawn. It was reduced to 5, “wherein it was noted that the same may be reviewed in future.” The review took eight more years.

2023. SEBI then proposed moving in the opposite direction. A consultation paper of 18 May 2023 would have brought brokerage, securities transaction tax and GST inside the cap and set the limit against the AMC’s total assets rather than the scheme’s. The board deferred it on 28 June 2023 after receiving revised impact data from the industry, and asset manager shares rallied on the deferral. The geographic allowance was separately suspended in March 2023 after SEBI found it being worked through transaction splitting, and revived in September 2025 in a narrower form - 1% of a first investment, capped at ₹2,000 per investor - with implementation deferred to 1 March 2026.

The 2018 Reform Left Mid-Sized Schemes Where They Were

Blending each regime’s marginal slabs into the weighted-average ceiling an investor actually faces shows where the reforms landed and where they did not.

Blended ceiling on an open-ended equity scheme by scheme AUM, under the 1996, 2019 and 2026 slab tables. Source: author’s calculations on the slab tables in SEBI’s 2018 and 2025 board memoranda. The 1996 and 2019 limits include statutory levies; the 2026 limits exclude them, so the lowest line is not a like-for-like measurement of the other two.

Below ₹500 crore the 2019 ceiling was lower than the 1996 one - by 25 basis points at ₹100 crore, narrowing to 6 basis points at ₹400 crore. Above roughly ₹2,500 crore it was lower by progressively more: at ₹30,000 crore, 1.454% against 1.760%. But between ₹500 crore and ₹700 crore the two structures produce an identical ceiling, and from about ₹700 crore to ₹2,090 crore the 2019 structure sits marginally above the 1996 one, by 1.6 basis points at its widest.

The cause is structural rather than intentional. The 1996 table stepped down at ₹100 crore, ₹400 crore and ₹700 crore. The 2019 table held its top rate all the way to ₹500 crore before stepping. Cutting the top rate while pushing the first step outward can leave the blended figure where it was, and for a band of mid-sized equity schemes it did.

2026 Moved the Boundary of the Number, Not Only Its Level

This change differs in kind from the three before it, because it redefines what the number contains rather than only where it is capped. The base expense ratio now excludes all statutory levies: STT, CTT, GST, stamp duty, SEBI fees and exchange fees are charged on actuals, over and above the permitted brokerage. Total expense ratio survives as an arithmetic sum - base expense ratio plus brokerage plus regulatory levies plus statutory levies.

Two of the cuts are unambiguous. The cash market brokerage cap of 12 basis points included statutory levies and amounted to 8.59 basis points net; it is now 6 basis points exclusive of levies. The derivatives cap of 5 basis points, 3.89 net, is now 2. And the 5 basis point allowance has been removed outright - fourteen years after the 20 basis points it descends from was granted as a transitional measure, and on SEBI’s note that the additional charge applied to the entire AUM “irrespective of any exits by unitholders.”

The slab cuts are where the arithmetic stops being straightforward. The equity ceiling falls 15 basis points at the top slab and 10 at the bottom. But the ceilings it is being compared against included levies that the new ones do not. A 15 basis point cut set against an undisclosed quantity of levies removed is not a 15 basis point cut to anybody.

The Calibration That Set the New Limits Is Not on the Record

SEBI states the principle plainly. The board note records that the thresholds proposed in the consultation paper of 28 October 2025 for equity schemes at ₹2,000 crore and above were “revised upwards to limit the impact on cost structure of AMCs broadly to the extent of exclusion of statutory levies from the base expense ratio limits.”

The industry had asked for precisely that. Respondents argued the proposed reduction exceeded the actual impact of the levies and sought a 5 basis point upward revision on the higher slabs. AMFI additionally sought a 10 basis point allowance for direct plans, which SEBI refused on the ground that it “would also constitute a structural change with potential increase in cost for unitholders of direct plans.” SEBI accepted the first request and rejected the second.

What is not available is the arithmetic. The two sub-paragraphs recording the modifications SEBI made to the consultation paper’s limits, at 4.5.2.3 (v) and (vi), appear in the published memorandum as “(This has been excised for reasons of confidentiality)” - and (v) is one of the two modifications the approved proposal incorporates. Whether 15 basis points matches the levies removed is therefore not something a reader of the public record can check.

Outside estimates run in both directions. Industry commentary puts the net saving at 5 to 10 basis points, against SEBI’s own calibration language pointing to neutrality. Five months into the regime, no aggregate realised figures have been published, and the levies now charged on actuals are the quantity nobody has measured. The range is the finding; the point estimate is not.

What This Means When Reading a Fee

None of this establishes that the reform was not worth doing. Separating the AMC’s fee from the taxes it collects is a real improvement in disclosure, the brokerage caps are genuinely lower, and retiring a fourteen-year-old transitional allowance is overdue rather than cosmetic. The narrower claim is that the level of the disclosed number and the amount an investor pays have moved together less often than three decades of reporting on these reforms implies.

Compare regimes on what is paid, not on what the ceiling says. A ceiling that excludes levies and a ceiling that includes them are two different measurements wearing the same units.

Read the base expense ratio as one line of four. Brokerage, regulatory levies and statutory levies are now disclosed separately and charged on actuals, which means a manager’s turnover reaches the investor more directly than it did when it was buried inside a single capped figure.

And watch what is granted alongside the next cut. Performance-linked expense ratios are now permitted in principle, with the modalities left to a circular SEBI has yet to issue. That circular, rather than the slab table, is where the next offset would sit.

The ceiling has come down. The boundary around it has moved further. Which of the two an investor actually paid is a question the published record does not yet answer.

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