In what could be a big blow to the broking industry, and a painful affair for mutual fund companies, the Securities and Exchange Board of India has proposed that mutual funds get membership on stock exchanges, and do trades through their own trading terminals, two senior MF officials with knowledge of the matter told Moneycontrol.

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“The matter is still at the discussion stage,” one official said, “….the objective is two-fold.”

SEBI did not comment on the questionnaire sent to it on the issue.

At present, the brokerage charges incurred by mutual funds while buying and selling of shares falls outside the Total Expense Ratio (TER) that they charge unitholders. Mutual funds pay roughly 0.12 percent (12 basis points) to brokers for every trade. It is lower--6 basis points--if the trade is done through the Direct Market Access Route (DMA), wherein dealers from mutual funds can place trades directly from the terminal at their end.

SEBI would like to make this cost part of the TER. Asset management companies are protesting this move as it would hit their profit margins, with the cost varying according to how frequently they churn their portfolios.

One of the solutions being offered by the regulator is that mutual funds have their own broking terminals as it would help lower costs in the long run.

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The other aim is to minimize, if not altogether eliminate, instances of mutual funds trades being front run by brokers. Front running is a practice where the broker trades in a stock ahead of a transaction in the same stock by the client, and profits from it. This misconduct came into focus last year when former Axis Mutual Fund chief dealer Viresh Joshi was found to have front run trades of the fund’s various schemes. SEBI recently passed an interim order banning Joshi and 20 others from trading in the markets till further notice, for their involvement in the racket.

“SEBI’s thinking seems to be that if the trades don’t go to brokers, there won’t be any leakage of trades,” said the second official. “..but it is not fool proof. When you want to buy or sell large blocks of shares, you will have to ask around in the market, so word does get out.”

If implemented, the move would also dent the profits of institutional brokers as domestic mutual funds are a major source of revenue because of the large pool of equity assets they manage. In 2022, gross purchases and sale of shares by domestic mutual funds added up to over Rs 23 lakh crore, translating into broking commission of around Rs 2800 crore.

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