SEBI Slaps Charges on Nippon Life India Asset Management Amid Serious Legal Troubles

The capital markets regulator has imposed fines on Nippon Life India Asset Management Ltd. and Nippon Life India Trustee Ltd., amounting to Rs 2 lakh and Rs 1 lakh, respectively, for inappropriately charging the total expense ratio (TER) of various schemes to the asset management company’s accounts.

The Securities and Exchange Board of India (Sebi) prohibits such practices to maintain fairness among large and small asset management companies (AMCs), reduce portfolio churning, and ensure transparency in expenses.

In an order dated August 8, Sebi noted that the AMC had borne excessive expenses for a few of its schemes and that the trustee failed to ensure compliance with regulations.

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On October 22, 2018, Sebi issued a circular mandating that all scheme-related expenses, including commissions paid to distributors, must be paid from the scheme itself and within regulatory limits, rather than from the books of the AMC or related entities. During Sebi’s investigation, it was found that in five of the AMC’s exchange-traded funds (ETFs), less than 1% of the expense was charged to the schemes, while certain other scheme expenses were charged to the AMC’s books, which was alleged to be in violation of the October 2018 circular.

AMCs are permitted to cover expenses that are “very small in value but high in volume” from their books, up to a maximum of 2 basis points (bps) of the respective scheme’s assets under management (AUM). However, in this case, expenses exceeding this limit were charged to the AMC’s books for FY21 and FY22.

Although the AMC and its trustees argued that the schemes in question were ETFs and Fund of Funds (FoFs), primarily oriented toward direct plans, Sebi’s order emphasized that the October circular applies to all types of schemes without exception.

The order stated that allowing varied practices could create disparities in the mutual fund industry, where profitable or well-funded AMCs could afford to cover scheme expenses from their books while smaller AMCs could not. It added that the objective of the TER circular is to enhance transparency in expenses and reduce portfolio churning, not to permit inconsistent practices. Consequently, Sebi rejected the AMC and trustee’s arguments as untenable.

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