Prudent Corporate on SEBI TER changes: GST, 5 bps

What changed in SEBI’s mutual fund expense framework

Prudent Corporate Advisory Services has flagged two recent regulatory shifts that matter for mutual fund distributors and platforms. The first is SEBI’s revised total expense ratio (TER) approach, where the expense ratio will now be inclusive of statutory levies, including GST. The second is SEBI’s withdrawal of a 5 basis point (bps) benefit that was linked to exit load and had been available since 2012.

Management described the GST-related change as strategically positive even if the immediate impact is “revenue neutral” for entities already registered under GST. But it also acknowledged near-term uncertainty for the industry on the 5 bps exit-load-linked benefit, with discussions ongoing at an industry level.

GST now included in TER and why distributors care

According to Prudent, the new TER approach removes an earlier anomaly in which a GST-registered distributor could effectively earn less than an unregistered distributor. By making TER inclusive of statutory levies, the structure is expected to create a more even footing across distributor categories.

Prudent said this “level playing field” could help smaller players join organised distribution platforms. The company positioned the change as strategically beneficial to its business model, even if, at a pure accounting level, the impact is neutral for GST-registered participants.

How Prudent is aligning payouts and GST reimbursements

Prudent has aligned its payout structure to match the regulatory shift. The company indicated that its internal payout rates will be treated as exclusive of GST. Distributors who raise a GST invoice will be reimbursed GST based on the invoice they submit.

This operational change is important because it alters how yield is experienced by partners, especially those who were earlier competing with non-GST-registered distributors. Prudent also cautioned that this alignment is creating implementation complexity in the near term.

Payout timing: a one-off delay as clarity evolves

Prudent said that, for the first time in its history, payouts are expected to be delayed by a few days because more clarity is required from asset management companies (AMCs). The company linked this delay to the need to understand and implement the updated mechanics of payout rates and GST treatment.

Management also indicated that rate alignment would flow through as AMCs adjust their structures. Earlier payouts were described as being on a “gross rate” basis, while the new approach is expected to align rates after accounting for GST mechanics.

Removal of 5 bps exit-load-linked benefit: still being debated

The second SEBI change discussed was the removal of the 5 bps benefit that was provided over and above regular TER in lieu of exit load. This benefit, in place since 2012, has now been withdrawn.

Prudent said the change represents a cost for the entire industry, but emphasised that the broader implications are still being discussed and negotiated. Management expects greater clarity by the end of the month and said stakeholders would be updated once the picture becomes clearer.

Who is hit harder: impact on non-GST partners

Prudent’s management highlighted that non-GST partners could see a meaningful decline in economics. It said most players in the industry are non-GST-registered because their revenue is below the registration threshold of around Rs 20 lakh, and these participants earlier had an advantage.

With that advantage “gone away”, Prudent expects its competitiveness to improve relative to what non-registered partners were earning from AMCs versus what Prudent offered. The company pointed to an estimated 15% reduction in yield from AMCs for those partners once GST is taken out of the earlier structure. Elsewhere, management also referred to a 15% to 20% revenue impact across the board for non-GST partners.

Platform scale, consolidation, and the TER regime

In commentary included with the broader discussion, the mutual fund industry’s indirect equity AUM (76% share) was described as being slated to grow at 18% to 20%, supported by low mutual fund penetration. Prudent was characterised as one of the larger distributors, with a technology and distribution edge that could help in a tighter TER regime.

The same commentary suggested the new TER environment could drive consolidation, and that pricing power has been shifting from banks to mutual fund distributors as distribution scales. It also noted that Prudent’s AUM is distributed with the top-eight AMCs contributing 68%, which partially mitigates AMC performance concentration risk.

Commission cuts and margin guardrails

Prudent has already passed on 70% of an AMC commission cut since Aug’24, as per the commentary. Despite that, yields were described as stable year-on-year because incremental business (25% of AUM) is higher yielding.

The combined impact of the 5 bps exit-load benefit removal and a 10 bps GST cut was described as potentially negative by about 2 bps. The view presented was that Prudent can manage the hit by passing on commission cuts, as it has done in the past, and supported by higher-yielding newer flows. On this framing, EBITDA margins were expected to remain steady at about 24%.

Business profile data points highlighted alongside the regulatory discussion

Prudent operates primarily in mutual fund distribution, with insurance contributing about 11% to 11.5% of revenue in the referenced remarks. Management also said it aims to maintain a SIP market share of 3.8%.

Separately, Sanjay Shah, CMD, discussed category positioning amid concerns around froth in smallcap and midcap segments. He said that since Oct 2023, Prudent has been advising movement towards balanced advantage, multi-asset allocation, and largecap categories for controllable new lump-sum flows. He also noted Prudent’s SIP book is around Rs 700 crore, with about 30% linked to midcap and smallcap categories, and argued that this SIP “auto-flow” dynamic is meaningful for the industry.

Key numbers at a glance

Why this matters for investors and distributors

For distributors, the immediate practical issue is how AMCs and platforms operationalise the new TER and GST treatment. Prudent’s comments indicate that invoicing discipline and GST registration status could become more visible differentiators in partner economics.

For investors, the stated regulatory intent centres on standardisation and fairness in expense structures, while the industry debate will likely focus on how cost reductions are allocated between AMCs and distribution. Prudent’s stance suggests it is preparing for a scenario where pressure is passed through the chain, while using scale, technology, and payout structuring to remain competitive.

Conclusion

Prudent described FY26 as a satisfactory year and is now focusing on adjusting payout processes to reflect SEBI’s TER and GST changes. The company expects further clarity on the implications of the 5 bps exit-load benefit withdrawal by the end of the month, after industry-level discussions conclude.