SEBI Sets the Record Straight on Short Selling Regulations Amid Major Mutual Fund Overhaul

The Securities and Exchange Board of India (SEBI) has clarified that there will be no changes to short selling regulations, countering misleading media reports. Additionally, SEBI has approved a comprehensive overhaul of mutual fund regulations to improve cost transparency and reduce investor expenses. Key changes include a revamped Total Expense Ratio (TER) framework, exclusion of certain statutory charges from TER calculations, and tighter brokerage norms. These reforms aim to align mutual fund costs with actual expenses while enhancing investor protection. Read on to discover how these changes will impact the investment landscape.

By Narendra Chaudhary Dec 21, 2025, 20:28 IST

Clarification from SEBI on Short Selling

In a recent announcement, the Securities and Exchange Board of India (SEBI) clarified that there will be no alterations to the current regulations governing short selling. The regulatory body responded to a misleading media report suggesting that changes would take effect on December 22, 2025.

On another note, SEBI has approved a significant reform of mutual fund regulations aimed at enhancing cost transparency and alleviating the financial burden on investors. This overhaul will be enacted through the new SEBI (Mutual Funds) Regulations, 2026, which will replace the existing framework established in 1996 following a thorough review.

Central to this reform is a restructured Total Expense Ratio (TER) framework. SEBI has decided to exclude various statutory and regulatory charges—such as securities and commodities transaction tax (STT/CTT), GST, stamp duty, SEBI fees, and exchange fees—from the TER calculations. These charges will now be billed separately, providing investors with a clearer understanding of fund management expenses.

The updated TER will consist of three elements: the base expense ratio, brokerage fees, and statutory or regulatory charges. Additionally, SEBI has eliminated the previously allowed 5 basis points (bps) expense allowance associated with exit loads.

Brokerage norms have also been tightened, with mutual funds now permitted to pay up to 6 bps for equity cash market transactions, an increase from the previously suggested 2 bps but still lower than the current maximum of 12 bps. For derivative transactions, the brokerage cap has been set at 2 bps, excluding statutory charges.

Furthermore, SEBI has imposed stricter limits on distribution commissions and has permitted performance-based expense structures for specific mutual fund schemes, subject to regulatory guidelines.

The board has also approved reductions in the base expense ratio limits for various categories. For instance, the cap for index funds and exchange-traded funds (ETFs) has been reduced from 1.0% to 0.9%. A similar reduction applies to liquid-scheme-based fund of funds, while the limit for close-ended equity schemes has been lowered from 1.25% to 1.0%.

SEBI stated that these revised regulations are designed to better align mutual fund expenses with actual costs while enhancing transparency and safeguarding investor interests throughout the industry.