Asset managers have overcharged mutual fund investors by as much as Rs1,500 crore in the last five years by unfairly charging fees, according to an internal study by the market regulator.

A Securities and Exchange Board of India (Sebi) advisory committee has recommended that asset managers credit the excess charges collected by them back into the mutual fund schemes. The regulator's board, which is meeting on Wednesday, is likely to consider this issue, said two people aware of the matter.

Here's how this overcharging happened:

Till 2012, mutual funds pocketed the exit loads collected and used it for their sales and marketing expenses. An exit load is a cost imposed on investors when they redeem a scheme within a pre-specified time period.

In September 2012, the regulator told asset management companies that they should deposit exit loads back into the schemes. However, to compensate for their losses, Sebi allowed asset managers to charge an additional 20 basis points (bps) in expense ratios. One basis point is one-hundredth of a percentage point.

But some fund houses used this extra leeway to impose higher charges in two ways.

One, they added this 20 bps expense ratio even in schemes that did not levy an exit load, such as closed-end funds. Two, for funds that did levy an exit load, the 20 bps expense ratio resulted in fund houses pocketing more than what exit loads had brought in.

The Sebi internal study calculated the amount collected from this 20 bps charge to be around Rs1,600-1,700 crore as of December. It said that only around 10% of this was credited back, resulting in excess fee collection of around Rs1,500 crore. A Sebi spokesperson did not respond to an email seeking comment.

"The perversion was that the 20 bps was used in all schemes. What was intended to be a compensation for loss of exit load money became a birth right for fund houses to charge 20 bps," said an industry official close to the developments.

Of the emails sent to the 15 largest fund houses on the issue, only Tata Asset Management Ltd responded. "We have no exit load in our tax-saving schemes and nor do we charge 20 bps. We have never charged (20 bps) in close-ended schemes, since in any case the investor cannot exit. As regards clawback for those who were not exactly following the right practice, we feel that though the proposal is fair, it would be very difficult to implement, especially in an open-ended scheme," a Tata Asset spokesperson said.

In arrangement with HT Syndication | MINT