SEBI’s Streamlined Prudential Norms for Passive Mutual Fund Schemes

The Securities and Exchange Board of India (SEBI) has introduced new regulations aimed at enhancing the ease of doing business for Mutual Funds (MFs). This article delves into the key aspects of SEBI’s circular dated July 8, 2024, which streamlines prudential norms for passive schemes regarding exposure to securities of group companies of the sponsor of Mutual Funds.

Objective and Background

Formation of the Working Group

SEBI constituted a working group to review the existing regulatory framework under the SEBI (Mutual Fund) Regulations, 1996. The primary objective was to identify and recommend measures to promote ease of doing business for MFs.

Public Consultation and Advisory Committee Input

Following a public consultation on the working group’s recommendations and deliberations in the Mutual Funds Advisory Committee (MFAC), SEBI decided to streamline the prudential norms applicable to passively managed Mutual Fund schemes.

Key Amendments to Prudential Norms

Investment Cap in Group Companies

The revised regulations mandate that no Mutual Fund scheme shall invest more than 25% of its net assets in the listed securities of group companies of the sponsor, with exceptions for equity-oriented exchange-traded funds (ETFs) and Index Funds.

Specific Conditions for ETFs and Index Funds

Equity-oriented ETFs and Index Funds, based on widely tracked and non-bespoke indices, are allowed to invest according to the weightage of the constituents of the underlying index. However, these investments are subject to an overall cap of 35% of the net asset value of the scheme in the group companies of the sponsor.

Criteria for Widely Tracked Indices

Definition and Tracking

Widely tracked and non-bespoke indices are defined as those tracked by passive funds or acting as primary benchmarks for actively managed funds with collective Assets under Management (AUM) of Rs 20,000 crore and above.

Biannual List Updates

The list of indices meeting the specified criteria is determined semi-annually, based on AUM as of March 31 and September 30. AMFI updates this list and publishes it on its website by April 15 and October 15 each year, after SEBI’s approval.

Current List of Indices

As of June 30, 2024, the indices include Nifty 500, Nifty 50, Nifty Midcap 150, BSE 500, Nifty Large Midcap 250, Nifty Smallcap 250, Nifty 100, BSE SENSEX, BSE 100, and others.

Rebalancing Requirements

Timeline for Rebalancing

Passive schemes based on indices other than those listed must rebalance their portfolios within 30 business days from the circular’s issuance date. If rebalancing is not completed within this period, justifications and efforts taken must be documented and presented to the AMC’s Investment Committee, which may extend the timeline up to 60 business days.

Consequences of Non-Compliance

If rebalancing is not achieved within the mandated plus extended timelines, AMCs will be restricted from launching new schemes and must waive any exit load for exiting investors.

Regulatory Framework and Investor Protection

SEBI’s Authority

This circular is issued under SEBI’s powers as per Section 11(1) of the SEBI Act, 1992, read with Regulation 44(1), clause 9(c) of the Seventh Schedule, and Regulation 77 of the MF Regulations. These measures aim to protect investor interests and promote the development and regulation of the securities market.

Conclusion

SEBI’s streamlined prudential norms for passive Mutual Fund schemes represent a significant step towards simplifying the regulatory landscape for MFs. By setting clear investment caps and rebalancing requirements, SEBI aims to enhance transparency, protect investor interests, and promote a more efficient and robust mutual fund industry.

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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.