SEBI Increases Exposure Limit for Passive Funds in Listed Group Companies
Introduction
In a notable effort to boost transparency and ensure fairness across the mutual fund sector, the Securities and Exchange Board of India (SEBI) has implemented fresh prudential norms for passive mutual fund schemes. Announced recently, these changes aim to mitigate concentration risk and ensure a diversified investment approach, particularly concerning the exposure of these funds to securities of their sponsors' group companies.
Key Changes in Investment Norms
Effective July 8, 2024, SEBI's revised regulations stipulate stricter limits on how much passive mutual fund schemes can invest in the listed securities of their sponsor group companies. This regulatory shift is part of SEBI's broader strategy to foster a more robust and transparent investment environment.
For the majority of passive mutual fund schemes, the updated regulations impose a limit of 25% on investments in the sponsor's group companies relative to their net assets. However, SEBI has introduced a slightly more lenient, yet still stringent, set of norms for equity-oriented Exchange Traded Funds (ETFs) and index funds. These funds are permitted to invest according to the weightage of their underlying index constituents but are capped at 35% of the net asset value (NAV) for investments in the sponsor's group companies.
Rationale Behind the New Regulations
Previously, mutual fund schemes were restricted from investing more than 25% of their NAV in sponsor group companies. This restriction often prevented passive funds from effectively replicating their underlying indices, especially when group companies of sponsors made up more than 25% of an index. Such limitations put certain Asset Management Companies (AMCs) at a disadvantage compared to those whose sponsors' group companies did not dominate their respective indices.
To address this disparity and promote fairness across the industry, SEBI's board approved amendments to mutual fund rules, allowing equity passive schemes to match the weightage of their index constituents, up to the 35% cap. This adjustment helps passive funds maintain their primary function of closely tracking their respective indices without being overly exposed to any single corporate group.
Enhancing Transparency and Compliance
In addition to adjusting investment caps, SEBI has implemented measures to boost transparency in the mutual fund sector. The regulator has defined "widely tracked and non-bespoke indices" as those with collective assets under management (AUM) of INR 20,000 crore or more, either tracked by passive funds or serving as primary benchmarks for active funds. The Association of Mutual Funds in India (AMFI) will biannually update and publish a list of these indices, utilizing AUM data from March and September. The publication dates are scheduled for April 15 and October 15, as specified in the guidelines.
The initial list, applicable from June 30, 2024, features prominent indices like the Nifty 50 and BSE Sensex. Passive schemes that do not conform to these indices must adjust their portfolios within 30 business days from the issuance of the SEBI circular. If rebalancing is not achieved within this period, AMCs must provide a written justification and may extend the rebalancing timeline by another 30 business days with approval from their investment committees.
Penalties for Non-compliance
Failure to comply within the extended timeframe will result in penalties for AMCs. These penalties include a prohibition on launching new schemes and the inability to levy exit loads on existing investors until compliance is restored. This rigorous approach underscores SEBI's dedication to upholding a just and transparent market environment.
Industry Impact and Future Outlook
SEBI's initiative reflects thorough public consultations and deliberations within the Mutual Funds Advisory Committee (MFAC). These measures aim to strengthen the integrity and stability of passive mutual fund investments, ensuring they are secure and reliable for investors while fostering overall market stability.
By tightening investment norms and enhancing transparency, SEBI aims to mitigate risks associated with concentrated investments in sponsor group companies. These changes are expected to create a more equitable environment for all AMCs and, ultimately, protect the interests of investors in the mutual fund sector.For more details, please refer to the latest SEBI circular.
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Frequently Asked Questions
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What changes has SEBI introduced for passive mutual funds?
SEBI has implemented new prudential norms that restrict most passive mutual funds from investing more than 25% in the listed securities of their sponsor's group companies. Equity-oriented ETFs and index funds are allowed to invest up to 35% of their NAV.
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When do these new regulations take effect?
The new regulations take effect from July 8, 2024.
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What is the investment cap for equity-oriented ETFs and index funds under the new SEBI norms?
Equity-oriented ETFs and index funds can invest up to 35% of their NAV in the listed securities of their sponsor's group companies, based on the weightage of their underlying index constituents.
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What are the consequences if a mutual fund scheme fails to rebalance its portfolio within the stipulated timeframe?
If a mutual fund scheme does not rebalance within 30 business days, the AMC must provide a written justification and may extend the rebalancing period by an additional 30 business days with investment committee approval. Failure to comply may result in penalties, including a ban on launching new schemes and restrictions on levying exit loads.
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How will SEBI ensure transparency in tracking indices?
SEBI has outlined criteria for "widely tracked and non-bespoke indices" and mandates AMFI to update and publish this list biannually. As of June 30, 2024, the initial list comprises major indices such as the Nifty 50 and BSE Sensex.
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