Deployment Timelines For NFO Funds: SEBI’s Guidelines For Asset Management Companies

Introduction:

The Securities and Exchange Board of India (“SEBI”) has introduced new timelines for the deployment of funds collected by Asset Management Companies (“AMCs”) in a New Fund Offer (“NFO”). These changes, which will come into effect from April 1, 2025, are aimed at ensuring that AMCs efficiently allocate funds within a reasonable period while discouraging mis-selling practices.

Explanation:

The newly introduced regulations by SEBI lay down a structured framework for fund deployment by AMCs in NFOs. AMCs shall provide realistic timelines of deployment in the Scheme Information Document (“SID”) towards efficient allocation of funds. This ensures that the fund collection sorts out in coincidence with the timelines, preventing uncalled-for idle investments. An important provision states that AMCs must deploy funds collected in NFOs within 30 business days from the date of allotment of units. This ensures that funds are not left uninvested for a long time, which reduces the chance of risks pertaining to market timing and liquidity management.

In general, when AMC does not deploy the funds within thirty business days, justification for the same on an extended timeline of sixty days or before shall be presented, in writing, to the Investment Committee by AMCs to explain in detail the reason(s) that led to the delay in completion of the safe deployment of investor funds into various asset classes. The committee shall look into the situation and may extend it for 30 business days, but only if it is satisfied with the explanation on delay. Therefore, this clause should not be misused and extension should generally not be provided in those situations concerning liquid or readily available asset types.

The trustees play an important role in making sure that AMCs stick to the deployment timelines; they are responsible for monitoring the fund allocation and facilitating timely investment. Their vigilance provides governance reinforcement to SEBI mandates, thus adding to protection for investors.

If any funds are not deployed within the timelines prescribed (including granted extension), the AMC will be putting itself under pressure, as no fresh inflows would be allowed into the scheme, and investors would be allowed to exit the scheme after sixty business days without incurring any exit loads. SEBI directs AMCs to inform investors about their options; these would otherwise include their right to exit without any charges, as expressed to the Trustees together with every other deviation. Fund managers are permitted to extend or shorten the NFO period (except in Equity Linked Savings Scheme (“ELSS”)) depending on market conditions, availability of assets, and their ability to actually deploy the collected funds.

Nonetheless, any such change in the period must be in accordance with clauses 1.10.1 and 1.10.1A of SEBI’s master circular for mutual funds^[1] (as of June 27, 2024). In order to tackle cases of mis-selling, SEBI recently imposed certain restrictions on the distributor commissions in the case of switch transactions between an ongoing scheme and an NFO within the same AMC; the commission paid for such transactions shall be the lesser of the two schemes involved in the switch.

Conclusion:

SEBI’s recent directions on the deployment of funds from NFOs is another step taken toward making the mutual fund industry accountable and transparent. SEBI is interested in monitoring compliance, whereby investors’ funds are used for investment as stated, in the time frame provided. Stricter timelines and clear-cut compliance obligations are proposed for this very reason.

^[1] https://www.sebi.gov.in/legal/master-circulars/jun-2024/master-circular-for-mutual-funds_84441.html