SEBI’s Streamlining Of Prudential Norms For Passive Mutual Fund Schemes

Introduction

Through the notification dated 8 July, 2024 the Securities and Exchange Board of India (“SEBI”) has introduced a set of new regulations which are aimed at enhancing the ease of doing business for Mutual Funds and streamlined the prudential norms for passive schemes pertaining to exposure to securities of various group companies of the sponsor of mutual funds.

With the objective of constituting a working group for reviewing the existing framework of regulations in place under the SEBI (Mutual Funds) Regulations, 1996 the primary objective of the notification was to identify and suggest such measures which promote the ease of doing business for mutual funds. Additionally, post a public consultation based upon the recommendations of the working group and the suggestions of the Mutual Funds Advisory Committee (MFAC), the Securities and Exchange Board has also decided to streamline the entire process of prudential norms which are applicable to passively managed mutual fund schemes in the country.

Key Amendments By The Notification

There are various important amendments in the prudential norms that have been brought by the notification which are as follows:

1. Investment Cap in Group Companies- The updated regulations have made it mandatory that not more than 25% of net assets shall be invested in listed securities of group companies of the sponsor. However, the only exception allowed is for the equity – oriented exchange – traded funds (“ETFs”) and index funds.
2. Specific Conditions for EFTs and Index Funds- The Index Funds and equity – oriented exchange traded funds which are based upon the widely tracked and non – bespoke indices are permitted to invest according to the weightage of their constituents of underlying index. Such investments are also subject to an overall cap limit of 35% of the net value of assets of the scheme in the group companies of the sponsor.
3. The notification has also defined the widely tracked and non- bespoke indices as those which are tracked by the passive funds or act as a primary benchmark for the actively managed funds having collective assets under management (“AUM”) of Rs. 20,000/- crores and above. Such 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.
4. The notification has also set up a timeline for passive schemes based upon indices other than those mentioned above for rebalancing their portfolios within a period of 30 business days from the date of issuance of circular. In case the process of rebalancing is not completed within the stipulated period, the reasons and justifications along with the efforts ought to be recorded in form of a document and presented to the AMC’s investment committee which may lead to an extension of timeline up to 60 business days. However, if such rebalancing is not achieved within the mandatory timelines, such AMCs shall be restricted from launching their new schemes.

Conclusion

The streamlined prudential norms by the Securities and Exchange Board of India for passive mutual fund schemes showcases a significant step towards simplifying the regulatory framework of mutual funds. Additionally, by setting up clear limits for investments and rebalancing requirements as specified in the notification, this step by SEBI would enhance transparency, protect the interests of investors and promote smooth functioning of the investment industry.