Sebi okays new product bridging MF, PMS

The stock market regulator on Monday paved the way for a new investment product bridging mutual fund schemes and portfolio management services, relaxed rules for investment advisors and research analysts, and unveiled a new framework for passively managed MF schemes, among a series of significant decisions.

The Securities and Exchange Board of India (Sebi) said the new investment product will be introduced under the existing mutual funds framework, after a meeting of its board in Mumbai. The new asset class will offer flexibility in portfolio construction.

"The new product also aims to curtail the proliferation of unregistered and unauthorized investment schemes/entities, which often promise unrealistic high returns and exploit investors’ expectations for better yields, leading to potential financial risks," Sebi said.

Siddarth Pai, co-founder of 3one4 Capital said the new asset class will open a brave new chapter for India's capital markets. "Allowing mutual funds to run hedging and derivatives strategies, traditionally the mainstay of hedge funds (CAT-III AIFs), will see significant asset reallocation towards such strategies. The ₹10 lakh minimum ticket size mooted is far less than that prescribed for CAT-III AIFs, who may choose the tax advantages that the new asset class offers," he said.

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A. Balasubramanian, managing director and chief executive of Aditya Birla Sun Life AMC said mutual funds will be able to operate in the derivatives market similar to a hedge fund to generate higher returns, leading to greater institutional participation in F&O, which is currently dominated by proprietary traders and retail clients.

RIAs, RAs

Sebi also relaxed the eligibility criteria and restrictions to attract more individuals to become registered investment advisors (RIAs) and research analysts (RAs). The regulator accepted the proposal to remove net worth requirement for both, as their services are fee-based and they do not manage clients' funds and securities. They will be expected to maintain a deposit lien marked to a stock exchange that recognizes them.

Currently, aspirants for RIAs and RAs must have at least a post-graduate degree. Sebi has lowered the educational qualification to graduation.

MF Lite

The current regulatory framework for mutual funds governs both actively and passively managed schemes, though these regulations were originally designed with active funds in mind. Active funds rely on fund managers' discretion for asset allocation and investment, whereas passive funds follow a rule-based strategy with minimal discretion. Recognizing that many of the existing regulations may not be fully relevant for passively managed funds such as exchange-traded funds (ETFs) and index funds, Sebi has introduced the MF Lite framework.

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The framework offers relaxed requirements with respect to eligibility criteria for sponsors, reduced minimum net worth, track record, and profitability thresholds, simplified trustee responsibilities, streamlined approval process and relaxed disclosure requirements.

Ashish Gupta, chief investment officer, Axis MF, said the intent of the new framework was to ensure a level playing field between new players and existing schemes.

AMCs managing both active and passive schemes can choose to split off their passive funds into a separate group entity under the same sponsor, with the newly separated entity governed by the lighter regulations.

UPI block mechanism

Starting 1 February, 2025, qualified stock brokers (QSBs) will be required to offer additional trading options to their clients in the secondary market (cash segment). In addition to the current method of trading, QSBs must provide one of the following alternatives:

1. Trading Supported by Blocked Amount (TSBA) using UPI block mechanism, which allows clients to trade without transferring funds upfront. Instead, the required amount will be blocked in the client's bank account and only debited upon trade settlement. This will be similar to existing Application Supported by Blocked Amount (ASBA) in primary share sales.

2. 3-in-1 Trading Account Facility which integrates a client's bank, trading, and demat accounts, allowing for seamless trading and settlement directly from their bank account.

Clients can either continue with the existing method of trading, which involves transferring funds to their trading members (TMs), or choose one of the new options under the updated framework.

Optional T+0

The Sebi board reviewed the performance of the beta version of the optional T+0 settlement cycle and approved several enhancements, incorporating feedback from various stakeholders.

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The number of stocks eligible for trading under optional T+0 settlement cycle will be increased gradually. Initially, the top 25 scrips were included, but this will be expanded in phases to cover the top 500 stocks based on market capitalization. All registered brokers can offer their investors access to the optional T+0 settlement cycle. Institutional Investors such as foreign portfolio investors (FPIs) and mutual funds will also be able to access the optional T+0 settlement cycle. The optional T+0 settlement cycle in the equity cash market will continue to operate alongside the existing T+1 settlement cycle, giving market participants flexibility in choosing their preferred settlement method.

Amendments to insider trading regulations

Sebi cleared the broadened definition of "connected persons" by including new categories, aligning the definition with the Income Tax Act. The new definition will now include relative, partner or employee of connected person; person on whose advice connected person is accustomed to act; body corporate whose management is accustomed to act on advice of connected person, etc.

Makarand M. Joshi, founder MMJC & Associates, a corporate compliance firm, said Sebi's decision to expand the scope of connected person would increase scope of prohibition of insider trading regulations. "A lot of awareness would be required amongst these persons also to ensure that amended provisions are effectively implemented", he said.

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