Sebi imposes limits on passive mutual funds investing in sponsor group companies; details here

Capital market regulator Securities Exchange Board of India (Sebi) has released a circular to share the limits imposed on total investment which can be made by passive mutual funds in their sponsor group companies.

The regulator had constituted a working group to review the present regulatory framework and recommend measures to promote ease of doing business for mutual funds. This followed public consultations on the recommendations of the working group, and it was later decided to streamline the norm applicable to investments by passively managed mutual fund schemes in the group companies of sponsors.

Consequently, mutual fund regulations were amended via a notification dated July 2, 2024.

These changes include the following:

I. Cap on investment: Clause 9 of Seventh Schedule of the MF Regulations mandates that no mutual fund scheme will make any investment in the listed securities of group companies of the sponsor which is in excess of 25 percent of the net assets of the scheme, barring investments by equity-oriented exchange traded funds (ETFs) and index funds.

And the ETFs and index funds — based on widely tracked and non-bespoke indices — can make investments in constituent stocks subject to an overall cap of 35 percent of net asset value in the group companies of the sponsor.

The widely-tracked and non-bespoke indices are indices tracked by passive mutual funds or act as primary benchmark for actively-managed funds with collective Assets under Management (AUM) of ₹20,000 crore and above.

These indices include Nifty 500, Nifty 50, Nifty midcap 150, BSE 500, Nifty Large Midcap 250 and Nifty small cap 250, as on June 30, 2024.

II. List of indices on AMFI’s portal: The list of indices based on the criteria specified above, will be determined on half yearly basis as on March 31st and September 30th, respectively. The list of such indices will be updated by AMFI and published on its website by April 15th and October 15th respectively every year, after seeking SEBI’s approval.

III. Other indices: Passive schemes based on underlying indices, other than the indices mentioned in this circular, are supposed to be rebalanced within 30 business days from the date of issuance of this circular.

IV. When not rebalanced: In case the portfolios of such schemes are not rebalanced within 30 business days, an explanation in writing, including details of efforts taken to rebalance the portfolio will be placed before the AMC’s investment committee.

The investment committee may stretch the timeline for rebalancing by 60 business days.

V. Bar on new schemes: If the portfolios of schemes are not rebalanced within the aforementioned mandated including extension, fund houses will not be allowed to roll out any new scheme till the time the portfolio is rebalanced and not levy exit load, if any, on the exiting investors of such scheme.