SEBI Revises Norms on Sponsor Group Exposure for Passive MF Schemes

Moneylife Digital Team 09 July 2024

Investor Interest

Market regulator Securities and Exchange Board of India (SEBI) announced new measures to streamline the prudential norms applicable to investments by passively managed mutual fund (MF) schemes in the group companies of their sponsors.

According to the new prudential norms notified by SEBI, passive MF schemes cannot invest more than 25% of their net assets in the listed securities of the sponsor's group companies.

Earlier, SEBI set up a working group to review the regulatory framework under SEBI (MF) Rules. Under public consultation on the working group's recommendations in the mutual funds' advisory committee (MFAC), the market regulator decided to streamline the extant prudential norms.

The amendments, effective 2 July 2024, primarily impact investments by equity-oriented exchange-traded funds (ETFs) and index funds in the group companies of their sponsors.

The updated regulations are as follows...

• Mutual fund schemes are now prohibited from investing more than 25% of their net assets in listed securities of the sponsor's group companies. However, equity-oriented ETFs and index funds based on widely tracked and non-bespoke indices may invest according to the weightage of the index constituents, subject to an overall cap of 35% of the scheme's net asset value (NAV) in group companies of the sponsor.

• SEBI has defined 'widely tracked and non-bespoke indices' as those tracked by passive funds or used as primary benchmarks for actively managed funds with collective assets under management (AUM) of Rs20,000 crore and above.

• The list of qualifying indices will be determined biannually, based on the AUM threshold as of 31st March and 30th September each year. The Association of Mutual Funds in India (AMFI) will publish the updated list on its website by 15th April and 15th October each year after obtaining SEBI's approval.

• Passive schemes based on indices not listed must rebalance within 30 business days from the issuance of the circular. If portfolios are not rebalanced within this period, the asset management company (AMC) must provide a written justification to its investment committee, which may extend the rebalancing period by up to 60 business days.

• If the portfolios of schemes are not rebalanced within the period mandated plus extended timelines, AMCs will not be permitted to launch any new scheme until the time the portfolio is rebalanced and not levy exit load, if any, on the existing investors of such schemes, it added.

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