The Securities and Exchange Board of India (SEBI) has announced new limits on investment in shares of sponsor group companies by passive mutual funds.
The new rule comes after SEBI’s working group reviewed the current regulatory framework to enhance the ease of doing business for mutual funds.
As per existing rules, no Mutual Fund scheme can make any investment in the listed securities of group companies of the sponsor which is in excess of 25% of the net assets of the scheme.
The above doesn’t apply to investments by equity oriented exchange traded funds (ETFs) and Index Funds. However, SEBI has now imposed limits on how much an ETF or an index fund can invest in shares of listed securities of sponsor’s group companies. Read on for the new limits.
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New Rules for Passive Funds by SEBI
Special Provisions for ETFs and Index Funds: Equity-oriented ETFs and index funds based on widely tracked, standard indices can invest based on the index’s constituent weights, but they must keep their investments in the sponsor’s group companies within 35% of the scheme’s total net asset value (NAV).
Definition of Indices: SEBI has defined “widely tracked and standard indices” as those with collective assets under management (AUM) of Rs 20,000 crore or more, tracked by passive funds or used as primary benchmarks for active funds.
Semi-Annual Updates: The list of eligible indices will be updated biannually by the Association of Mutual Funds in India (AMFI) and published on its website by April 15th and October 15th each year, after obtaining SEBI’s approval.
Rebalancing Requirements: Passive schemes based on indices not included in the specified list must rebalance their portfolios within 30 business days from the date of issuance of the circular.
If rebalancing is not achieved within this period, justification must be provided to the Investment Committee of the Asset Management Company (AMC), which may extend the timeline by up to 60 business days.
Also Read: India Joins JP Morgan’s Bond Index: What It Means for Investors and the Economy
Restrictions on AMCs: AMCs that fail to rebalance their portfolios within extended timelines will be prohibited from launching new schemes and cannot impose exit loads on investors leaving the affected schemes.
By merging these regulatory rules, the mutual fund sector will become more effective and transparent, benefiting both investors and fund managers. This step demonstrates SEBI’s continued commitment to properly regulating the securities market and promoting its orderly expansion.
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Disclaimer: The above content is for informational purposes only. Please consult a SEBI-registered investment advisor before investing.
